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High input costs keep EBITDA margin under check…

About the stock: Berger Paints is the second largest paint player in India.

* Berger derives ~82% of its topline from the decorative paints while rest comes from the industrial segment. Company has ~13 manufacturing units in India with ~30,000 dealer network across the country

* Strong b/s with RoCE, RoE of 26%, 22% respectively (five-year average)

Q1FY22 Results: Strong revival in the decorative paints helped drive performance, however higher raw material costs weigh on gross margin

* Favourable base and a strong demand for decorative paints helped drive revenue up 93% YoY to ~| 1799 crore

* Price hikes of about 4%-5% restricted fall in gross margin to ~238bps YoY. However, improved operating leverage drives EBITDA margin up by 337 bps YoY to 13.3%

* PAT jumped ~9.3x YoY to | 141 crore supported by favourable base and strong topline growth.

What should investors do?

Berger’s share price has grown by ~3.8x over the past five years (from ~| 220 in August 2016 to ~| 840 levels in August 2021).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We roll over our valuation on FY24 and value Berger at | 860 i.e. 58x P/E on FY24E EPS.

Key triggers for future price performance:

* Repainting represents ~80% of total decorative paint demand. Gradual reduction in re-painting cycle would drive future paint demand

* Increased focus on the ‘water proofing & building chemical’ category will continue drive revenue growth for Berger Paints. 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 also like Asian Paints in our coverage universe

* Asian Paints is the market leader in the decorative paint and expanding its product portfolios along dealer expansion in tier II and tier III cities

* BUY with a target price of | 3665

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