Niche play adds a rosy hue to Berger Paints India

Berger Paints India, one of the leading players in decorative paints segment in the country, stands to benefit from its increased focus on premium market segment along with improving product mix and capacity expansion initiatives.

Business: Berger Paints India, the second-largest player in terms of consolidated sales turnover, engages in manufacturing and sale of various decorative and industrial paints in India and internationally. Its product range includes synthetic enamels, acrylic emulsions, distempers, metal and wood paints, interior wall coatings, and exterior wall coatings. It also provides colour consultancy services and has well established brands like Berger Rangoli, Berger Silk, Berger Illusions, Breathe Easy, Weather Coat, Luxol, Butterfly, Bison, etc that cater to the entire paints spectrum from premium to mass market. The company has seven manufacturing plants in India and one overseas with total installed production capacity of around 3 lakh metric tonne. Berger has significant global presence with seven subsidiaries and two joint ventures in countries including India, Russia, Poland, Cyprus, Bangladesh and Nepal.        

The company derives close to 80% of its revenues from decorative paints while the rest 20% comes from industrial paints (automotive and protective coatings) and external insulation finishing systems. The company has a countrywide distribution network of 14,500 dealers, including 8,000 tinting machines with strong presence in East and North India.

Investment rationale: Berger is the second-largest player in the decorative paints segment with a market share of close to 19% with strong product offerings that cater to economy and premium segments. The company, which till now derived more than three-fourth of revenues in decorative paints from economy products, has increased its focus on high-growth premium segment that offers higher margins as well. The company has launched new emulsion-based products including Weather Coat All Guard and Breathe Easy over the last year to compete with its well-known peers in the premium segment.

Also, it is concentrating on increasing its presence in the high-growth western and southern regions by setting up exclusive retail outlets and increasing distributor base.

In terms of product portfolio, Berger derives equal revenues from water-based (emulsions and distempers) and solvent-based (enamels, primer, etc). The shift towards water-based products would improve its revenues and margins.

Further, the company is looking to nearly double its existing capacities through brownfield expansion and greenfield projects over next 2-3 years. It would also benefit from backward integration initiatives with its Ahmedabad emulsion plant getting partly operational, adding to its operating margins.

The company’s international subsidiaries, though, account for 10% of the overall sales and have been a drag on the bottomline. However, the company has witnessed improvement in sales in its Poland-based subsidiary and better operating performance in its subsidiary at Nepal.    

Concerns: The paint industry’s fortunes being directly dependent on overall industrial and housing segment growth and consumer discretionary spends may be severely impacted if there is a prolonged slowdown in economic growth.  The prices of key raw materials such as crude-based derivatives and titanium dioxide continue to remain firm, and this may lead to pressure on margins if the company is not able to pass on price hikes.

Valuations:  Berger’s revenues are expected to grow at a compounded annual growth rate of over 16% over the next two fiscals on the back of its growing market share and increased capacities. Net profits are likely to grow 17% during this period on improving product mix and backward integration initiatives.

At the current market price of Rs98.90, the Berger stock is trading at 20.34 times its expected earnings per share in fiscal 2012 and 16.72 times its expected fiscal 2013 earnings. Even as the company may face headwinds in the near term due to slowdown in discretionary spends and higher operating expenses, investors may consider the stock on declines from a long-term perspective.

Disclaimer: The writer does not hold any shares in the company