Hold Berger Paints Ltd For Target Rs.790 - Emkay Global
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High input costs dent margins
* BRGR reported largely in-line sales growth of 21% to Rs25.5bn in Q3. EBITDA/PAT declined 5-8% and were 4-9% lower than our estimates. Standalone sales grew by 22% with 12% volume growth. 2-year sales/volume CAGR stood at 23%/19%.
* BRGR saw lower growth than APNT due to slower industrial business. Decorative growth was similar to APNT, as per management. Metros grew faster, aided by a strong festive season. Network expansion has been faster, which is expected to continue ahead.
* Margins were down qoq as Q2 had the benefit of low-priced inventory. Full benefits of price hikes effected in decorative in Q3 should be reflected in Q4 and further price hikes in industrial in Q4 should absorb the cost push and improve gross margins qoq.
* Growth momentum has been strong, but high input cost pressures and risks of moderation in demand limit upsides to earnings. We retain Hold with a revised TP of Rs790 (from Rs820), valuing at 55x Mar’24E EPS vs. 60x Dec’23E EPS, factoring in higher COE.
Healthy sales growth led by volume growth of 12%:
Domestic sales grew by 21% to Rs22.5bn, led by 12% volume growth in the standalone business. Growth differential was higher vs. APNT in Q3 and vs. the previous quarter due to slower industrial business. BRGR posted a 2-year sales/volume CAGR of 23%/19% vs. APNT’s 27%/25%. Consolidated sales grew by 20%, with overseas subsidiaries growing by 15% and other subsidiaries growing by 20%. BRGR saw strong growth in Nepal and Poland. Within industrial, the auto segment was muted.
Margins disappoint on high input cost pressure:
Gross margins fell 760bps due to high input cost pressures. The qoq decline of 160bps despite price hikes was due to high-priced inventory. EBITDA declined by 5%, with margins down 420bps. Significant control on overhead costs (staff costs up 6% and overhead costs up 3%) resulted in a lower EBITDA margin decline. Flat other income resulted in a higher 8% PAT decline. Price hikes of ~15% effected during Q3 should increase realizations by further ~8-10% and improve margins in Q4. Despite the margin pressures, subsidiary profits were up as the base quarter included MTM fluctuations in Russia, which impacted Q3FY21 profitability.
Other highlights:
BRGR’s volume growth was lower than that of APNT due to slow growth in the industrial segment (~20% contribution). Decorative volume growth was similar to APNT, as per management. BRGR has effected a cumulative price hike of 24% since Jan’21; the bulk of it was in Q3FY22. Price hikes in industrial are lagging behind, and the segment should see further hikes in Q4. Management indicated a faster network expansion in 9MFY22 and hopes to sustain that going ahead.
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