Berger Paints’ management is encouraged to see demand recovering faster than expected. Demand is being driven by tier-3/4 cities (less impacted by Covid-19) and is currently at near-normal levels.
Berger Paints’ management is encouraged to see demand recovering faster than expected. Demand is being driven by tier-3/4 cities (less impacted by Covid-19) and is currently at near-normal levels. While January-February volume growth was in double digits, March volume fell by 45% due to lockdown (we estimate Q4 volume decline in low-single digits). While April was a washout, May witnessed good demand. The management expects volume growth in June, supported by pent-up demand and channel filling. The auto/industrial segment continues to be impacted; the management expects continuing weakness in commercial vehicles while the company is seeing two-wheeler paint demand at 70-80% of last year’s levels.
Berger is on a cost-cutting drive and could pass on input cost benefit during the year. It expects to continue to grow its dealer network by c 10-12%. While we expect severe impact on demand in H1FY21, we expect demand to recover in H2FY21. However, at the current price, there is little room for error.
Overall, demand recovery is shaping up well (June could end with volume growth), which highlights the resilient characteristics of the category; demand in tier-3/4 cities is at near-normal levels; but metros continue to be severely impacted; while premium products are witnessing growth, entry-level products are growing much faster, hence the effect of premiumisation in value growth is not clearly visible; value growth to continue to be lower than volume growth in FY21, according to the management. However, margins would not be impacted as economy products continue to have company-average margins.
We cut FY20F/21F/22F PAT by 6%/6%/5% as we factor in the weak Q4FY20. We value Berger at a P/E of 59xFY22F EPS (unchanged) at a 10% premium to its past three-year average trading multiple, as we expect high long-term volume growth, high earnings’ visibility and an unleveraged balance sheet. Upside risks, high demand from new launches, higher-than-expected margins from new segments, low input cost inflation; downside risks, low volume growth, high competitive intensity, and a sharp increase in input costs.