Berger Paints shares correct on rich valuations, earnings miss
Shares of Berger Paints India Ltd have fallen 10% in the past five trading sessions following its September quarter earnings, announced last week. Consolidated net profit rose 55% year-on-year to Rs138.78 crore and consolidated net sales increased 7.5% year-on-year to Rs1,142.14 crore.
But the surge in profit was due to a one-time gain of Rs44.20 crore, which was on account of the sale of a division to Berger Nippon Paint Automotive Coatings Pvt. Ltd, the company’s joint venture with Nippon Bee Coatings Pvt. Ltd of Japan.
What didn’t go well with the Street was that profit was buoyed by a one-off item and had that not been the case, the number would have looked more subdued. It’s a miss on the sales front, too. Ebitda (earnings before interest tax depreciation and amortization) margin expanded 130 basis points year-on-year to 15.59%; the rise was restricted by increased staff cost and other expenses.
Segment-wise, the decorative business saw steady volume growth, but the cause of concern, its protective and infrastructure business remains sluggish. Demand for core protective coating products continued to be affected by low infrastructure spending, said Berger Paints. Apart from that, a spike in the cost of key raw materials—crude oil and titanium dioxide—could hurt margins going ahead. Akin to peers Asian Paints Ltd and Kansai Nerolac Paints Ltd, Berger Paints too may hike prices to offset this impact.
All hopes for improvement in volume from hereon lie on the expected positive impact of a good monsoon and pay hikes awarded by the seventh pay commission. Some analysts say given its higher rural exposure and presence across segments, Asian Paints would benefit more from the good monsoon and changing macros compared to Berger Paints.
Meanwhile, in the last one year, Berger Paints’ shares have risen more than 40%, outperforming the broad market as well as rival Asian Paints. On the valuation front, the stock trades at a one-year forward price-to-earnings multiple of 48.17 times. Given the sharp run-up and expensive valuations, it isn’t surprising the shares are correcting sharply because of the earnings miss.