BERGER PAINTS : ACCUMULATE AT EVERY DIP!!!

Scrip Code: 509480 / BERGEPAINT

CMP:  Rs. 136.00; Buy at Rs. 130 - Rs. 135 levels.
Medium to Long Term Target: Rs. 152; STOP LOSS – Rs. 120.00; Market Cap: Rs. 4,707.83 cr; 52 Week High/Low: Rs. 153.35 / Rs. 78.25.

Total Shares: 34,61,64,514 shares; Promoters : 26,15,89,683 shares –75.59 %; Total Public holding : 8,45,74,831 shares –24.41. %; Book Value: Rs. 24.40; Face Value: Rs. 2.00; EPS: Rs. 5.33; Div: 70 % ; P/E: 25.51 times; Ind P/E: 31.28; EV/EBITDA: 18.88.

Total Debt: Rs. 169.80 cr; Enterprise Value: Rs. 4877.63 cr.

BERGER PAINTS INDIA LTD: The Company was founded in 1760 but started its business in Kolkata, India in the year 1923. The company has undergone many change of hands – In the year 1947, it was acquired by British Paints (Holdings) UK, which renamed the company as British Paints (India). This 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 interior emulsions, designer finishes, distempers, exterior emulsion, primer, texture finishes, enamals, cement mix, crack fill paste. The company also offers general industrial and automotive coatings, such as pretreatment chemicals, water base primers, polyester topcoats, polyestermetallic/pearl basecoats, thermosetting acrylic basecoats, thermosetting acrylic clear coats, alkyd-amino topcoats, poly-urethane paints, quick drying paints, polyester surfacers, epoxy surfacers, alkyd amino HLPS, and heat resisting paints and powder and protective coatings. It serves home owners, professionals, and industrial users through a network of dealers. 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. Berger Paints has six subsidiaries and two JVs located across geographies including Cyprus, Russia, Poland and Nepal. The company is compared with Kansai Nerolac Paints Limited, Akzo Nobel India Limited and Noroo Holdings Company Limited.

Investment Rationale:

Berger Paints India Ltd. (BPIL) is one of the India’s foremost paint companies, currently ranked as 2nd largest on the basis of consolidated sales turnover in Indian paint industry. It enjoys about 19 % share of the over Rs. 21,000 crore of the Indian paint industry wherein the organized sector accounts for 70 % while the remaining is with the unorganized sector comprising of around 2,000 small scale paint units. 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 as against 15-20 kgs in developed countries. This industry is categorized in two segments – decorative paints, which contributes 70 % and the balance 30 % belongs to industrial paints - comprising automotive and industrial, protective, powder, coil and marine coatings. A decorative paint constitutes 80 % of BERGER PAINTS sales and enjoys strong brand equity in the eastern regions. CMIE a leading business & economic database research company expects the production in paint industry to grow by 13.3 % in 2012-13. The production is further expected to increase by 15 % in 2013-14 to around 19.6 lakh tonnes. The sales volumes are expected to grow by 14-15 % per annum during 2012-14 periods and are likely to cross 20 lakh tonnes by March 2014. Taking into account the rising consumer demand and diversified needs, the paint companies are coming out with new variants of paints and taking BERGER PAINTS market share of about 19 % surely the company will be benefited from the rising demand.

The paint companies are now emphasizing more on brand endorsement and so are looking to rope in top celebrities for their brand endorsements. Berger Paints is also looking to rope in Top Bollywood actresses for the endorsement of its Silk range of emulsion and plans to spend Rs. 35 Cr on an advertisement campaign, the company prefers Bollywood actress Kareena Kapoor or Katrina Kaif for the endorsement of their products probably any one of them could be the new Brand Ambassador for the Berger Brands. These initiatives are expected to increase the demand from refurbishment. Berger Paints have been 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.

Outlook & Valuation:

Berger Paints is looking for acquisition both within and outside country, in the overseas market the company is looking for acquisition of technology however in the domestic market any acquisition move should be driven by the possibility of increasing the market share which is currently at 19 %.  Berger has entered Poland through an acquisition which boosted its energy efficient & protective external insulation finishing system, Berger is already present in Russia and Nepal through its subsidiaries. Berger has outgrown its peers in Q1FY13 on the back of expanding distribution reach and higher growth in premium segment. Berger's India standalone business registered sales growth of 17 % to Rs. 751.6 Cr in Q1FY13 on the back of estimated 7-8 % volume growth. The volume growth was impressive considering almost flattish volume growth in peers thereby indicating market share gaining in this quarter. This was achieved on the back of expansion in distribution reach and selling through new trade channels. Going ahead, it is expected that the company will maintain its current growth momentum, but poor monsoon could act as a spoilsport. However with the price hike to the tune of 5 % in the decorative paint business in last quarter and with lower inventory supported EBIDTA expansion with consolidated EBIDTA margins at 9.50 % up by 60bps YoY. Company has taken some price hikes in industrial paints segment and would take further hikes to maintain the margins. Company also witnessed significant fall in import price of TiO2 and expects to see its benefit in coming quarters. Other crude derivatives, however, continue to rise owing to INR depreciation. It is expected that the EBIDTA margin will improve going forward on the back of softening in Raw Material cost and stabilization in exchange rate. Combined subsidiaries sales grew by 4 % in Q1FY13, much slower than the avg. growth of 25 % in last four quarters due to the poor performance in Nepal subsidiary because of the political upheaval. Bolix which is the largest subsidiary (5 % of consolidated sales) reported flattish growth due to uncertain economic condition in Europe. Apart from 80,000 MT/annum decorative paints capacity at Hindupur during 1st phase of expansion, company is also building its 40,000MT capacity for textured coatings developed by its subsidiary Bolix which it plans to introduce in the current year. Company expects sales of Rs. 15 – 20 Cr from its construction chemical business in FY13 and expects it to register a CAGR of 40 % over FY13-15. At the current market price of Rs. 136, the stock is trading at 21.25 x FY13E EPS of Rs 6.40/share and 18.37 x FY14E EPS of Rs 7.40/share & at 16.0 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 P/E ratio. It is believed that going forward this discount should narrow due to the Gaining considerable size with a revenue CAGR and with the Product mix shifting towards higher growth & Increasing presence across India with rising penetration in the south makes this stock attractive to ACCUMULATE with a target price of Rs 152/share.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	2,328.10	2,936.10	3,476.00	3,980.50
NET PROFIT (Rs. Crs)	150.10	180.10	221.90	255.60
EPS (Rs.)	4.30	5.20	6.40	7.40
PE (x)	33.10	27.60	22.40	19.40
P/BV (x)	7.20	6.10	5.10	4.30
EV/EBITDA (x)	21.50	17.40	14.40	12.10
ROE (%)	23.40	24.00	24.90	24.20
ROCE (%)	25.20	26.10	27.30	27.50

I would buy BERGER PAINTS (I) LTD with a price target of Rs. 152 for Medium to Long term 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. 120.00 on every purchase.

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

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE