Q1FY19 RESULT UPDATE RETAIL EQUITY RESEARCH Berger Paints India Ltd Paints BSE CODE: 509480 NSE CODE: BERGEPAINT Bloomberg CODE: BRGR:IN SENSEX: 38,252 SELL Rating as per Largecap 12months investment period CMP Rs. 336 TARGET Rs. 313 RETURN (7%) 27 th August 2018 Expensive valuation; a deterrent. Berger Paints India (Berger) is the second largest paint company in the domestic market with 10 strategically located manufacturing units and a countrywide distribution network of 25,000+ dealers. Consolidated revenue grew by stellar ~19% YoY in Q1FY19 powered by robust growth in volumes. Although EBITDA grew impressively by ~23% YoY underpinned by benefits of price hike and operating leverage, expansion in margin was restricted to only 47 bps YoY owing to higher input cost. We factor consolidated revenue CAGR of 16% over FY18-20E driven by its capacity expansion, continued new product launches and aggressive network expansion. Despite improvement in capacity utilization, price hikes and benefit of operating leverage, we factor EBITDA margin improvement of 70bps over FY18-20E mainly due to higher input cost. The stock is currently trading at rich valuations of 58.7x/48.3x FY19E/20E EPS making the risk reward unfavourable. Hence, we recommend SELL rating on the stock with a TP of Rs. 313 based on 45x FY20E EPS. Healthy growth in volume drives growth Berger delivered robust performance in Q1FY19 with consolidated revenue growing strongly by ~19% YoY primarily on the back of healthy growth in volumes. Berger s standalone business grew by ~19% YoY anchored by improved performance in decorative paints business with volume growth of 17% YoY. Moreover, consolidation of Saboo Coatings subsidiary also aided the overall growth. The company has acquired 100% stake in the latter on 5 th June 2017. Benefit of operating leverage largely offsets higher input cost Mirroring healthy growth in revenue coupled with benefit of operating leverage, EBITDA grew strongly by ~23% YoY. However, EBITDA margin grew by only 47bps YoY mainly due to pressure in gross margin. Gross margin during the quarter contracted by 110bps YoY owing to higher input cost. In order to offset the impact of higher input cost, the company has taken price increase of ~2% in the decorative business however it was unable to take any price increase in the industrial space and is hopeful of taking price increase in Q2FY19. Net profit growth stood at 19.5% YoY in Q1FY19 as the benefit of sharp rise in other income (~22% YoY) was negated by higher depreciation (11.7%), interest (37.3%) and tax rate. Additionally, lower profit in JVs also weighed on the profitability. Despite improvement in capacity utilization, price hikes and benefit of operating leverage, we factor EBITDA margin improvement of just 70bps over FY18-20E mainly due to higher input cost. On an expansion spree The company is on an expansion spree and is further diversifying into the manufacturing of automotive refinish paints through joint venture with Japan based Rock Paint Co. Ltd. As per the agreement, both have agreed for developing, producing and selling superior automotive refinish paints in India and Nepal. Additionally, the company is expanding capacities in Uttar Pradesh and Maharashtra plants and has outlined a capex of Rs. 280 cr which will be be spent over the next two years. Of this, Rs. 200 cr is earmarked for setting up a greenfield unit at Sandila, Uttar Pradesh to manufacture water & solvent decorative, industrial & protective coating, resins, emulsion and construction chemical. While the rest would be spent on second-phase of expansion at Jejuri plant in Maharashtra. Further the reduction of GST rate on paints to 18% from 28% earlier will augur well for volume growth going ahead, as the company has passed on the benefit to the customers through price cut on products. Going forward, we believe the company s capacity expansion drive coupled with its continued focus on new product launches and aggressive network expansion will aid it in gaining market share. Resultantly, we factor revenue CAGR of 16% over FY18-20E. Outlook & Valuation: We believe Berger s capacity expansion drive, expanding distribution network and new product launches, will help it to benefit from demand recovery. As a result, we expect sales/pat to grow at 16%/21% CAGR over FY18-20E. Despite strong growth, we believe steep valuations (58.7x/48.3x FY19E/20E EPS) restrict any upside in the stock. Hence, we assign SELL rating with a TP of Rs. 313 based on 45x FY20E EPS. Company Data Market Cap (Rs cr) 32,611 Enterprise Value (Rs cr) 32,683 Outstanding Shares (cr) 97.1 Free Float 25% Dividend Yield 0.5% 52 week high Rs. 341 52 week low Rs. 232 6m average volume (lacs) 8.5 Beta 1.1 Face value Rs. 1 Shareholding % Q3FY18 Q4FY18 Q1FY19 Promoters 75.0 75.0 75.0 FII s 5.3 5.7 5.3 MFs/Insti 9.0 8.5 9.1 Public 7.7 7.7 7.5 Others 3.0 3.1 3.1 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 15% 36% 38% Absolute Sensex 10% 11% 21% Relative Return* 5% 25% 17% *over or under performance to benchmark index Consolidated (Rs.cr) FY18 FY19E FY20E Sales 5,116 5,913 6,918 Growth (%) 12.8% 15.6% 17.0% EBITDA 807 941 1,128 Margin(%) 15.6 15.9 16.3 PAT Adj 461 556 675 Growth (%) 7.3% 20.6% 21.4% Adj.EPS 4.7 5.7 6.9 Growth (%) 7.3% 20.6% 21.4% P/E 70.8 58.7 48.3 P/B 14.9 13.0 11.1 EV/EBITDA 40.7 34.6 28.6 RoE (%) 22.5 23.6 24.7 D/E 0.2 0.1 0.1
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q1FY19 Q1FY18 YoY Growth % Q4FY18 QoQ Growth % Sales 1,483 1,247 18.9 1,298 14.2 EBITDA 227 185 22.6 200 13.4 Margin (%) 15.3 14.8 47bps 15.4 (11bps) Depreciation 34 30 11.7 32 6.3 EBIT 193 155 24.8 168 14.8 Interest 4 3 37.3 6 (40.0) Other Income 16 14 21.7 12 34.7 Exceptional Items - - - - - PBT 206 165 24.3 174 18.2 Tax 72 56 28.7 60 18.3 PAT 134 110 22.1 114 18.1 Share of profit of JVs (1) (3) (74.2) 7 - Reported PAT 135 113 19.5 106 27.0 Adjustment - - - - - Adj PAT 135 113 19.5 106 27.0 No. of shares (cr) 97.1 97.1-97.1 - EPS (Rs) 1.4 1.2 19.5 1.1 27.0 Source: Company, Geojit Research
Consolidated Financials Profit & Loss Account Balance Sheet Sales 4,208 4,535 5,116 5,913 6,918 % change -2.2% 7.8% 12.8% 15.6% 17.0% EBITDA 645 719 807 941 1,128 % change 26.2% 11.4% 12.3% 16.5% 19.9% Depreciation 99 108 124 142 164 EBIT 546 611 683 799 964 Interest 27 16 25 19 13 Other Income 35 55 46 61 70 PBT 553 649 704 841 1,021 % change 37.3% 17.2% 8.5% 19.4% 21.4% Tax 189 229 244 286 347 Tax Rate (%) 34.1% 35.4% 34.6% 34.0% 34.0% Reported PAT 371 474 461 556 675 Adj* - 44 - - - Adj PAT 371 429 461 556 675 % change 40.5% 15.9% 7.3% 20.6% 21.4% No. of shares (cr) 69.4 97.1 97.1 97.1 97.1 Adj EPS (Rs) 5.3 4.4 4.7 5.7 6.9 % change 40.5% -17.2% 7.3% 20.6% 21.4% DPS (Rs) 1.0 1.8 1.8 2.0 2.2 Cash 105 102 205 346 564 Accounts Receivable 545 578 692 782 915 Inventories 733 935 1,007 1,053 1,142 Other Cur. Assets 47 74 227 229 232 Investments 348 472 333 333 333 Gross Fixed Assets 858 1,126 1,307 1,527 1,747 Net Fixed Assets 776 957 1,003 1,081 1,137 CWIP 51 62 97 97 97 Intangible Assets 186 179 265 265 265 Def. Tax (Net) (68) (81) (82) (82) (82) Other Assets 85 79 113 113 113 Total Assets 2,809 3,359 3,860 4,218 4,716 Current Liabilities 925 1,035 1,230 1,365 1,545 Provisions - - - - - Debt Funds 310 406 422 322 222 Other Liabilities 12 16 14 14 14 Equity Capital 69 97 97 97 97 Reserves and Surplus 1,493 1,804 2,097 2,420 2,838 Shareholder s Fund 1,562 1,902 2,195 2,517 2,935 Minority Interest - - - - - Total Liabilities 2,809 3,359 3,860 4,218 4,716 BVPS (Rs) 22.5 19.6 22.6 25.9 30.2 Cash flow Pre-tax profit 559 703 705 841 1,022 Depreciation 99 108 124 142 164 Changes in W.C 49 (145) 8 (3) (45) Others 75 (54) (142) (42) (57) Tax paid (178) (220) (277) (286) (347) C.F.O 603 392 418 652 737 Capital exp. (122) (269) (293) (220) (220) Change in inv. (153) (95) 100 - - Other invest.cf 16 55 9 61 70 C.F - investing (259) (308) (183) (159) (150) Issue of equity 0 0 - - - Issue/repay debt (232) 51 (81) (100) (100) Dividends paid (108) (117) (205) (233) (256) Other finance.cf (27) (16) 85 (19) (13) C.F - Financing (368) (82) (200) (352) (370) Chg. in cash (23) 2 35 141 217 Closing cash 105 102 205 346 564 Ratios Y.E March FY16 FY17 FY18 FY19E FY20E Profitab. & Return EBITDA margin (%) 15.3 15.8 15.6 15.9 16.3 EBIT margin (%) 12.9 13.4 13.2 13.5 13.9 Net profit mgn.(%) 8.8 9.4 8.9 9.4 9.8 ROE (%) 26.3 24.8 22.5 23.6 24.7 ROCE (%) 31.1 31.8 29.6 31.5 34.5 W.C & Liquidity Receivables (days) 43 42 48 48 48 Inventory (days) 85 102 96 88 82 Payables (days) 68 72 80 80 80 Current ratio (x) 1.5 1.6 1.7 1.8 1.8 Quick ratio (x) 0.8 0.7 0.9 1.0 1.1 Turnover &Levg. Gross asset T.O (x) 3.6 4.6 4.2 4.2 4.2 Total asset T.O (x) 1.5 1.4 1.4 1.4 1.5 Adj. debt/equity (x) 0.2 0.2 0.2 0.1 0.1 Valuation ratios EV/Net Sales (x) 5.6 7.3 6.4 5.5 4.7 EV/EBITDA (x) 36.4 45.8 40.7 34.6 28.6 P/E (x) 62.9 75.9 70.8 58.7 48.3 P/BV (x) 14.9 17.1 14.9 13.0 11.1
Recommendation Summary (last 3 years) Dates Rating Target 27 August 2018 SELL 313 Source: Bloomberg, Geojit Research Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable. Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhijit Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion.
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