Can Berger Paints sustain market share, margins amid growing competition?

In its Q3 earnings call, the company said rapid expansion of its distribution network in underrepresented regions could swiftly compensate for any minor losses incurred from the entry of a new player. (Photo: Mint)
In its Q3 earnings call, the company said rapid expansion of its distribution network in underrepresented regions could swiftly compensate for any minor losses incurred from the entry of a new player. (Photo: Mint)

Summary

  • While the management noted that it likely gained market share in Q3, the competitive landscape warrants caution as Grasim's Birla Opus enters the paints sector.

Berger Paints India Ltd outperformed its larger peers on revenue growth in the December quarter (Q3FY24). Consolidated revenue increased by 7% year-on-year to 2,882 crore, while Asian Paints Ltd and Kansai Nerolac Paints Ltd saw 5.4% and 5% revenue growth, respectively.

Berger’s management noted that it likely gained market share during the quarter, based on the results published by the top four paint companies in India. Berger India maintained its improved market share at around 20% in value terms.

However, the competitive landscape warrants caution as Grasim's Birla Opus enters the paints sector. While Berger prefers to maintain a balance between margin and market share, if push comes to shove, it won’t mind a slight margin dilution to maintain its share.

In its Q3 earnings call, the company said rapid expansion of its distribution network in underrepresented regions could swiftly compensate for any minor losses incurred from the entry of a new player. Berger is likely to be quite aggressive in new dealer additions for at least the next year or two.

 

Even so, ICICI Securities sees multiple headwinds to market share and Ebitda margin expansion. It expects a significant rise in competition, particularly in mass and economy products, which is a crucial segment for Berger. There have also been two rounds of price cuts (in November and January), and advertising spending has increased. With all this, ICICI sees Berger’s Ebitda margin falling to 15.4% in FY25 from 16.7% in FY24.

Berger is looking to maintain its Ebitda margin in the range of 15-17%. In Q3, Ebitda margin rose 368 basis points (bps) year-on-year to 16.7%, while gross margin expanded by 638 bps to 41% thanks to lower input costs and some formulation savings. That said, Berger expects gross margin to moderate sequentially owing to price cuts, and thus believes that Ebitda growth in Q4 could be slightly lower than the 37% it clocked in Q3.

Demand could also be a dampener. After a strong October, demand has been relatively subdued in the past three months. It is expected to pick up after the general elections, with inflation cooling.

Against this backdrop, Berger’s shares have fallen by 8% so far in 2024. The stock trades at 48.5 times estimated FY25 earnings, according to Bloomberg data. Moreover, “deteriorating category dynamics is an overhang," said Amit Purohit, analyst at Elara Securities (India). The broking firm has cut its FY25 and FY26 earnings estimates by 6.3% and 6.5%, respectively, to factor in lower-than-anticipated margin.

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