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Berger Paints. Photo: Indranil Bhoumik/Mint
Berger Paints. Photo: Indranil Bhoumik/Mint

Will investor optimism remain bright for Berger Paints after Q3?

  • Stock has risen nearly 78% so far in FY20, signalling that investors are already factoring in the firm’s bright performance
  • Berger’s net profit rose about 37% to almost 182 crore

MUMBAI : The Berger Paints India Ltd stock is in a formidable position as far as valuations go. The company’s stock trades at 66 times estimated earnings for FY21, based on Bloomberg data. In comparison, the stock of bigger peer Asian Paints Ltd trades at 54 times FY21 earnings.

The Berger Paints stock touched a 52-week high in early trading on 5 February, the day it announced the December quarter (Q3) results towards the fag end of trading. On Thursday, the stock declined by 2.4%.

The moot question thus is whether the Q3 results justify investor optimism.

Graphic by Naveen Kumar Saini/Mint
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Graphic by Naveen Kumar Saini/Mint

“With sales growth being similar to that of Asian Paints and most consumer peers, Berger’s valuation premium of 20% (56 times FY22 estimated earnings per share) appears unjustified," wrote analysts at Emkay Global Financial Services Ltd in a report on 5 February.

“The strong earnings momentum is currently driven by lower input prices and the tax rate cut, which are already priced in, and expected to normalize in FY21 estimates," they said.

The company’s consolidated Q3 Ebitda (earnings before interest, tax, depreciation and amortization) margin expanded 200 basis points year-on-year to 17.47%. One basis point is 0.01%.

The Ebitda performance was driven by input cost savings and a favourable base. Raw material expenses as a percentage of revenue declined by a meaningful 300 basis points.

Other expenses, however, increased faster, eating into margin expansion to that extent. As a result, Ebitda increased by 18%, while revenue growth was 5%.

“Considering that the company has cut prices of enamels by 2.5-4% and has not raised prices of other products, we believe volume growth was in high single digits," said ICICI Securities Ltd. “Despite headwinds such as prolonged monsoon, political uncertainty in Jammu & Kashmir and North East, and a stronger base, the company has reported strong Q3FY20."

Overall, net profit increased by about 37% to almost 182 crore. Profit growth appears solid and the Berger Paints stock has risen by nearly 78% so far in FY20. That suggests investors are already factoring in the company’s bright performance to a good extent in the share price.

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