Berger tracked Asian Paints closely in March quarter, but lost in FY21

Berger Paints India Ltd closed the March quarter with an impressive show. While the company has not disclosed volume growth for Q4FY21, analysts estimate it to be around 55% on a year-on-year (y-o-y) basis.

Competitor Asian Paints Ltd posted 48% y-o-y volume growth. Since the year-ago numbers were impacted by a nationwide lockdown, it makes sense to look at the two-year compounded annual growth rate (CAGR).

Berger’s revenue in Q4 grew 15.3% on a two-year CAGR basis, nearly the same as Asian Paints’ 15.7%. “The revenue trajectory was better than both Kansai Nerolac and Indigo Paints, clearly reflecting the dominance of Asian Paints and Berger Paints in the decorative paints industry so far,” said analysts at JM Financial Institutional Securities. For perspective, the average growth of Kansai Nerolac on a two-year basis was much lower at 7.6%, indicating high market share gains for Berger and Asian Paints. For the whole of FY21, however, Berger’s domestic business grew at a two-year CAGR of 4.5%, slightly lower than the growth of over 6% in the case of Asian Paints, the broker’s analysts point out. This is likely because of a higher share of industrial sales for the former, where the pick-up has been more gradual.

Investors have sat up and taken notice of the slight underperformance. Asian Paints shares have risen 57% compared to its pre-covid highs, while those of Berger have risen at 36%. This has helped bridge the large gap in the valuations of the two firms, even though Berger remains relatively pricey. At a one-year forward price-to-earnings (PE) multiple of around 83 times, Berger is the most expensive listed Indian paint stock, according Bloomberg data. Asian Paints is the second most expensive with a PE multiple of around 76 times. In Q4, Berger’s operating performance was ahead of peers. Gross margins expanded by 10 basis points (bps) y-o-y to 43.7% compared to a 260 basis points contraction for Asian Paints. One basis point is one hundredth of a percentage point.

This could be attributed to low-priced inventory, better mix and price hikes in the industrial paints segment, analysts said.

Berger’s Ebitda margins improved by 120bps y-o-y due to a sharp drop in employee cost and operating leverage benefit. Ebitda is short for earnings before interest, taxes, depreciation and amortization. To tackle the input cost pressures, most paint makers announced price hikes in May.

But given the sharp surge of 15% in raw material prices, the quantum of price hikes may not be enough to protect margins of all paint firms, analysts said. In the case of Berger, the impact could be much higher than others as the benefits of inventory procured at cheaper rates would wane. So, analysts caution that earnings surprise, especially on the margin parameter, is now behind.

While margin pressures are a concern, volume growth has been surprising on the upside. Paint firms have seen double-digit volume growth for the third quarter in a row, aided by pent-up demand for economy paints from smaller cities and towns. However, with the second wave of covid infections spreading fast in rural areas, volumes growth may lose momentum in the next few quarters. Analysts point out that although Berger is aggressively spending on advertisements and promotions, given its higher exposure to rural markets, its domestic decorative paints volumes could moderate more than peers.