Berger growth shines; stock pricey

The management aims to deliver double-digit revenue growth in FY24 aided by accelerated distribution expansion, robust demand environment and an extended festival season. In Q2, the company’s performance could witness moderation in growth due to monsoon, but Q3 is likely to be robust, management said.

Last quarter, Berger saw demand improve in urban and rural markets. It launched a slew of new paint products; and added 1,500 dealers and 1,300 tinting machines to boost penetration. The increased thrust on stepping up distribution channel is understandable given that competitive intensity in the sector is likely to heat up.

Nonetheless, Berger’s consolidated gross margin has expanded by 407 basis points (bps) y-o-y in Q1 to 39.8%. Given steep hit Berger faced due to elevated raw material prices, a bounce-back was much awaited. So, pace of further margin recovery will be a crucial monitorable since management expects to continue to benefit from moderation in raw material prices.

That said, the management does not see any price cuts in the short term as demand conditions are firm. But it added that the competitive landscape is prompting paint companies to give higher rebates and discounts. For FY24, the management sees gross margin in the 38-40% range. On the back of improving cost efficiencies, the Ebitda margin guidance has been revised higher to a 17-18% band from the 16-17% guided earlier.

Despite the various positives, Berger investors are feeling blue. The threat of new entrants such as Grasim Industries Ltd hurting the growth momentum of incumbents remains. There is competition from two sides, bigger companies like Grasim and the unorganized sector. “Due to elevated raw material prices and better pricing power of larger companies, unorganized paint makers took a beating in the recent past. But now, with raw material prices easing, they are seen making a comeback, which could weigh on profitability of incumbents including Berger. And that is a key downside risk,” said an analyst, requesting anonymity.

In short, the near future does not seem so rosy. “We expect Ebitda margin to recover to 17.5-18% in FY2024E but fall by about 250 bps over FY2024-26E, following Grasim’s launch,” said a Kotak Institutional Equities report dated 10 August. While Berger remains a credible number 2 company in decorative paints, the changing competitive landscape (Grasim’s foray) merits a better risk-reward, added the Kotak report.

In 2022, shares of Berger Paints had fallen by nearly 25%. After that dismal performance, the stock is catching up. So far in 2023, Berger’s shares have rallied by 19%. A sharp upside from hereon may not be easy to come by.

At FY25 price-to-earnings estimates, Berger Paints trades at a multiple of 49 times compared to Asian Paints’ 53 times, showed Bloomberg data. In current backdrop, Berger’s valuations are a sore point. “Factoring in margin guidance and healthy Q1 beat, we raise our FY24e/FY25e 2%/3%. However, valuations are rich, leaving little room for a negative surprise,” said a Anand Rathi Share and Stock Brokers Ltd report.

Updated: 11 Aug 2023, 12:48 AM IST