There's a lot to cover in Berger Paints' stock

 

• Burger Management expects market share to grow by 80 bps to 18.8% in H1 FY23 driven by softening raw material prices further

Berger Paints India Ltd.'s September quarter earnings performance was mixed.

While decorative paints volumes grew nearly 11% year-on-year (y-o-y), margins disappointed due to cost inflation and poor product mix. Berger's gross margin compression of more than 300 basis points (bps) year over year was the fastest among peers. One basis point is 0.01%.

On a three-year CAGR basis, second quarter decorative business revenue grew by 18.4%, compared with 20% growth seen by market leader Asian Paints Ltd. CAGR is short for compound annual growth rate. Analysts say that although Berger is lagging behind Asian Paints on this parameter, the gap has narrowed in Q2FY23 versus Q1FY23.

In a post-earnings call with analysts, Berger Management said it achieved a market share gain of 80bps, growing from 18% in FY22 to 18.8% in the first half of FY23. Apart from this, the prices of raw materials are likely to soften going forward. Gross margin should expand from Q3 of FY2023, coupled with improvements in product mix. Berger increased the prices in the months of September and October.

Margins of all paint companies should be boosted by moderation in cost inflation and benefit of price increases. However, for investors in Berger stock, the entry of Aditya Birla Group company Grasim Industries Limited could be a potential risk.

"Even if Berger's management is not unduly concerned, the prospect of a pricing/promotional war driven by massive capacity additions in the industry could pose a challenge in terms of maintaining market share as well as maintaining historical margin profiles." Thus there is scope for many reforms for the industry," said analysts at Nirmal Bang Institutional Equities.

In the first half of FY23, Berger added 3,200 tinting machines, compared to typical annual additions of 3,000-4,000 and half-yearly average additions of around 1,700-1,800. The management said that it will continue this growth momentum in the second half of FY2023 as well.

The company's aggressive expansion has done little to comfort its investors, amid fears of increased competition. So far this calendar year, Berger Paints stock has declined 22% as against 10% fall in Asian Paints shares.


This concern has also resulted in cut in earnings. "Berger saw good momentum in the decorative and industrial segments. Nevertheless, inflationary pressures and a poor mix impacted margins. This along with the entry of new players and increasing competition should give us FY23E/FY24E earnings per share growth of 6.2% / induces to cut .2.8% and target valuation to 65x from 75x," said analysts at Nuwama Research.