Berger passes with flying colours in June quarter

Distribution expansion plans improve volume growth visibility; low input cost will aid profits

The Berger Paints stock has gained 7 per cent in just three session, outperforming the 2.6 per cent gain by Asian Paints.

This comes after Berger announced a strong set of numbers for the June quarter (Q1) on Monday, after market hours. In fact, Berger’s stock hit its all-time high of ~356.95 on Thursday. Sturdy volume growth and profitability in Q1, which also improves the FY20 earnings visibility, cheered the Street.

The firm reported 12 per cent volume growth, driven by higher sales growth in tier2 and tier-3 towns. Average price cuts of 0.5 per cent in solvent-based products, along with focus on distribution, pushed volume offtake.

Of the total active dealers (close to 20,000 in FY19), 70 per cent are in such cities. The management’s plan to expand the distribution network by 10 per cent every year should auger well and help reap benefits from supportive demand for paints.

A lower GST rate, reduction in repainting cycle (from 7 to 5 years) are other factors improving volume growth visibility of organised paint makers like Berger. In fact, a major chunk of the overall paint demand comes from repainting. Analysts at Edelweiss Securities expect Berger to clock 12.5 volume growth in FY20, marginally lower than 14 per cent in FY19.

Further, the 6 per cent price hikes in FY19 supported overall top line growth of 15.7 per cent year-on-year to ~1,717 crore. The price hikes, along with benign input costs, propelled operating profit. The Ebitda (earnings before interest, tax, depreciation and amortisation) margin expanded by 164 bps YoY to 17.8 per cent.

Prices of key raw material such as titanium dioxide and crude oil derivatives remained lower. For instance, prices of titanium dioxide plunged 14 per cent YoY and 5 per cent sequentially. Further margin support came from faster growth in highmargin premium products.

Net profit, therefore, surged 31.8 per cent YoY to ~176.4 crore. The input price trend remains key, though it is still supportive, thereby improving near-term earnings visibility.

However, stretched valuations may limit the upside for the stock, which is trading at 46 times its FY21 estimated earnings, or at a 21 per cent premium to its 5-year historical average 1-year forward valuations.