Analyst Corner – Berger Paints: Maintain ‘neutral’ with target price at Rs 540

By: |
August 20, 2020 8:36 AM

Industrial business has been more affected vs other segments. Some recovery seen in two-wheelers and passenger vehicles; commercial vehicles continue to be challenged.

Berger Paints (BRGR) management is upbeat on the growth outlook for 2Q/3QFY21. It expects to close 2Q with positive growth, given July delivered single-digit growth and August has seen double-digit growth so far, and it expects 3Q to be supported by festive demand. Demand recovery was led by tier-2, 3, 4 towns, initially in entry-level products; however, in July-August demand has also been witnessed in premium/luxury products, and therefore management expects mix improvement in 2Q.

The auto coatings’ segment continues to witness sales declines; two-wheelers and passenger vehicles are returning to near-normal levels y-o-y, but commercial vehicles continue to be significantly lower. BRGR continued to consumer higher priced crude inventory through 1Q and GPM was also impacted by inferior product mix; however, in 2Q it expects mix improvement, formulation changes and lower priced crude inventory to benefit GPMs. Operating margins should benefit from renegotiation of existing contracts, scale efficiencies, lower travel and rental costs.

While 1Q demand recovery has been better than expected for most paint companies, largely led by strong demand in tier-2, 3, 4 towns, we expect progressive unlocking in metros / tier-1 cities and the upcoming festival season to continue to support demand recovery. Also, margin expansion should benefit given mix improvement and consumption of low-priced crude inventory. We prefer APNT (strong recovery in decorative) over BRGR (given its rich valuation).

We value BRGR at a P/E of 59x Sep-22F EPS (unchanged), implying a TP of Rs 540 per share (unchanged). We maintain our ‘neutral’ rating with a FY20-23F EPS CAGR of 13% (unchanged). High demand from new launches is a key upside risk; low volume growth is a key downside risk.

April (traditionally a good month constituting c.45% of 1Q sales) was a washout (due to the Covid-19-related lockdowns). Demand returned to 90% of y-o-y level in May, and June saw double-digit volume and value growth with withdrawal of lockdown in most markets; this recovery was partly due to deferred demand from April.

Industrial business has been more affected vs other segments. Some recovery seen in two-wheelers and passenger vehicles; commercial vehicles continue to be challenged.

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