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Hold Berger Paints Ltd For Target Rs. 800

Berger’s FY21 revenue and EBITDA growth of 7.1% and 12% is largely in-line with sector revenue and EBITDA growth of 6% and 12.4%, respectively. 4Q volume growth of ~55% (our view) was industry leading performance. While we remain positive on (1) Berger’s strong positioning in value-for-money paints, (2) strong distribution network especially in East India, (3) aggressive growth strategy and innovation and (4) high probability of market share gains in ancillary segments such as waterproofing and putty, we believe the premium valuations are unjustified and maintain HOLD rating with DCF based revised TP of Rs800.

* Q4FY21 results: Berger reported consolidated revenue, EBITDA, PAT growth of 49.5%, 61% and 101%, respectively. We believe volume growth was ~55% YoY. Key reasons for strong performance were (1) continued momentum in consumer off-take from Q3FY21, (2) recovery metros and tier-1 cities, (3) recovery in industrial paints and (4) favorable base. Gross margin was stable at 43.7% YoY but EBITDA margin expanded 118bps likely due to cost saving initiatives. Standalone business reported revenue and PAT growth of 53% and 2.5%, respectively.

* Revenue recovery in line with sector: The paint sector (four market leading companies) reported revenue and EBITDA growth of 6% and 12.4%, respectively in FY21. While Berger’s Q4FY21 are superior to its peers, we note Berger’s FY21 revenue and EBITDA growth of 7.1% and 12%, respectively is largely in-line with the sector growth rates.

* Higher focus on ancillary products: It has been focusing on ancillary products such as waterproofing and putty. It believes there is immense potential for these segments to grow considering low penetration. We model waterproofing to contribute significantly to Berger decorative business in medium term.

* Rising input prices but some margin tailwinds: Input prices are up 10-100% YoY but we model Berger to report just 50bps lower EBITDA margins due to (1) increase in revenue share of premium paints with recovery in metros, (2) selective price hikes and lower trade schemes, (3) cost saving initiatives, (4) operating leverage and (5) positive contribution from ancillary businesses.

* Maintain HOLD: We model Berger to report revenue and PAT CAGRs of 15.9% and 17.5% YoY respectively over FY21-23. RoE is expected to be stable ~24% over FY21-23. However, we believe the stock price upside is limited at current valuations and hence maintain HOLD rating with a DCF based target price of Rs800. Key upside risk is higher-than-expected market share gains in paints. Key downside risks are steep increase in input prices and increase in competitive pressure.

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