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In-line 2Q. Capex announcements may be interpreted as signaling statements

Berger’s Q2FY23 results were in-line with peers. It's revenue growth of 20% compares with Asian Paints (19%), Kansai (19%), Akzo (25%) and Indigo (24%). While volume growth in Decoratives was 11% (we reckon it's tonnage growth, which is less meaningful), Berger says it has improved market share to 18.8% in H2FY23 from 18% in FY22. Though gross margins declined by 300bps to 35.3% in Q2FY23, we model it to recover to ~39% by Q4FY23. It plans to invest aggressively in capex, similar to the market leader. It also plans to increase capacity by 33% with commencement of plant at Sandila, UP and an additional unit at West Bengal. It also has plans for brownfield capex at Hindupur and Rishra. These may be interpreted by consensus as signaling to newer entrants (read Grasim). Our neutral stance on paints sector remains intact. REDUCE.

* Q2FY23 results: Berger reported revenue, EBITDA and adjusted PAT growth of 20%, 2.8% and 0.2%, respectively YoY. Berger reported volume growth of 11% in decorative. The volume growth in Industrial paints was slightly lower than 11%. Gross and EBITDA margin declined 300bps and 228bps, respectively YoY due to high input prices and adverse revenue mix. Standalone revenue and EBITDA were up 22.5% and 4.7%, respectively YoY. Standalone PAT declined 0.4% YoY.

* Segment-wise details: While T1, T2 and T3 cities have performed well, the off-take in rural markets was impacted. Due to prolonged monsoon, sales of exterior emulsions were affected but waterproofing segment performed well. In Industrial paints, auto, infrastructure and protective paints did well.

* Capacity expansion plans: The company plans to commence production at Sandila, UP for decorative paints. It will increase capacity by 33% and will be sufficient for next 2.5-3 years. Berger also plans to invest in Panagarh, West Bengal in capacity of construction chemicals, resins and industrial products. It also plans to invest in brownfield expansion at Hindupur and Rishra.

* Margin improvement in H2FY23: The company expects to improve gross margin to 37-38% in Q3FY23. We model further margin expansion in Q4FY23 with correction in input prices as well as improvement in revenue mix.

* Maintain REDUCE: We model Berger to report revenue and PAT CAGRs of 19.7% and 21.9% YoY respectively over FY22-24. RoE is expected to be stable ~23% over FY22-24. However, we believe the stock price upside is limited at current valuations (46x FY24E EPS) and hence maintain REDUCE rating with DCF-based revised target price of Rs545. Key upside risk is higher-than-expected market share gains in paints and steep correction in input prices.

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