BERGER PAINTS (I) LTD: ADD COLOURS TO YOUR PORTFOLIO !!!

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

Scrip Code: 509480 / BERGEPAINT

CMP:  Rs. 214.10; Market Cap: Rs. 14,843.21 Cr; 52 Week High/Low: Rs. 248.00 / Rs. 102.33. 

Total Shares: 69,32,84,120 shares; Promoters : 51,97,33,336 shares – 74.97 %; Total Public holding : 17,35,50,784 shares –25.03 %; 

Book Value: Rs. 16.33; Face Value: Rs. 1.00; EPS: Rs. 3.65; Dividend: 60.00 %; P/E: 58.65 times; Ind. P/E: 62.00; EV/EBITDA: 28.03.

Total Debt: Rs. 528.19 Cr; Enterprise Value: Rs. 14,917.27 Cr.

BERGER PAINTS INDIA LTD: The Company was founded in 1760 but started its business in Kolkata, India in the year 1923. Berger Paints India Limited was established by Lewis Berger – who laid the foundations of the brand Berger way back in 1760 in the UK, with modest beginnings in India in 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. Presently, the majority stake is with the Delhi based Dhingra brothers. Berger Paints engages in the manufacture and sale of various decorative and industrial paints in India and internationally. The company declared its very first bonus in ratio of 1 new for every 2 held on June 1967; 7 new shares for every 15 held on June 1973; 1 new for every 1 held on October 1998; 1 new shares for every 2 held on January 2004 and lastly 3 new shares for every 5 held on June 2006. The company first announced the splits in its face value of shares from Rs. 10 to Rs. 2 on March 2004 and then it again split its face value of shares from Rs. 2 to Rs. 1 on November 2014. The company’s products include interior emulsions, designer finishes, distempers, exterior emulsion, primer, texture finishes, enamels, cement mix, crack fill paste. The company also offers general industrial and automotive coatings, such as pre-treatment chemicals, water base primers, polyester topcoats, polyester-metallic/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 colour consultancy services. Berger Paints has six subsidiaries and two JVs located across geographies including Cyprus, Russia, Poland and Nepal. Berger Paints subsidiary includes Beepee Coatings Private Limited, Berger Jenson & Nicholson (Nepal) Pvt Ltd, Berger Paints (Cyprus) Ltd, Lusako Trading Ltd in Cyprus and Berger Paints Overseas ltd. The company is locally compared with Asian Paints Ltd, Kansai Nerolac Paints Limited, Akzo Nobel India Limited, Jenson and Nicholson India Ltd, Jyoti Resins and Adhesive Ltd and Globally compared with Akzo Nobel NV of Netherlands, BASF SE of Germany, Dai Nippon Toryo Co of Tokyo, Dow Chemicals of USA, Schulman (A) Inc of USA, Kraton Performance Polymers Inc of USA, Sherwin Williams Co of USA, PPG Industries of USA, Kanto Denka Kogyo Co of Japan, Noroo Holdings Company Limited, Fujikura Kasei Co Ltd of Japan.

Investment Rationale:

Berger Paints India Limited is the second largest paint company in the country with a consistent track record of being one of the fastest growing paint companies, quarter on quarter, for the past few years. This FMCG has one of the largest networks consisting of 16,500 plus distribution channel members served through 135 stock points & 10 production units with about 170 Sales offices including those belonging to the company’s own division and subsidiaries and has employee strength of 2,500. It has 4 distinct business verticals namely decorative coatings, protective coating, automotive coatings, Industrial and Powder coatings with about 10,000 + products. It has business ventures or technology transfer tie ups with various renowned paint companies in the world like Nippon Bee of Japan and Becker Acroma spa of Italy. Berger Paints India Ltd’s product has attained instant recognition worldwide and continues to meet quality requirements that are demanded today in domestic markets. To meet the surging demand of its brands, the company is undertaking huge expansion projects across various locations in India. The company is confident that this new plant which is strategically located and well connected to Bangalore, Hyderabad, Chennai, kochi and Mumbai will be able to fully meet the increasing demand for water based coatings in commercially important regions of India. The Company’s products have been accepted well in 2013-14 and expect the same kind of support from the customers in the near future also. It is expected that the company to post a CAGR of 11 % & 12 % in its top-line and bottom-line over 2013 to 2016E respectively. There has been significant growth of water based coating both for interior and exterior applications during the last 2 decades in paint industry. This upsurge in demand has been specifically strong in the southern region which provided to set up this new water based paints plant at Hindupur for catering to the requirements of this important region with an initial capacity of 80,000 tonnes per annum. The company starts production in the first half of the current fiscal. Once fully completed, the capacity of the Hindupur plant will be 3,20,000 MT per annum of water based paints and 1,00,000 MT per annum of emulsions, used as intermediates for water based paints. The Jejuri plant for industrial paints too is likely to commence operation this fiscal. Berger currently has 11 manufacturing units in Bengal, Goa, Pondicherry, Andhra Pradesh, Gujarat, Jammu and Delhi. The Indian paint industry is largely divided into decorative and industrial segments. Decorative paints enjoy a market share of 71 % and industrial paints have the balance of 29 %. Decorative paints can be further classified into higher end acrylic exterior and interior emulsions, medium range exterior and interior emulsions and enamel paints, low end distempers, wall putty, primers and thinners and wood coatings. They can also be broadly categorised into water and solvent based paints. Water based paints have an edge and are growing at a higher rate because most paintable surfaces in architectural constructions use water based coatings. It also has the added advantage of being more environmentally friendly. Industrial paints, on the other hand, comprise automotive including auto refinish, general industrial including consumer durables, protective coatings, coil coatings and powder coatings. As in the previous year, in the year 2013-14 too, paint industry volumes as a whole continued to perform well with a growth rate, which is estimated to be more than 2 times of GDP for decorative products. The acceleration underscores the resilience of the industry - brought about by the continuous efforts of the industry to open up new markets, introduce superior products, extending the network and convincing the customers about the benefits of more frequent painting of houses. No doubt, this also reflects growing urbanisation, desires of an ever increasing middle class and reduction in repainting cycle. Despite this, per capita consumption of paints in India is now about 2.6 kg compared to the international average of 10 - 13 kg. The total size of the market is roughly estimated at Rs. 35,000 crores. Given the much anticipated recovery in urban sentiments, GDP revival and the expected fillip to the economy, this may increase to more than Rs. 50,000 crores by 2016-17. Industrial paint demand continued to be lukewarm with sluggish growth in the infrastructure industries, particularly in automobiles, high inflation, a rather tight money market and increase in prices of raw materials. However, with the expected increase in infrastructure spending and recovery of the industry, the Company believes that this sector will bounce back.

Outlook and Valuation:

Berger Paints India Ltd (BPIL) is one of the largest paint company in India with its premium brands viz., Breathe Easy, Silk and Weather coat Allguard continued to perform well in all the markets. Berger paints India ltd is amongst top 30 paints companies in the world with global footprints across continents. It is also amongst the top 6th paint company in Asia. Berger Paints India Limited has it’s headquarter in Kolkata, with 7 strategically located manufacturing units, and over 85 sales offices, the company also has an international presence in 4 countries. Berger is the lone supplier to nuclear power plants with its protective coatings in industries. And also supplies its products to professionals and Home owners. In the recent past, Indian economy had been growing at a rate of less than 5 %. In spite of that, as mentioned earlier in this report, the paint industry in general and Berger Paint in particular, continued to maintain their respective growth trajectory, specifically in the decorative coatings segment. In the coming times, the country will have to contend with issues of inflation control and interest rates, current account and fiscal deficits, subsidies and non-plan expenditure – all the time keeping an eye on eradication of poverty, attraction of investment and generation of employment. The paint Companies believes that these are problems which are surmountable with will and tenacity. Several important policies had been stalled in the recent past and once these are cleared, the paint Companies believes that the paint industry will grow at an even faster pace. In infrastructure, it is reported that out of the projects worth Rs. 22,000 billion & only one-third have been revived in the recent past. In this context, it is important to note that the global paints market is worth about $ 121 billion (2012); with total production being 38 million metric tonnes (MT). In the Asia Pacific region, water based (architectural paints) constitutes 65 % by volume. The Indian paint industry volume and value, by comparison, has far to go. Globally, by volume, the split is approximately 50 % architectural paints and the remaining 50 % - industrial performance coatings. The Asia Pacific region contributes 44 % paints and coatings market. India constitutes only 15 % and China 57 % by volume of the Asia Pacific market. Thus, there is actually a major opportunity of growth in both decorative and industrial segments in India. Recently on 18 February 2015, Berger paints is planning to set up an industrial coating plant at Stavropol, an industrial area in southwest corner of the Russian Federation, which houses several automobile and manufacturing businesses. The company has signed a memorandum of Understanding with Stavropol regional government in this regard. The company has received 6 hectares of land at a very favourable price on a nominal lease till 2030 and production is expected to start in 12 to 15 months. The company will conduct a feasibility study for setting up a modern industrial coating in the region and aims to satisfy the demands in Russia and develop bilateral Co-operation. Berger Paints plans to begin with small investment and increase it gradually and will employ 50 people with a target of 3,000 tonnes per year and then scale up it up to 50,000 tonnes. Around $5 million will be invested to set up the plant in Russia. The management has clearly stated that company has taken care of Indian requirement for the next 5 years post setting up the facility in Hindupur, Andhra Pradesh and will keep on investing in India as and when needed, also the logistical issues in exporting of paint from India to other countries is much more as paint is bulky and so company decided to set up one plant to Russia. Berger Paints has plants in Nepal, Bangladesh, Poland and the overseas turnover accounts for less than 5 % to the total turnover of the company. On financial side the International business saw muted performance impacted by one-off correction in Nepal and flat numbers in BJN India due to consolidation and restructuring exercise in Sherwin Williams. Instability in Ukraine impacted growth in Bolix S.A., while loss of customer in DIY segment continued to impact Poland sales. BNB Coatings continue to show robust sales growth, but Becker Coatings had a flat quarter. Company expects BJN India will be through with its restructuring and will pick up from FY16, while growth in Nepal is also expected to revive from next quarter. The Company’s Q3FY15 revenue was muted, but lower inputs led to higher EBITDA margins. Berger’s Revenues were at Rs. 1,120 Cr, up 8.5 % YOY. The Gross margin was up 2.40 % YoY to 41.9 % led by low input prices, erstwhile price hikes and better mix. But, EBITDA margin expansion was lower at 0.60 % YoY to 13.3 % due to higher Ad spends. The EBIDTA grew 13.3 % YoY to Rs. 150 Cr, but higher depreciation led to flat APAT at Rs. 82.1 Cr. Berger’s reported tepid Domestic operations a 10.8 % YoY growth to Rs. 990 Cr with volume growth at 6 % YoY. Growth in decorative paints was lower due to sluggish demand and early festive season vs previous year. General industrial & auto paints showed healthy growth trends and is expected that the domestic growth to pick up, but in near term, industrial paint sector could outperform decorative growth rates. Given the pricing power ability, it is likely to have uptick in revenue CAGR. While volume growth was tepid, market share gains and display of strong margin expansion is reassuring. It is expected that the domestic growth to revive in ensuing quarters and strong margin tailwinds to flow through in ensuing quarters. It is expected that the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also.

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	3,869.70	4,350.90	5,209.20	6,437.60
NET PROFIT (₹ Cr)	249.40	278.60	429.30	566.00
EPS (₹)	3.60	4.00	6.20	8.20
PE (x)	60.50	54.10	35.10	26.60
P/BV (x)	13.50	12.60	11.40	10.20
EV/EBITDA (x)	35.00	29.30	20.40	16.00
ROE (%)	24.10	24.10	34.10	40.60
ROCE (%)	24.50	26.90	37.70	45.50

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

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.

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