Berger Paints Ltd.’s September quarter earnings were solid, with year-over-year growth of nearly 28%. Analysts say revenue growth was helped by a number of positive factors, including improved sales in the industrial paint segment and a hike in prices. While Berger’s second-quarter revenue growth was ahead of analysts’ expectations, it lagged close competitors Asian Paints Ltd.
“On a two-year basis, Asian Paints’ standalone sales growth rate (up 44%) was above Berger’s (up 35.5%). On a two-year basis, Berger’s consolidated sales growth stood at 39.2% versus Asian Paints’ 40.5%, analysts at Edelweiss Securities Ltd said in a note. In addition, Berger forecasts volume growth of around 20%, surpassing Asians. The annual sales of paints in the decorative segment has grown by 34 per cent.
However, Berger’s operating performance has been better than Asian Paints amid challenges of cost inflation. On a consolidated basis, Berger’s Q2FY22 EBITDA margin fell 333 basis points (bps). One basis point is one hundredth of a percentile. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
Asian Paints saw its operating margin decline by 1090 bps, followed by Kansai Nerolac’s 937 bps and Indigo Paints’ 690 bps margin decline.
Analysts at ICICI Securities Ltd said in a report, “Berger’s Q2FY22 EBITDA margin was lower on account of decline in margins, price appreciation vis–vis the market leader, market share gains in Economy Paints and potential reduction in operating leverage and ad-spending. ”
As for Berger’s gross margin, it fell 449 bps, impacted by input cost inflation. Asian Paints’ gross margin declined by 970 basis points in the second quarter of FY12. Of course, paint companies are raising prices marginally to protect their margins, but analysts say it is unlikely to compromise market share gains by focusing on price hikes. In simple words, cost inflation concerns are unlikely to subside anytime soon.
“While the Input Price Index is around 60%, we believe that the paint industry and Berger are behind the curve in passing overall input inflation as they are gaining market share and want to continue to do so rather than focus solely on margins. There will be some indication to new competitors. We model the profit pool of the paint industry to remain under pressure in H2FY22 and FY23,” ICICI added in the report.
Meanwhile, Berger’s shares are trading at nearly 90 times the one-year forward price-to-earnings multiple, which is slightly ahead of Asian Paints’ PE multiple of 88 times. With this, Berger is the most expensive listed Indian paint stock. But analysts warn that these costly valuations are unlikely to last until the full cost of cost inflation is offset.
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