Berger Paints has a tough task putting the gloss back on profitability
Berger Paints India Ltd’s margins continue to narrow due to higher input costs, even after the company raised paint prices twice in the recent past. It announced a price hike of around 3% in March and 2.7% in May for its decorative paints segment, which contributes to 70% of its revenues. The full impact of these hikes was not visible during the June quarter.
The company’s consolidated gross margin has come off from its peak seen in the previous fiscal year. Similarly, its Ebitda margin fell by more than 2.5 percentage points year-on-year. Higher staff and other expenses dented its operating margin, but the fall was restricted by lower advertising expenditure. Ebitda stands for earnings before interest, tax, depreciation and amortization.
While the price of some solvents and monomers showed a declining trend, that of titanium dioxide jumped, Berger’s management said in a post-earnings conference call. Among segments, the impact on gross margin was steeper for the industrial business compared to decorative, given a subdued pricing scenario in the former, it added.
If input prices remain at current levels, the company will have to increase prices further to achieve last year’s margins. Also, ad spends are slated to increase in the second quarter, added the management. A steeper-than-anticipated erosion in margins weighed on the net profit growth. The paint maker’s consolidated net profit stood at Rs112.9 crore in the June quarter, missing analysts’ estimates of Rs125 crore polled by Bloomberg. But consolidated net sales at Rs1,364 crore exceeded expectations of Rs1,240.6 crore, aided by performance of its subsidiaries.
However, Macquarie Research is of the view that successive price increases may not be prudent, given the hikes in the past five months. Cautioning margin headwinds in the near term, it foresees a 90 basis points year-on-year decline to 14.9% (for the consolidated entity) in fiscal year 2018 (FY18). A basis point is one-hundredth of a percentage point.
Macquarie Research has trimmed its FY19 earning per share estimate and the stock’s target price by 2% each. IIFL Institutional Equities has trimmed its FY19 estimate by 4%.
Apart from higher input prices, what also crimped gross margins were the discounts doled out to dealers in the run-up to the goods and services tax (GST) implementation, to compensate for tax losses on transition stock, said the management. Destocking due to GST hit volume growth but the decline was less compared to what its larger rival Asian Paints Ltd faced.
The management hopes trade stocking will normalize in the next two months but it is not clear when the decorative paints’ volume growth will bounce back to double-digits.
The Berger Paints stock is trading at a one-year forward price-to-earnings multiple of 48 times. Its valuation is lower than the 50 times that of Asian Paints, but is not cheap by any means. As things stand, the stock looks priced to perfection.