Berger Paints: Near term positives priced in, upside limited
reported in line performance for the last quarter of FY18. Growth in revenue was driven by strong double-digit volume growth during Q4. Operating margin expanded despite inflationary cost pressures on account of cost control measures and better product mix. Being an industry leader in the paints industry, the company is expected to grow faster than the industry and gain market share.
For the quarter gone by, revenues increased 16.7 percent year-on-year (YoY) to Rs 1,298 crore. Earnings before interest, tax, depreciation and amortisation (EBITDA) increased 24 percent YoY to Rs 200 crore as margin expanded around 90 basis points to 15.4 percent. Profit after tax remained stable on account of lower other income, higher interest costs, losses in the joint venture with Nippon Paints Automotive Coatings and increase in taxes.
The company ended FY18 with a topline growth of 13.5 percent. However, EBITDA grew 12.3 percent as margins contracted in a challenging cost environment.
Strong business performance
Strong operational performance for Q4 FY18 was led by expansion in dealers, sales network and better product mix. Demand outlook is improving after the hiccups related to rollout of the Goods & Service tax faced in Q1 and Q2 of last year.
The company recorded around 11 percent YoY growth in the decorative paints business, with overall domestic volumes growing 14 percent. Overall volume growth was in line with that of it peer Asian Paints, which reported low double-digit growth in the quarter gone by.
Berger Paints is witnessing strong demand in the decorative and automotive segments and expects margins to gradually improve in the industrial business.
The management is planning to set up an integrated paint plant at an investment of about Rs 200 crore in Uttar Pradesh’s Sandila industrial area. This plant will be set up in a phased manner and is expected to get completed by FY19-end. Capex for the UP plant will be funded through internal accruals. It does not plan to incur major capex in FY19, apart from the usual maintenance capex.
International business and JVs on a recovery path
Performance of Berger Nippon Paints Automotive Coatings, the JV between Berger Paints and Japan-based Nippon Paints, was impacted by adverse currency fluctuations and initial start-up costs.
Its Nepal business is making robust progress in terms of revenue growth and profitability. Performance of its Poland-based subsidiary, Bolix, also improved on a yearly basis. In Europe, the company created another subsidiary in the UK and expects strong business from this segment in 2019.
Input costs continue to rise
Titanium di oxide (TiO2), the key raw material for paint companies, continues to move northwards. Its average selling price was around 26 percent higher YoY in the first quarter of 2018. In April, quarterly contract prices of TiO2 touched the highest levels in the last 5 years. Constrained demand-supply scenario will keep prices of TiO2 at elevated levels for the next couple of quarters.
Apart from high TiO2 prices, the company is also facing cost pressures on other raw materials. The prices of monomers and crude oil derivatives, which mirrors oil price movements, have moved up both on a sequential as well as year-on-year basis. A large portion of these raw materials are imported. Adverse movement in the dollar-rupee is adding to industry woes.
Berger Paints have been tackling persistent input cost pressures with gradual price hikes. As input costs continue to inch up, the management is gradually raising prices to pass it on to customers. After the 1.5 percent hike announced in March, it announced another price hike of 2 percent effective May.
Outlook and recommendation
GST and implementation of the Rural Estate Regulatory Authority hampered consumer demand to a large extent last fiscal. However, the demand environment is gradually improving as the economy is on a gradual recovery path after these disruptions. Paint companies will be prime beneficiaries of GST in terms of market share gains from the unorganised segment.
The management is optimistic on demand in FY19 and remains confident that the recent price hikes will ease off margin pressures.
At 45 times FY20 price-earnings multiple, the valuation multiple of Berger seems in line with that of FMCG front-runners and also the sector leader Asian Paints. The current valuations seem to factor in near term positives and offers limited upside from current levels.
For more research articles, visit our Moneycontrol Research page