634690904394736279Retail Research - Berger Paints

7/30/2019 634690904394736279Retail Research - Berger Paints

1/9

Berger Paint s I ndia Ltd.

1

BERGERPAINTSINDIALTD. BUY

ABOUT BERGER PAI NTS I NDI A LTD.

Berger Paints India Ltd. (Berger) is engaged in thebusiness of manufacture of paints. By virtue of itsconsolidated turnover, Berger is the 2nd largest paintmanufacturer in India. The Company manufactures andmarkets a wide range of decorative & industrial paintproducts under several brands. It has sevenmanufacturing facilities in India, four facilities overseas,more than 85 depots and a strong distribution networkof 15000 plus dealers. It has several regional & areaoffices to support its operations spread across India.

MAJOR BUSI NESS AREAS OF BERGER

A. Decorative Paints

Decorative Paints segment contributes 80 % of Bergerstotal revenues. Under this segment, it sells interior wallcoatings, exterior wall coatings, metal and wood paints,green paints. Recently the Company has forayed intoConstruction Chemicals space.

B. Industrial Paints

Industrial Paints segment accounts for the remaining

20% of the Companys total revenues. Berger sells paintproducts to General Industrial and Automotive segment.Berger offers consultancy services to various userindustries and engineering consultants by providingthem with painting specifications, helping them followgood painting practices and guiding them againstprotection from corrosion.

Retail Equit y Research02

ndApril, 2012PriceTarget :Rs.123

PotentialUpside:14.4%


2/9


2


3/9


3

I NDUSTRY ANALYSI S PAI NTS

Paint Industry can be divided into 2 segments - Decorative paints and Industrial paints. Decorativepaints segment which includes Interior and Exterior Wall Finishes, Enamels, Wood Finishes andAncillary products accounts for nearly 70% of the industry sales, while the Industrial paints segment,

which comprises Automotive and Industrial, Protective, Powder, Coil and Marine Coatings accounts forthe remaining 30% of the industry sales.

Realty and Housing sector drive the demand for Decorative paints which constitute the majoritydemand in the paint industry. Hence they are the main drivers for the Paints industry. Industrialgrowth, especially in sectors like Infrastructure, Construction, Automobiles, Consumer durables andindustries which require paint, etc. contribute to the demand for Industrial paints.

The demand for Decorative paints in rural areas has grown remarkably over the years. Higherdisposable incomes, desire for a better standard of living etc have changed their spending habits andcontributed to this robust demand for Decorative paints. Many households are shifting from lime washor unpainted walls to entry level paint products. Moreover, the time frame for repainting has gradually

shrunk from 5 6 yrs to 3.5 4 yrs. Indias per capita consumption of paints per annum at 0.5 kg isamong the lowest in the world as compared to the global average of 10-13 kgs. This gives plenty ofroom for the Paints industry to expand in future.

Over the years, the Indian Paints industry has witnessed a gradual shift towards the organized playerswho command nearly 65 % of the market share. Berger Paints, Asian Paints, Kansai Nerolac, AkzoNobel and Shalimar Paints are the major players in the organized segment. The remaining share is heldby the unorganized sector which comprises of around 2000 small scale paint units. Customers are nowmoving towards the organized players as they have become more conscious towards brands andquality of products. The size of the Indian Paints industry is estimated at roughly Rs. 24,000 crores.

Over the last few years Paint manufacturers have introduced various paint products with value-added

features like weather protection, various types of textures, eco-friendly production, low Volatile OrganicContent (VOC) etc. These products often fetch a better premium over regular paints and provide the

manufacturers with higher margins. The number of eco-friendly paint products available in the markethas risen steadily. Consumers are attracted towards eco-friendly paint products as they are not harmfulto both human beings as well as the environment.


4/9


4

PAI NT I NDUSTRY - FUTURE OUTLOOK, OPPORTUNI TI ES & GROWTH DRI VERS

Higher disposable incomes to drive demand for Decorative Paints The average Indianconsumer, backed by higher incomes & purchasing power has become more conscious about aestheticsand quality of living. This is also helped by the spread of audio-visual media, internet andcommunication facilities and will translate into a robust demand for decorative paints. Moreover,

housing construction, urbanization and affordable housing have helped boost sales in the decorativesegment.

Faster growth in rural areas The demand for paints in rural towns has witnessed a faster growthas compared to urban areas. Rising disposables incomes and a preference for a higher standard ofliving have changed the spending habits in rural areas. Consumers have slowly shifted from lime washor unpainted homes to entry level paint products. However rural towns still have a huge untappedpotential.

Robust grow th in Real Estate Sector to dr ive demand for decorative paints The demand forreal estate is expected to grow at a Compound Annual Growth Rate (CAGR) of 19% between 2010 and2014. Out of this, Tier 1 metropolitan cities are projected to account for about 40%. Apart from

housing, demand for space from sectors like education, healthcare etc is also slated to rise. This willtranslate into a robust demand for paints in future.

Economic recovery in I ndustrial & I nfrastructural sector Economic growth in sectors likeconstruction, automobile, manufacturing which require industrial paints drive the demand for Industrialpaints. These sectors are dependent on overall economic growth of the nation. Strong industrial activitybacked by government spending can drive the demand for industrial paints.

I NVESTMENT RATI ONALE

Robust financial performance Bergers consolidated net sales have grown at a decent CAGR of

17.54 % in the last five years. Continuous focus on expanding geographical coverage through a largedealer network and on newer and more innovative products for its customers boosted its top line.

Source: Company/TSL Research


5/9


5

Stable operat ing m argins Operating profit margins maintained by occasional price hike in its paintproducts, has offset the rise in price of its key raw materials. Over the last five years, operating profitmargins have ranged between 10 12 %. Going forward we expect continuous improvement in itsproduct mix which will help them to maintain its growth momentum.

2nd largest player with a strong distribution network Berger is an established player in the

Indian Paints industry. It owns strong and established paint brands. By virtue of its revenue, it is the2nd largest player, after Asian Paints. This gives Berger a significant advantage in the Paints market.

Continuous focus on expanding its domestic geographic reach Berger is continuouslyfocusing on roping in new dealers, innovating new products and improving the products bouquet foreach dealer to enhance its geographical reach in India. The Company has expanded its total dealer

network to more than 15000 (FY 2012), with approximately 700 dealer addition every year.

Foray into Construction Chemicals segment Berger recently forayed into the ConstructionChemicals space after launching a new range of construction chemicals and new roof paint under itsbanner - Home Shield. It plans to develop this new segment significantly and targets sales to the tuneof Rs 25 crore during FY 2012-13 and Rs 100 crore in next three years.

Product i nnovat ion t o mat ch changing consumer needs and dynam ic business envir onment

- Berger innovates in terms of new products and offerings with varied uses through constanttechnological advancement & upgradation to be able to tap every consumer segment. Some of itsrecent additions are Emulsion and Enamel in Breathe Easy category, niche products in roofing andceiling compounds or paints, wood coatings area. In the industrial and protective coatings segment, it

has made technological advances to offer better products with varied uses.


6/9


6

Growth in Premium products in Decorative Paints segment Berger is focusing on developingits premium emulsion category which has witnessed significant growth in the last few years. Moreoverthrough product innovation, it is trying to capture opportunities for technically superior premiumproducts in the Decorative Paints segment. This demand is fuelled by higher purchasing power,increased urbanization and rising construction activity in the housing segment.

Fig: Demand drivers for Decorative paints segment

Risks and ConcernsSharp in crease in pri ces of k ey raw mat erials - Raw Materials and packaging costs form a majorcomponent of the manufacturing cost. Rise in price of key raw materials like Rutile due to inflation andshortage of its availability push up the manufacturing cost and exerts pressure on Bergers profitmargins. Moreover prices of some raw materials are also linked to crude oil and witness pricefluctuation similar to crude oil. Moreover depreciation of Indian Rupee against the US Dollar also

aggravates the problems. Berger passes this rise to its customers through occasional price hikes of itsproducts.

Slackening of demand due to pace of economic growth and seasonality Demand forIndustrial Paint depends upon economic growth. A weaker growth in industries like automobile,manufacturing, infrastructure directly impacts demand for industrial paint. Demand for Decorativepaints which accounts for nearly 80% of Bergers total sales depends upon Housing and Real Estatesector. However demand for Decorative paint rises during festive months and is seasonal in nature.Moreover a lower than normal monsoon also affects the demand for paints.


7/9


8/9


8

Bergers consolidated net sales have grown from Rs 1396.93 Cr in FY 2008 to Rs 2328.12 Cr in FY2011. Good product mix and technologically upgraded varieties of paints and a continuous expansion ofdealer network boosted its top line. Berger is generating healthy Operating Cash Flows from its

business, which will help in future as it expands its operations. These were to the tune of Rs 127.39 Crin the FY 2011.Bergers Profit after Tax has also risen from Rs 93.03 Cr in FY 2008 to Rs 150.09 Cr inFY 2011 due to rich product mix. Over the last 4 years, Berger has generated a consistent Return onNet Worth to the tune of 20 to 26 %.

Bergers Quarterly EPS in the 3rd Quarter ended 31st December 2011 remained flat on a Quarter onQuarter basis at Rs 1.42. Rising price of raw materials due to factors like inflation, high crude oil prices,lack to availability etc. resulted in lowering Bergers margins, but Berger has managed to pass on somehikes to its consumers. As the Company shifts to water based paints from solvent based paints,margins are expected to remain stable and improve in future.

Valuation:

At the current price levels, Berger is trading at a TTM PE of 22 times. Berger is continuouslyexpanding operations and improving margins with a better product mix. Considering its marketposition, its strong distribution network, Berger is expected to perform well in future. Goingforward in FY 2012-13 we have taken a conservative 14.5% growth in PAT. At a conservativeestimate Bergers EPS is expected to touch Rs 5.59 in FY13.Valued at current TTM PE multiple of22, the estimated future price will be Rs. 123, giving a potential upside of 14.4% over a period of oneyear.

Source: Company/TSL Research


9/9


9

Tata Secur it ies Limit ed

One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai 400 001

Tel: 91 22 6745 9000 Fax: 91 22 6610 6722

Web: www.tatasecurities.comSEBI Registration Number BSE INB010664150 INF011207954 NSE INB/F/E231288730 Portfolio Manager INP000003872

Depository Participant of CDSL: IN-DP-CDSL-450-2008 Depository Participant of NSDL: IN-DP-NSDL-298-2008 Merchant Banker INM 000011302

Compliance Officer: Mr. Umesh Maskeri : 022 - 61827805 email:[email protected]

Head- Retai l Research: Sanjit Sen, B.Com ( Hons), A.C.A Email i d: Sanjit .Sen@tat acapital .com

DI SCLAI MER

Analyst Certification: I, Vasu Goyal, the research analyst and author of this report, hereby certify that the views expressed in this research reportaccurately reflect my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of thecompensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. Theanalyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (TataSecurities Limited, hereinafter referred to as TSL) and has taken reasonable care to achieve and maintain independence and objectivity in making anyrecommendations.

Disclaimer

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. TSL isnot soliciting any action based upon it. Nothing in this research report shall be construed as a solicitation to buy or sell any security or product, or toengage in or refrain from engaging in any such transaction. In preparing this research report, I did not take into account the investment objectives,financial situation and particular needs of the reader.

This research report has been prepared for the general use of the clients of the TSL and must not be copied, either in whole or in part, or distributed orredistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research report inany way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. TSL will not treat recipientsas customers by virtue of their receiving this report. Neither this document nor any copy of it may be taken or transmitted into the United States (to USPersons), Canada or Japan or distributed, directly or indirectly, in the United States or Canada or distributed, or redistributed in Japan to any residentsthereof. The distribution of this document in other jurisdictions may be restricted by the law applicable in the relevant jurisdictions and persons into whosepossession this document comes should inform themselves about, and observe, any such restrictions.

It is confirmed that, the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months.Our research professionals are paid in part based on the profitability of TSL, which include earnings from other business. Neither TSL nor its directors,employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenueor lost profits that may arise from or in connection with the use of the information contained in this report.

The report is based upon information obtained from sources believed to be reliable, but I do not make any representation or warranty that it is accurate,complete or up to date and it should not be relied upon as such. I accept no obligation to correct or update the information or opinions in it. TSL or any ofits affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in theinformation contained in this report. TSL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind,

regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, andnon-infringement. The recipients of this report should rely on their own investigations.

TSL and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities related to the information contained in thisreport. To enhance transparency, TSL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated asendorsement of the views expressed in the report.

Disclosure of I nterest Statement in the above report as on 2nd Apri l 2012:

1. Name of the analyst : Vasu Goyal

2. Qualifications of the analyst : B.Com (Hons), A.C.A, C.S

3. Analysts ownership of any stock including the long & short position

related to the information contained : NIL

4. Dependants holdings of any stock including the long & short positions

related to information contained : NIL

5. TSL ownership of any stock including the long & short positions

related to the information contained : NIL

6. Broking relationship with company covered : NO

7. Investment banking relationship with the company covered : NO

This information is subject to change without any prior notice. TSL reserves at its absolute discretion the right to make or refrain from makingmodifications and alterations to this statement from time to time. Nevertheless, TSL is committed to providing independent and transparentrecommendations to its clients, and would be happy to provide information in response to specific client queries.Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the

advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The

price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional

risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect

the value of the investment. Opinions expressed are subject to change without any notice. Neither the Company nor the director or the employee of TSL

accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research report and/or further

communication in relation to this research report.

CopyrightinthisdocumentvestsexclusivelywithTataSecuritiesLimited.

Documents

634690904394736279Retail Research - Berger Paints