Home / Markets / Mark To Market /  Berger Paints' stock has a lot of ground to cover

The September quarter earnings performance of Berger Paints India Ltd was a mixed bag.

While decorative paints volumes grew around 11% year-on-year (y-o-y), margins disappointed due to cost inflation and poor product mix. Berger's gross margin compression of over 300 basis points (bps) y-o-y was the steepest among peers. One basis point is 0.01%.

On a three-year CAGR basis, Q2 decorative business revenue grew 18.4%, this compares with 20% growth witnessed by market leader Asian Paints Ltd. CAGR is short for compound annual growth rate. Analysts note that although Berger is lagging Asian Paints on this parameter, the gap seems to have narrowed in Q2FY23 versus Q1FY23.

In a post-earnings call with analysts, the Berger management said that it saw market share gains of 80bps, rising from 18% in FY22 to 18.8% in  first half of FY23. Further, raw material prices are likely to soften going forward. That, coupled with an improvement in product mix, should lead to expansion in gross margin from the third quarter of FY23. Berger took price increases in the months of September and October.

The benefits of softening cost inflation and price increases would give the margins of all paint companies a boost. However, for investors in Berger stock, the entry of Aditya Birla Group company Grasim Industries Ltd, could be a potential risk.

“Even while Berger’s management is not unduly worried, the possibility of pricing/promotion war, driven by huge capacity additions in the industry, may turn out to be a challenge in terms of maintaining market share as well as retaining the historical margin profile, thus a possibility of multiple correction for the industry," said analysts at Nirmal Bang Institutional Equities.

In the first half of FY23, Berger added 3,200 tinting machines compared with typical annual addition of 3,000-4,000 and around 1,700-1,800 half-yearly average additions. The management said it will continue this pace of addition in the second half of FY23 as well.

Amid fears of rising competition, the company's aggressive expansion has done little to provide its investor's comfort. In this calendar year so far, the Berger Paints stock has declined 22% versus a 10% fall seen in the shares of Asian Paints.


This concern has also led to an earnings cut. "Berger continued to witness good momentum in the decorative and industrial segments. Yet, inflationary pressures and a poor mix hit margins. This along with the entry of new players and rising competition impel us to cut FY23E/FY24E earnings per share by 6.2%/2.8% and the target valuation to 65x from 75x," said analysts at Nuvama Research.

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