Asian Paints Ltd may be trading close to its all-time high market capitalization of ₹1.75 trillion, but Berger Paints Ltd, its much smaller competitor, has been racing ahead as far as valuation multiples go.
In the past three months, Berger’s share price has risen by 47%, while that of Asian Paints has risen by 19%. More importantly, the former’s one-year forward price-earnings multiple has risen to 64 times, far higher than Asian Paints’ 54 times valuation, according to Bloomberg consensus earnings estimates.
So, what has changed? “Berger has been primarily focusing on the mid and the lower-end of the decorative paint segment. In this area, it has kept the price point very attractive, and for this reason, has experienced strong growth in volumes. This has been ahead of other bigger paint companies, so there was some shift in market share in decorative paints from other larger players to Berger Paints. Since growth was high, people started giving higher multiples to Berger," said Amit Agarwal, vice president, Kotak Securities Ltd.
In the FY19 March quarter earnings conference call, Berger’s management said it had priced its product nearly 2.5% lower than Asian Paints’. Furthermore, Berger’s presence in tier-2 and tier-3 cities has helped it push bottom-of-the-pyramid products. According to some analysts, Berger’s edge over its competitors stems from lower dependence on the slow-moving industrial and automotive paints segment. That is one reason why Berger reported higher margin expansion in Q1 compared to Asian Paints and Kansai Nerolac Ltd. While Asian Paints reported 18% growth in net profit in the June quarter, Berger’s bottomline rose by over 32%.
Asian Paints is now pushing low-end products like distempers and putty. Its double-digit volume growth of nearly 13-14% in the September quarter was driven by these products, as the growth of its core paint segment remained sluggish. Berger Paints hasn’t reported Q2 results yet.
Interestingly, while some analysts do not expect Asian Paints to regain its top spot in terms of valuation multiples in a hurry, they don’t find Berger’s premium valuations justified either. “Berger has gained 50-100 basis points market share annually in the past four-five years. New and innovative launches should ensure more gain in market share. We believe the company has lower market penetration compared to the leader, Asian Paints, and has a higher scope for further growth. However, considering rich valuations, we maintain a sell rating," analysts at Dolat Capital Market Pvt. Ltd said in their June quarter earnings review report.