Berger Paints India Ltd’s earnings in the March quarter (Q4) were largely in line with the Street’s expectations on most counts. The company’s decorative paints business registered low double-digit volume growth, similar to competitor Asian Paints Ltd. According to analysts, Berger Paints India’s volumes grew in the 10-11% range.

Gross margins have been under pressure for most paint makers for quite some time now, because of rising input costs. The price of titanium dioxide (TiO2), a key raw material, increased by around 12% on a year-on-year basis. Also, prices of some crude oil-based solvents and monomers are said to have risen during the March quarter.

Still, the company’s operating margin expanded, thanks to a decline in other expenses, which offset the sharp surge in the cost of raw materials. But operating profit grew by around 18.6% year-on-year, which is far lower than its valuations of 50 times earnings demand.

Like its peers, Berger Paints India’s is trying to offset that impact by hiking prices. The company announced a nearly 2.5% price hike in March, followed by another 2% increase in May, for its decorative paints segment, which contributes around 70% to the company’s revenue.

The full impact of these price hikes is likely to reflect in the June quarter, although it remains to be seen if things would improve materially on the gross margin front going ahead.

Berger Paints India’s shares are hovering close to the 52-week high at Rs300 per share.

On a year-on-year basis, both Berger Paints India and Asian Paints have outperformed the Nifty 500 index, although the former has risen at a faster pace. As such, analysts see limited upside in the Berger Paints India stock from current levels.

Even though Berger Paints India stock has outpaced Asian Paints, the two companies are neck and neck on the valuations front. The Berger Paints India stock is trading at a one-year forward price-to-earning multiple of around 50 times, similar to that of Asian Paints’.

While the volume growth outlook for the sector and for Berger Paints India is bright, courtesy improving rural demand, margins remain a risk, especially if the cost of raw materials continues to escalate. In this backdrop, valuations look rich.

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