BERGER PAINTS : Paint your Imagination !!!

Scrip Code: 509480 / BERGEPAINT

CMP:  Rs. 101.45; Buy at Rs. 95 - 100 levels.
Short term Target: Rs. 105, 6 month Target – Rs. 115; STOP LOSS – Rs. 87.40; Market Cap: Rs. 3,510.90 cr; 52 Week High/Low: Rs. 123 / Rs. 73.50.

Total Shares: 34,60,72,464 shares; Promoters : 26,15,89,683 shares –75.59 %; Total Public holding : 8,44,82,781 shares –24.41. %; Book Value: Rs. 22.35; Face Value: Rs. 2.00; EPS: Rs. 4.29; Div: 55 % ; P/E: 23.55 times; Ind P/E: 33.04; EV/EBITDA: 17.90.

Total Debt: Rs. 24.57 cr; Enterprise Value: Rs. 3,590.50 cr.

BERGER PAINTS INDIA LTD was founded in 1760 but started its business in Kolkata, India in the year 1923. The company has undergone many change of hands - In 1947, it was acquired by British Paints (Holdings) UK, which renamed the company as British Paints (India). The UK Company was then acquired by Celanese Corporation, which later sold the Indian company to Berger, Jenson Nicholson Ltd in 1969. In 1983, the company was renamed as Berger Paints India and it started using the trade name of Berger. Berger Paints engages in the manufacture and sale of various decorative and industrial paints in India and internationally. The company’s products include synthetic enamels, acrylic emulsions, metal and wood paints, interior wall coatings, and exterior wall coatings. It has a wide variety of product portfolio including interior and exterior wall coatings as well as metal and wood paints. It has strong and well established brands like Berger Silk, Berger Rangoli, Berger Illusions, Berger Weather Coat, Jadoo Enamel, etc. It also provides color consultancy services. The company offers its products primarily for home owners, professionals, and industrial users. Berger Paints has six subsidiaries and two JVs located across geographies including Cyprus, Russia, Poland and Nepal.

Investment Rationale:

The Indian Paints Industry is estimated at US$ 380 Cr and is growing at 1.8-2x GDP growth since the last few years. This industry is dominated by top 4 players commanding more than 90 % share of the organized market. The per capita consumption of paints in India remains very low at 1.5 kgs, against 15-20 kgs in developed countries. This industry is categorized in two segments – decorative paints, which contributes 70 % and industrial paints that contributes 30 % to the total industry size. Berger Paints is the second largest player in the decorative paints market with a 17 % market share. Decorative paints constitute 80 % of its sales and enjoy strong brand equity in the eastern regions. It has a pan India distribution network of 14,000 dealers and 7,700 tinting machines. Further, the company also has a strong foothold in the protective coatings market, which contributes nearly 10 % to its total sales. Also the company has adopted aggressive expansion plan to increase its production capacity by 52 %, through the addition of 160,000 MT at a cost of Rs. 140.00 Cr scalable to 320,000 MT in Andhra Pradesh over the next 2 years. Berger Paints is focusing on raising the share of water-based paints in its total product portfolio and has also filled the product gap that existed with Asian Paints, through the introduction of premium products in the water-based paints. This segment will drive higher revenue growth and will also expand operating margins in the future. The shift towards water-based paint will bring high growth & also it’s a higher margin product segment compared to solvent-based paints. In FY10, it had issued 2 Cr shares on warrant conversion to a promoter group company, Jenson and Nicholson and issued additional 72 Lakhs shares to Nalanda Fund at Rs. 50.5/share to fund its growth prospects, leading to a total dilution of 8% on the expanded equity capital. It is expected that Berger Paints will not dilute equity further, as it has sufficient internal accruals to fund its growth plans over the next two years.

Outlook & Valuation:

Berger Paints (I) Ltd is the second largest player in the decorative paints market with a 17 % market share and is expected to benefit from the long-term steady demand in paints industry. Revenue and earnings CAGR of 19 % - 20 % over FY11-13E can be expected from Berger Paints, leading to a comfortable cash flow position; Additional fund raising is ruled out. Focus towards water-based paints to augur well will be added advantage for operating margins. Company witnessed 18 % CAGR over FY06-11, while concerns on the short-term demand scenario remains; It is believed that over a longer term, the company is on the way for a healthy growth. The company has already undertaken a 7 % price hike in 1QFY12, which will further help overall sales growth in coming quarters. Company’s subsidiaries  are expected to contribute 7 % to the consolidated sales by FY13E. At the current market price, the stock is trading at 20 x FY12E EPS of Rs 5.00 per share and 16.0x FY13E EPS of Rs 6.20 per share. At 16.36 x FY13E EPS, it is trading at 38% discount to the market leader, Asian Paints. Historically, the company has traded at an average discount of 40% to Asian Paints’ one-year forward mean Price Earning Ratio. It is believed that going forward this discount should narrow due to reasons like Gaining considerable size with a revenue CAGR of 19% over FY11-13E; Product mix focus shifting towards higher growth and better margin business of water-based emulsion paints; Increasing presence across India with rising penetration in the south. Initiate buy with ACCUMULATE on the BERGER PAINTS with the target price of Rs 105/share for the short term valuing it at 17.5x FY13E (30% discount to Asian Paints) EPS of Rs 6.20/share

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. crs)	1,891.30	2,328.10	2,896.70	3,317.40
NET PROFIT (Rs. crs)	120.40	150.10	173.30	215.30
EPS (Rs.)	3.50	4.30	5.00	6.20
PE (x)	28.60	22.90	19.90	16.00
P/BV (x)	7.40	5.60	4.70	3.90
EV/EBITDA (x)	16.60	13.40	11.60	9.60
ROCE (%)	24.70	23.30	23.10	24.30
RONW (%)	22.60	25.10	25.90	28.00

I would buy BERGER PAINTS (I) LTD with a price target of Rs. 105 for the short term and Rs. 115 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 87.40 on purchase.

As the author of this blog I disclose that I do hold BERGER PAINTS in my investment portfolio.