Yes, you read it right. The Berger Paints India Ltd stock is the most expensive paint stock on the bourses. It continues to outclass larger peers and the market leader in decorative paints, Asian Paints India Ltd, by a mile in valuations.
According to Bloomberg data, Berger Paints is trading at a one-year-forward price-to-earnings (PE) multiple of 54 times, while Asian Paints quotes at 48 times. But the former’s steep valuation multiple is not backed by substantial growth in earnings.
That does not quite justify the stiff valuations. “Berger’s Q4 performance again raises the same question: Why does the stock deserve to trade at more than a 25% premium to market-leader Asian Paints, which itself is trading at a heady 50 times FY22 EPS?" said JM Financial Institutional Equities Ltd analysts in a report on 24 June. EPS stands for earnings per share.
The nationwide lockdown has hit the consumer discretionary segment the hardest.
Despite that, Asian Paints clocked low single-digit sales volume growth in the March quarter. This was much better than what was being anticipated by investors.
On the other hand, analysts estimated that Berger’s volumes fell 6-7% in the March quarter. Consequently, the fall in revenue and profit was more for Berger.
Softer raw material expenses have been a bright spot for the paint sector, leading to gross margin expansion.
But here too, Asian Paints scored better, with its gross margin touching a multi-year high in the March quarter.
In a post-earnings conference call with analysts, the Berger Paints management indicated a stable input costs outlook. It added, however, that gains may decrease on rising crude prices, a weak mix, rupee depreciation and likely price cuts.
As far as demand is concerned, the commentary indicated a swift recovery in May-June, led by small towns. Berger has greater operations in smaller towns than in metros, which have been relatively less impacted by the coronavirus crisis, the management said.
Even though the company’s management hopes for a quick demand rebound, analysts aren’t too convinced.
“Although recovery seems faster, led by small towns, demand visibility is still low. The near-term performance may be boosted by pent-up demand, which may not sustain," Emkay Global Financial Services Ltd analysts said in a report on 26 June.
“We factor in a 7% fall in sales in FY21, and 22% growth in FY22. Despite optimistic margin assumptions, valuations at 54x make it expensive vs. other consumer peers," it added.
Cautioning about near-term earnings pressure, the JM Financial report said: “Valuation of 63x FY22 earnings per share is obscene, and seems to factor in a growth rate that is unlikely to ever materialize