Total Debt: Rs. 609.56 Cr; Enterprise Value: Rs. 20,203.92 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; 3 new shares for every 5
held on June 2006 and lastly in ratio of 2 new shares for every 5 held on July
15, 2016. 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 compared with Asian
Paints Ltd, Kansai Nerolac Paints Limited, Akzo Nobel India Limited, Jenson and
Nicholson India Ltd, Jyoti Resins and Adhesive Ltd and Noroo Holdings Company
Limited and globally compared with AkzoNobel of Netherlands, PPG of USA, Henkel of Germany, Sherwin-Willams of USA, Axalta of USA, RPM of USA, Valspar of USA, BASF of Germany, Kansai of JAPAN, Fujikura Kasei Co Ltd of Japan, Nippon Paint Holding of JAPAN, SIKA from Switzerland,
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 paint major 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. The paint industry can easily
grow at 12 % to 13 % annually over the next few years from its current size of
Rs. 35,000 Cr. The per capita paint consumption in India is a little over 4 kgs,
which is still very low as compared to the developed western nations.
Therefore, as the country develops and modernizes, the per capita paint
consumption is bound to increase. The unorganised sector controls around 35 %
of the paint market, with the organised sector accounting for the balance 65 %.
In the unorganised segment, there are about 2,000 units having small and medium
sized paint manufacturing plants. Top organised players include Asian Paints,
Kansai Nerolac, Berger Paints and ICI. Demand for paints comes from two broad categories:
Decoratives and Industrials. The
major
segments in decorative include exterior wall paints, interior wall paints, wood
finishes and enamel and ancillary products such as primers, putties etc. Decorative
paints account for over 70 % of the overall paint market in India. Asian Paints
is the market leader in this segment. Demand for decorative paints arises from
household painting, architectural and other display purposes. Demand in the
festive season i.e. September-December is significant, as compared to other
periods. This segment is price sensitive and is a higher margin business as
compared to industrial segment. There are three main segments of the industrial
sector which includes automotive coatings, powder coatings and protective coatings.
Kansai Nerolac is the market leader in this segment. User industries for industrial
paints include automobiles engineering and consumer durables. The industrial paints
segment is far more technology intensive than the decorative segment. The
paints sector is raw material intensive, with over 300 raw materials from which
nearly 50 % are petro-based derivatives which is involved in the manufacturing
process. Since most of the raw materials are petroleum based, the industry
benefits from softening crude prices. The volumes in paint industry 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, the per capita consumption of paints in India is now about 4 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 2017-18. Berger Paints enjoys market
share of 18 %. Berger Paints has set up Uber like model called as whereby the company
is creating a huge inventory of painting contractors. Express Painting is a
model where anyone wishing to paint his house will contact local painting contractor
who suggests the owner which paint to use, so in Express painting the home
owner can SMS the company and Berger will arrange a painter in that vicinity.
Company has done KYC of all the contractors so quality and authenticity of the
workers is assured. BERGER has launched a new EXPRESS PAINTING (XP) which eases
the trouble of the home owners from the dust and odour. BERGER is now offering
a painting process using a mechanised with in-built vacuum suction which sucks
the dust into a bag. This tool reduces the time taken by 40 % and ensures even
coating of paint. This
painting service from Berger Paints is witnessing good demand and as the
company trains more painters the service is expected to expand. Service cost to
consumers is at par with industry unlike Asian Paints. However, paints being
sold through this channel are of premium range. Besides this Berger Paints is
setting up a full fledge Training academy in Kochi for painters. About 3,200
sqft space has been rented nearby Chembumukku for this and is been in operation
from November 2015 onwards. There are painting booths and equipment’s for
painters. They will be trained on the use of paints and equipments which have
been imported making the painting process safer and better. Berger has invested
roughly around Rs. 70 lakhs. Berger has
JV with Nippon JV, this JV will address 4 Wheelers like cars & UVs and 3W
and this JV will open up a new business stream. Berger will bring its
relationships while Nippon will bring the technology. Berger
paint saw increase in volume growth for the entire year of 12.5 % and is
expected to be better going forward. Management expects that H1FY17 won’t be
that great but after monsoon post September volume growth will spur. Berger has
been consistent in its financial strength, and Berger Paints India Ltd has recommended a final dividend of Re.
1.00 (100 %) per equity share of Re.1.00 each. And also recommended
bonus Shares in the proportion of 2 Bonus Shares of Re. 1/- each for every
existing 5 fully paid-up Ordinary Shares of Re. 1/- each and the record date
for bonus is set at 15 July, 2016. The FY17 can be good as going forward
after September and October which is typically paint season which will witness
a pick up due to rains and volumes are expected to be better. So Berger is definitely
a winner and best pick in the paint sector.
Outlook and Valuation:
Berger
Paints India Ltd (BPIL) is one of the largest paint companies 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, 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. Indian Coatings industry has
been growing over past several years at a rate ahead of the country’s GDP growth. The industry has two main
segments: Decorative Paints and Performance Coatings, comprising Protective, Powder,
Metal, Marine, Vehicle Refinishes and Coatings for specialised applications,
and consists of both organised and unorganised sectors. Decorative Paints
account for a major part of the industry. The main drivers for the growth of this
business have been shortening of repainting cycle and better demand from
smaller towns. Another important driver for demand for Decorative paints is the
new homes underpinned by rising income levels and shift from joint families to
nuclear families. Performance Coatings business is essentially a B2B market in
contrast to the Decorative paints, which is largely B2C market. This business
is technology intensive with a diverse set of growth drivers, which include key
customer relationships, sustained focus on R&D and innovation, with strong emphasis
on offering a solution rather than a product. Due to increased Government funding for infrastructure, demand
for paints both in industrial and decorative segment is set to rise, thereby
rendering Indian paint industry to be poised for further growth. The key
drivers and challenges of the market indicate the factors for growth of the
market including growth in real estate construction, growth in automotive industry,
growth in industrial sector, growth in disposable income, low penetration and
increased Government expenditure on infrastructure. India is an emerging
economy and with a rising GDP and the subsequent growth in industrial
activities and infrastructural developments. Aided with increased Government
spending on infrastructure in India, market is optimistic about its impact on
the paint industry. For new constructions, paint has become an integral component
of the development stage. Another factor boosting the market is the growth in
the automotive industry which creates huge demand for industrial paints.
Further, with enhanced level of communication in terms of media exposure,
awareness about latest trends governing the sector has reached a whole host of
consumers. Fulfilling needs to look unique becomes possible with more
disposable income at the hands of people which is seen to be on an upward
trend. Moreover, low per capita consumption of paints in India provides enough
opportunity for further growth in this sector. However, the sector is also
facing certain challenges. Factors like rising input prices and stringent
environmental regulations pose as a barrier for growth. To conclude, the paint
industry has a promising future in India, provided players in the market
implement innovation and cutting edge technology to combat the negative
factors. BERGER PAINT is setting up a
decorative paint facility in Assam of 36,000 tonnes per annum to cater to demand
from North East region, the capacity is expected to commission by March’17.
Hindupur phase 1 facility is fully commissioned having current capacity of
80,000 tones per annum which can be expanded up to 3,20,000 tones per annum in
phases depending upon demand environment. Total capex for FY17 is Rs 130 Cr to
be spent on Assam capacity, incremental liquid paint Capacity in Jejuri
(Maharashtra) and increasing its distribution reach. Berger Paints is best
amogst its peers on rationale
that it is the 2nd largest player in Indian decorative paint segment, after
Asian Paints, with a market share of 18 % to 19 %. Capacity
addition at various locations (through internal accruals) and dealer network
expansion from current 15,000 to aid growth. Also, Express Painting and Berger
Nippon JV will add to base growth. A portfolio shift towards higher
value and higher margin products should help boost earnings. With majority of
the capex behind, Berger will be Free Cash Flow +ve and could potentially raise
payouts to investors. At the current market price of Rs. 285.00, the stock is trading at a PE of 42.53 x FY17E and 33.13 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 6.70 in FY16E and Rs. 8.60 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
| KEY FINANCIALS | FY15 | FY16A | FY17E | FY18E |
|---|
| SALES (₹ Crs) | 4,322.10 | 4,634.10 | 5,324.90 | 6,265.90 |
| NET PROFIT (₹ Cr) | 264.70 | 369.80 | 464.60 | 593.00 |
| EPS (₹) | 3.80 | 5.30 | 6.70 | 8.60 |
| PE (x) | 74.60 | 53.40 | 42.50 | 33.30 |
| P/BV (x) | 15.80 | 13.40 | 11.10 | 9.20 |
| EV/EBITDA (x) | 38.40 | 30.00 | 24.70 | 19.60 |
| ROE (%) | 22.30 | 27.10 | 28.50 | 30.10 |
| ROCE (%) | 25.10 | 31.10 | 35.60 | 38.50 |
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*As the author of this blog I disclose that I do hold Berger Paints I LTD in my any of the portfolios.
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