Hold Berger Paints India Ltd For Target Rs.670 - ICICI Direct
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High input cost weighs on margin…
About the stock: Berger Paints is the second largest paint player in India.
* Berger derives ~80-85% of its topline from decorative paints while the rest comes from the industrial segment. It has ~13 manufacturing units in India with ~50,000 dealer network (FY22) across India
* Strong b/s with RoCE, RoE of 26%, 22%, respectively, (five-year average)
Q2FY23 Results: Volume led topline growth, delay in price hikes dented margins.
* Revenue increased 20% YoY to ~| 2671 crore in Q2FY23 driven by 11% volume growth in the decorative paints segment
* Gross margin declined 300 bps YoY due to a change in product mix and delay in price hikes. However, better operating leverage restricted the EBITDA margin fall by 228 bps YoY to 13.6%
* PAT remained flat on a YoY basis at ~| 219 crore due to lower EBITDA margin and higher interest outgo
What should investors do? Berger’s share price has given ~140% return over the past five years (from ~| 249 in November 2017 to ~| 598 levels in November 2022).
* We maintain our HOLD rating on the stock
Target Price and Valuation: We value Berger at | 670 i.e. 55x P/E on FY24E EPS.
Key triggers for future price performance:
* Repainting represents ~80% of total decorative paint demand. Gradual reduction in repainting cycle would drive future paint demand
* Increased focus on the ‘water proofing & building chemical’ category will continue to drive revenue growth for Berger. Water proofing & building chemical industry is pegged at | 6000 crore vs. | 1.5 lakh crore in China
* New product launches and expansion of manufacturing capabilities
Alternate Stock Idea: We like Asian Paints (APL) in our coverage universe. APL is India’s largest decorative paint company. The company derives ~98% revenue from the paints business. Robust b/s with RoCE, RoE of 30%, 25%, respectively.
* BUY with a target price of | 3685
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