Reduce Berger Paints Ltd For Target Rs. 564 - Elara Capital
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Margins peak out Market share gains on the back of strong festival season Berger Paints’ (BRGR IN) Q3 net sales grew 7% YoY, led by value/volume growth of 6.4%/9.1% in the standalone business. Decorative coatings outperformed with double-digit volume growth driving steady market share gain. The value-volume disparity in decorative coatings stemmed from a November price reduction and a greater proportion of economy-grade products. Nonetheless, compared with Q2, the gap has narrowed due to reduced emphasis on putty products. Growth in decorative coatings was boosted by festive season but demand waned post-Diwali, persisting until January. Tier II/III cities showed a stronger performance in Q3. Waterproofing and wood coatings sectors demonstrated resilience. Automotive and General Industrial Coatings experienced moderate growth, albeit on a high base. Internationally, BJN Nepal experienced a slowdown, while the Bolix Poland subsidiary saw significant growth. Decorative coatings – Initiatives in place to fill gaps BRGR holds less market share in luxury interior coatings compared with its strong presence in exterior coatings, wherein Weathercoat dominates. It plans to use the brand power of Easy Clean, particularly successful in the semi-luxury segment, to attract consumers to upgrade. In Q3, BRGR expanded its reach to >2,300 new retail touchpoints and 1,300 colorbank machines, aiming to deepen its presence in less competitive markets. Q4 EBITDA margin could deteriorate sequentially Q3 EBITDA margin improved 370bps YoY to 16.7%, led by gross margin expansion but was slightly hit by incremental ad-spends of 150bps. The management may aim to sustain EBITDA margin in 15-17% range going ahead. However, in Q4, margin may see slight deterioration from Q3 level due to incremental price cuts of 2.7% taken in January. Valuations: Reiterate Reduce with a TP of INR 564 We cut FY25E/26E earnings estimate 6.3%/6.5%, to factor in lower-than-anticipated margin. We reiterate Reduce as deteriorating category dynamics are an overhang, with TP unchanged at INR 564, on 45x (unchanged) FY26E EPS of INR 12.5 as we roll-forward.
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