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The September quarter earnings of Berger Paints Ltd were solid with revenues rising around 28% year-on-year. Analysts say revenue growth was aided by multiple positive factors, including sales recovery in the industrial paints segment and price hikes. While Berger’s Q2 revenue growth was ahead of analysts’ expectations, it lagged that of close competitor Asian Paints Ltd. 

“On two-year basis, standalone sales growth rates of Asian Paints (up 44%) were above Berger (up 35.5%). On two-year basis, Berger’s consolidated sales growth was at 39.2% versus Asian Paints at 40.5%," analysts at Edelweiss Securities Ltd said in a note. Also, Berger is estimated to have clocked volume growth of around 20% y-o-y, trailing Asian Paints’ 34% y-o-y volumes growth in the decorative segment.

However, Berger’s operating performance has been better than Asian Paints' amid the challenges of cost inflation. On a consolidated basis, Berger’s Q2FY22 Ebitda margin fell 333 basis points (bps). One basis point is one-hundredth of a percentage point. Ebitda is short for earnings before interest, tax, depreciation and amortisation. 

Asian Paints saw its operating margin decline by 1090bps, followed by Kansai Nerolac’s 937bps fall and Indigo Paints’ 690bps margin compression.

“Berger’s Q2FY22 Ebitda margin decline was lower than peers due to price hikes higher than market leader, market share gains in economy paints and operating leverage and likely reduction in ad-spend," analysts at ICICI Securities Ltd said in a report. 

As for Berger’s gross margin, it fell 449bps y-o-y impacted by input cost inflation. Asian Paints’ gross margins shrunk by 970bps in Q2FY22. Of course, paint companies are taking calibrated price hikes to protect their margins but analysts say they are unlikely to compromise on market share gains by focusing on price hikes. In simple terms, cost inflation concern is unlikely to ease in a hurry.

“While input price index is up almost 60% y-o-y, we believe the paint industry and Berger are behind the curve in passing on entire input inflation as they are gaining market shares and would like to continue that instead of just focusing on margins. There will be some signal to the new competitors. We model the paint industry profit pool to be under pressure in H2FY22 and FY23," added the ICICI report.

Meanwhile, shares of Berger are trading at a one-year forward price-to-earnings multiple of around 90 times, a little ahead of Asian Paints’ PE multiple of 88 times. With that, Berger is the most expensive listed Indian paint stock. But analysts caution that unless the entire burden of cost inflation is passed on, these expensive valuations are unlikely to sustain.

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