Easing cost pressure a positive but slowdown in consumption demand hit volumes
Despite dull earnings, Berger Paints is trading at expensive valuations akin to peers
The Berger Paints India Ltd stock was trading in the red ahead of its March quarter results on Thursday. Given that bigger peer Asian Paints Ltd reported dismal earnings for the last quarter, the Street’s nervousness wasn’t surprising.
Berger Paints India’s consolidated earnings were a miss both on the profit and revenue front. Net profit increased by about 5% year-on-year to ₹111.43 crore, lower than Bloomberg analysts’ consensus poll of ₹129.4 crore. True, revenue increased at a faster pace of 14% year-on-year to ₹1,472.09 crore but even that fell short of the Street’s expected ₹1,518.5 crore.
As for volumes, similar to Asian Paints, Berger Paints India’s decorative paints business saw low double-digit growth, according to analysts’ estimates. Not surprisingly, the overall slowdown in consumption demand has weighed on volumes.
Note that the company derives more than 75% of its revenue from decorative paints. As such, analysts aren’t too worried about the sluggish automobile demand impacting its industrial paints segment. That said, investors would have to closely monitor the impact of the ongoing consumption slowdown on the sector in general.
One comforting factor is that the cost of raw materials consumed has declined by around 3% in the March quarter on a sequential basis. On a year-on-year basis though, it remains high. Still, it helps that crude oil prices are showing signs of cooling off. In the last one year, Brent crude prices have dropped by 11%. As the chart alongside shows, the price of titanium dioxide, a key raw material, decreased by around 7% on a year-on-year basis. Also, prices of some crude oil-based solvents and monomers are said to have softened during the March quarter.
This could be a factor why the Berger Paints India stock ended the day’s session slightly higher compared to Wednesday.
Even so, the worry is given the subdued demand outlook, steep price hikes may not come in a hurry. Accordingly, a meaningful improvement in operating margin, which was below expectations during the March quarter, may still be few quarters away. Moreover, the risk from a weak rupee remains since many raw materials are imported.
Valuations, though, paint a brighter picture. The Berger Paints India stock is trading at a one-year forward price-to-earnings multiple of around 44.76 times, a bit lower than 51.07 times that peer Asian Paints is trading at.
While comparatively cheaper, Berger Paints India’s valuations may not be justified. Add to that, the weak earnings show is hardly encouraging. The company’s shares have corrected by 9% on a year-to-date basis, underperforming the Nifty 500 index, which posted 7% returns in the same span. Perhaps, Berger Paints India’s investors are taking cognizance of the demand outlook.