Berger Paints -- Right strokes: Buy

Berger Paints India, a major manufacturer of paints and varnishes operates in diverse segments, such as decorative, automotive, industrial, powder and protective coatings. It caters to both the domestic and international markets.

Strong market presence, pricing power, expansion plans and thrust to infrastructure spend signal good prospects for the company. Investors with a long-term perspective can buy the stock. At ₹236, it quotes at about 49 times its trailing 12-month earnings, close to the average valuation over the past three years. Though the stock fell last November due to demonetisation, it recouped, thanks to its key decorative segment registering double-digit volume growth in the December quarter.

In the near term, the performance in other segments should improve as the impact of demonetisation recedes. Also, input prices should stay within control. This, along with planned launches, should keep the company on the growth path.

Berger Paints is the second-largest player in decorative paints in the country. The segment contributes nearly 80 per cent of the company’s revenue; the industrial segment contributes 14 per cent and international operations about 6 per cent.

The decorative paints business has been a consistent performer over the years, aided by product launches and strong marketing initiatives. The company has an extensive distribution network of more than 16,000 dealers.

The demand for paints in the decorative segment should continue to grow, thanks to governmental push for the housing sector and growing purchasing power of consumers. Besides, implementation of the GST should help large, organised sector players, such as Berger Paints, given the expected shift from the unorganised sector.

The company also has good presence in industrial paints; it is the market leader in the protective paints segment in the country. To improve its presence in auto paints, Berger Paints has divested its three- and four-wheeler paints business into BNB Paints, a joint venture with Nippon Paints India. Berger Paints holds 49 per cent in the venture while Nippon Paints India holds 51 per cent. Economic growth and pick-up in manufacturing activity should aid the company’s growth in the industrial paints segment.

Berger Paints also has presence in Nepal, Bangladesh, Poland, Cyprus and Russia through wholly-owned subsidiaries.

Berger Paints has 10 manufacturing units across India. It recently commenced its automotive and general industrial paints production plant with a capacity of 4,800 kilo litre per tonne per annum at Pune. Also, the company has begun operation of its paint and putty plant in Assam with capacity of 6,600 kilo litre per tonne per annum of solvent and water-based paints and 7,200 tonnes of putty and distemper. This should help it cater to the expected growth in demand.

The company is in the process of launching paintable wallpapers. Products have also been introduced in floor and wood coating.The company has also been partnering with the international players through joint ventures to expand its product offerings.

Recently, it entered into a memorandum of understanding with Chugoku Marine Paints of Japan to market, supply and purchase marine-related industrial paints.

The fall in crude oil prices since 2014 has aided the company significantly, as titanium dioxide and other key raw materials are crude oil derivatives. Though oil prices have risen since last November due to the output cut deals among major producers, they are unlikely to rise beyond $60 a barrel due to supply-side responses from US shale producers. This should keep costs for paint-makers such as Berger Paints under control.

Also, the company has started using water or solvent-based paints derived from emulsion materials in the decorative and wood coating segments. This would reduce the dependence of crude oil-based raw materials.

Berger Paints has been doing well financially. Its revenue grew at an annual average of 12 per cent over the past four years to ₹4,634 crore in 2015-16. Net profit during this period increased at an annual average of about 19 per cent to ₹359 crore. While revenue growth was 7 per cent y-o-y in 2015-16, profit rose 37 per cent, aided by benign costs. The operating margin improved to 15 per cent in 2015-16 from 13 per cent the previous year.

In the nine months ended December 2016, revenue rose 8 per cent y-o-y, the operating profit improved about 16 per cent and net profit rose 32 per cent. The company’s debt-to-equity is under 0.3 times, giving it room for expansion plans. .

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