Home >Markets >Mark To Market >With rising competition, Berger Paints' valuations look weirder

September was a colourful quarter for paint manufacturers, courtesy strong recovery in the decorative paints segment.

The market leader in this category, Asian Paints Ltd, was the first to surprise with double-digit volume growth. Following this, peers Berger Paints India Ltd and Kansai Nerolac Ltd, too, saw volumes in the decorative paints segment grow in double digits. While volume growth was expected to rise on account of pent-up demand, hardly anyone had anticipated growth to be in double digits.

Management commentaries indicate that pent-up demand from smaller cities and towns continued to drive demand ahead of the festive season. Among product categories, sales of economy paints, such as putty and primers, was higher than premium paints. This is one reason due to which value growth has lagged volume growth for paint makers in the September quarter.

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In the case of Asian Paints, for instance, value growth stood at 7%, lower than the 11% growth in volumes. While Berger hasn’t yet disclosed its volumes, analysts said volume growth would be in the mid-teens to support revenue growth of 9%. Analysts at Kotak Institutional Equities said in an earnings preview report that Berger’s revenue growth would be boosted by 2.5 percentage points, owing to an acquisition.

Berger’s consolidated net profit grew 13.6% year-on-year to 221.1 crore, far higher than Bloomberg’s consensus estimate of 178 crore.

“We expect Berger to fare slightly better than peers owing to higher salience of semi-urban and rural markets that have bounced back strongly post-lockdown," Kotak Institutional Equities analysts said.

While decorative paints made an impressive comeback, the industrials segment continued to lag.

For Kansai, the leader in industrial paints, volumes continued to fall. Industrial paints demand was muted in July- August, but picked up from September, the management said. With improving auto sales, especially passenger cars, it expects demand for auto paints, which contributes the highest revenue share to its industrial paints business, to improve. Analysts are not gung ho on the revival of the industrial paints segment, given its cyclical nature.

Meanwhile, benign raw material costs aided gross margin expansion for paint companies in the September quarter. However, with prices of some raw materials firming up, managements have cautioned of some pressure on margins. Also, advertisement and employee expenses, which aided operating margins growth for the sector for the past two quarters, are likely to increase as normalcy resumes.

While Q2 numbers have been ahead of estimates overall, valuations are flashing red, at 73 times, 61 times and 44 times for Berger, Asian and Kansai, respectively.

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