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Volume growth momentum continues…

Berger’s Q4FY21 volume growth at 58% YoY (Q2:15%; Q3: 28%) is one of the best in the industry and much ahead of our expectation of 28%. Apart from a favourable base, the decorative paints volume growth was largely driven by a pick-up in construction activity in Q4 and healthy growth in construction chemical (largely water proofing business). On the other hand, a strong recovery in automotive sales helped a strong recovery in the performance of industrial paints (~15% of topline). For FY21, overall volume growth came in at 15% despite a loss of sales in Q1. However, the paint industry will witness near term demand challenges due to lockdown and margin pressure due to low operating leverage. Hence, we revise our revenue, earning estimates downward by ~5% each. We believe paint demand will pick up gradually post opening up of the markets. Also, the management has reiterated strong growth momentum would continue in the water proofing segment, which will aid in future volume growth.

Gross margin remains intact despite inflationary pressure

Despite significant inflationary pressure, Berger maintained its gross margin on a YoY basis in Q4FY21 (better than ~266 bps contraction in gross margin of Asian Paints). However, higher advertisement expenditure in Q4FY21 (associated with new product launches) limited the gain in EBITDA margin by 118 bps YoY for Berger. In order to offset high raw material prices the company took a price hike of ~2.5% in May 2021 and guided for further price hike in near future. While price hikes and improved product mix will help partially offset inflationary pressure in FY21-23E, we see limited upside in EBITDA margin considering higher advertisement cost and restoration of travelling & other costs.

Strong revenue traction from subsidiaries in Q4

Subsidiaries revenue (calculated) in Q4FY21 increased ~27% despite a higher base of 51% growth. The company’s subsidiaries in BJN Nepal and Bolix SA (Poland) reported a strong sales recovery in Q4FY21 post ease in lockdown restrictions and improved demand conditions in the respective regions. On the domestic fronts, STP Ltd (STPL), which is primarily into waterproofing and protective coatings has also recorded a strong performance in Q4FY21 led by a pick-up in construction activities.

Valuation & Outlook

We build in revenue, PAT CAGR of ~20% and 29%, respectively, in FY21- 23E supported by healthy volume growth of ~15%. We believe strong brand recall and a healthy balance sheet (RoE: 21%, RoCE: 25%) will help the company to sail through near term challenges easily. However, while we maintain our positive stance on the stock, the recent rally in the stock factors in most positives. We maintain our HOLD rating on the stock with a revised target price of | 835/share (earlier | 810).

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