- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Read More >
-
Stock Recommendation | BERGER PAINTS LIMITED – SELL – Target Price : 280
Publish date: FEBRUARY 08, 2019
Strong performance, valuations ahead of performance Strong volume growth in the decorative segment, stable volumes in the industrial segment, raw material price inflation were the highlights of the results for Berger during Q3FY19.
■ Berger reported high double digit volume growth on a high base in the decorative segment. Mass end-products (distemper and putty) recorded higher growth due to market share gains from unorganized players. Growth in Industrial, Automotive, and Protective segments was also healthy in the quarter. This led to revenue of Rs 16.17 bn (highest ever and +21.7% YoY). The volume growth was ahead of peers Asian Paints and Kansai Nerolac implying market share gains for Berger.
■ Operating margins contracted marginally to 14.6% (-200 bps YoY and +70 bps QoQ) despite high input cost inflation in large part of the quarter. Consumption of high cost inventory, rupee depreciation and sticky prices in the industrial segment in large part of the quarter impacted the gross and Ebidta margins for the quarter. To mitigate input cost inflation, the company has taken a total price hike of 5.5% in 9MFY19 with the company expecting the margins to return to normal levels from Q4FY19
■ Depreciation, interest cost, other income and taxes were stable for the company during the quarter.
■ Consequently, company reported strong PAT of Rs 1.34 bn (+3.3% YoY) in a challenging quarter which is commendable.
■ Management is confident of strong volume and sales growth and further improvement operational performance in Q4FY19 and Q1FY20.
We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of Berger also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term.
Berger’s performance has been better than peers and is indicative of continued market share gains. For Berger, we estimate 10% volume CAGR over FY18 – FY20E with improvement in operating margins and ROE of ~23.3% and ROCE of ~30.4% for FY20E. However, post factoring the growth prospects and post comparison with other big players, the current valuation is stretched for Berger. Maintain estimates and SELL recommendation with an unchanged TP of 280 at 41x FY20E.
Management indicated the sales performance of Q2FY19 could be attributed to:
Decorative segment - The Company reported high double digit volume growth in the decorative segment for Q3FY19. The decorative business constitutes around 80% of Berger’s overall business and typically grows at 1.5x the GDP of the country. The current volume growth on a large base (~15% volume growth in Q2FY19 as well) and relatively slower volume growth for other players indicate market share gains for Berger. Berger is expecting healthy volume growth in the decorative segment on the back of low per-capita consumption in the country, strong urbanization trends, shortening re-painting cycles, up-trading and increased government spending in an election year. We also believe that the reduction in GST on Paints (from 28% to 18%) from 27th July, 2018 to further aid volumes for the company.
Industrial paints segment - In Industrial paints, Berger is primarily present in Automotive coating and Industrial coating. Automotive paints constitute around 10% of the overall revenues of the company and remains strong for the company with healthy demand of automobiles in the country. Berger is empanelled with all major automobile companies in the 2 wheeler and 3 wheeler segment. While general industrial coating constitute around 8% of the overall revenues of the company. Management expects general industrial segment to do well in Q4FY19 and Q1FY20, which should boost the overall performance of the company.
Berger Paints has a total of 7 subsidiaries and 2 associates contributing about 10% of the overall revenues. Of these 7 subsidiaries the top 3 in terms of revenue are;
1) Berger Jenson and Nicholson, Nepal (~3% of overall revenues)
2) Bolix, Poland (~4% of overall revenues)
3) Saboo coatings (~1.5% of overall revenues)
Adverse currency movement and raw material price inflation led to Berger booking loss of Rs 10 mn from associates/subsidiaries.
Paint Industry uses two key raw material including crude derivatives (60%) and Titanium Dioxide (30%). The paint Industry was experiencing increase in prices of raw material for entire FY18 and till end of November 2018. Competition, time lag between RM price increase and product pricing and sticky nature of product prices for industrial customer’s impacted the gross margins of the company in Q3FY19.
However with correction in crude price to $60/barrel (-25% in the last 2 months), prices of crude derivatives have also decreased. Even prices of pigments like Titanium Dioxide, Iron oxide and Zinc oxide have shown softness in prices in the last two months. Correction in raw material prices is positive for paint companies and can provide an uptick to gross margins in Q4FY19 in a strong demand environment.
We believe that Berger will continue to gain market share with aggressive expansion of its dealer network (5-10% increase each year), aggressive sales push, higher dealer margins and focus on improving geographical reach. Reduction in GST rates can drive further improvement in demand. Berger’s performance has been better than peers and is indicative of continued market share gains. For Berger, now we estimate 10% volume CAGR over FY18 – FY20E with improvement in operating margins and ROE of ~23.3% and ROCE of ~30.4% for FY20E. However, post factoring the growth prospects and post comparison with other big players, the current valuation is stretched for Berger. Maintain estimates and SELL recommendation with an unchanged TP of 280 at 41x FY20E.
Berger Paint is the second largest decorative paint company in India and third largest in domestic industrial segment. It enjoys ~19% share of organized domestic decorative market. Berger also has a presence in overseas markets, prominent ones being Nepal (where it is a significant player in decorative market) and Poland (where it is second largest player in external insulation finishing system).Berger also has two JVs where Berger has 49% stake – a) Berger Becker Coatings Pvt Ltd catering to coil coatings – JV with Becker Industrifarg, Sweden which is a leading coil and special coatings player in Europe, and b) BNB Coatings India Ltd for manufacture of coatings for plastic substrates – JV with Nippon Bee Chemicals Co Ltd of Japan.
BUY - We expect the stock to deliver more than 12% returns over the next 12 months ADD - We expect the stock to deliver 5% - 12% returns over the next 12 months REDUCE - We expect the stock to deliver 0% - 5% returns over the next 12 months SELL - We expect the stock to deliver negative returns over the next 12 months NR - Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE - We advise investor to subscribe to the IPO. RS - Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA - Not Available or Not Applicable. The information is not available for display or is not applicable NM - Not Meaningful. The information is not meaningful and is therefore excluded. NOTE - Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark. Kotak Securities Limited established in 1994, is a subsidiary of Kotak Mahindra Bank Limited. Kotak Securities is one of India's largest brokerage and distribution house.
Kotak Securities Limited is a corporate trading and clearing member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE), Metropolitan Stock Exchange of India Limited (MSE). Our businesses include stock broking, services rendered in connection with distribution of primary market issues and financial products like mutual funds and fixed deposits, depository services and Portfolio Management.
Kotak Securities Limited is also a depository participant with National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Kotak Securities Limited is also registered with Insurance Regulatory and Development Authority as Corporate Agent for Kotak Mahindra Old Mutual Life Insurance Limited and is also a Mutual Fund Advisor registered with Association of Mutual Funds in India (AMFI). We are registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advise/warning/deficiency letters/ or levied minor penalty on KSL for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time.
We offer our research services to clients as well as our prospects.
This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions.
This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients.
We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals.
Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
We and our affiliates/associates, officers, directors, and employees, Research Analyst(including relatives) worldwide may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the subject company/company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of Research Report or at the time of public appearance. Kotak Securities Limited (KSL) may have proprietary long/short position in the above mentioned scrip(s) and therefore may be considered as interested. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL. Kotak Securities Limited is also a Portfolio Manager. Portfolio Management Team (PMS) takes its investment decisions independent of the PCG research and accordingly PMS may have positions contrary to the PCG research recommendation. Kotak Securities Limited does not provide any promise or assurance of favourable view for a particular industry or sector or business group in any manner. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and take professional advice before investing.
The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. Details of Associates are available on www.kotak.com
Research Analyst has served as an officer, director or employee of subject company(ies): No
We or our associates may have received compensation from the subject company(ies) in the past 12 months.
We or our associates have managed or co-managed public offering of securities for the subject company(ies) in the past 12 months: No
We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company(ies) in the past 12 months. We or our associates may have received compensation or other benefits from the subject company(ies) or third party in connection with the research report. Our associates may have financial interest in the subject company(ies).
Research Analyst or his/her relative's financial interest in the subject company(ies): No
Kotak Securities Limited has financial interest in the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: Yes
Our associates may have actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report.
Research Analyst or his/her relatives has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No.
Kotak Securities Limited has actual/beneficial ownership of 1% or more securities of the subject company(ies) at the end of the month immediately preceding the date of publication of Research Report: No
Subject company(ies) may have been client during twelve months preceding the date of distribution of the research report.
"A graph of daily closing prices of securities is available at https://www.nseindia.com/ChartApp/install/charts/mainpage.jsp and http://economictimes.indiatimes.com/markets/stocks/stock-quotes. (Choose a company from the list on the browser and select the "three years" icon in the price chart)."
Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. CIN: U99999MH1994PLC134051, Telephone No.: +22 43360000, Fax No.: +22 67132430. Website: www.kotak.com/www.kotaksecurities.com. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, MSE INE 260808130/INB 260808135/INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. NSDL/CDSL: IN-DP-NSDL-23-97. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing. Investments in securities market are subject to market risks, read all the related documents carefully before investing. Derivatives are a sophisticated investment device. The investor is requested to take into consideration all the risk factors before actually trading in derivative contracts. Compliance Officer Details: Mr. Manoj Agarwal. Call: 022 - 4285 8484, or Email: ks.compliance@kotak.com.
In case you require any clarification or have any concern, kindly write to us at below email ids:
● Level 1: For Trading related queries, contact our customer service at 'service.securities@kotak.com' and for demat account related queries contact us at ks.demat@kotak.com or call us on: Toll free numbers 18002099191 / 1800222299, Offline Customers - 18002099292
● Level 2: If you do not receive a satisfactory response at Level 1 within 3 working days, you may write to us at ks.escalation@kotak.com or call us on 022-42858445 and if you feel you are still unheard, write to our customer service HOD at ks.servicehead@kotak.com or call us on 022-42858208.
● Level 3: If you still have not received a satisfactory response at Level 2 within 3 working days, you may contact our Compliance Officer (Mr. Manoj Agarwal) at ks.compliance@kotak.com or call on 91- (022) 4285 8484.
● Level 4: If you have not received a satisfactory response at Level 3 within 7 working days, you may also approach CEO (Mr. Kamlesh Rao) at ceo.ks@kotak.com or call on 91- (022) 4285 8301.
Also read
- Read our latest stock recommendations
- Check out market strategy research
- Live insights about stock markets
- HDFC Bank Q1 result: Key highlights
- How to attain financial freedom
Don't have an account? Click here to open an account
