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Likely market share gains in value-for-money emulsions, putty and waterproofing

Berger’s Q1FY22 was stronger than consensus and our estimates. We believe the company has continued to gain market shares in low priced emulsions, waterproofing and putty markets from smaller/ unorganized players. Its revenue growth trajectory was slightly better than Asian Paints but tad weaker than Kansai. Berger’s gross margin (38.6%) was also comparable with Asian Paints (38.4%) but Berger’s EBITDA margin was 13.3% compared to 16.4% EBITDA margin of Asian Paints.

While we remain structurally positive on (1) Berger’s strong positioning in value-for-money paints, (2) established 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 Rs850.

* Q1FY22 results: Berger reported consolidated revenue, EBITDA, PAT growth of 93.2%, 159% and 812.1%, respectively. (Two-year revenue and PAT CAGR was 2.4% and -10.5%, respectively). We believe volume growth was ~100% YoY. Key reasons for strong performance were (1) recovery in metros and tier-1 cities, (2) recovery in industrial paints and (3) favorable base. Gross margin declined 240bps YoY due to higher input prices but EBITDA margin expanded 337bps due to cost saving initiatives. Standalone business reported revenue and PAT growth of 96% and 172%, respectively.

* Revenue recovery better than peers: Berger’s Q1FY22 revenue growth of 93.2% was better Asian Paints (91.1%) and Indigo (49.2%) but lower than Kansai (119.6%). We believe Berger has continued to gain market shares at the value-for-money emulsions and distempers.

* Rising input prices but some margin tailwinds: Input prices are up 10-100% YoY but we model Berger to report 60bps lower EBITDA margins in FY22 over FY21 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 17.4% and 18.6% 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 Rs850. 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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