Berger Paints: Premium valuation unjustifiable

46% fall in top line and muted profit margin led to 88% dip in pre-tax profit in June quarter

Berger Paints’ (Berger’s) June 2020 quarter (Q1) profit performance, announced last Friday, was not only weaker than the Street’s expectation, but also worse than the numbers of market leader Asian Paints.

This hurt sentiment towards Berger’s stock, which, at 60 times its FY22 estimated earnings, is currently trading around 16 per cent premium to Asian Paints, which is also three times in size. The stock fell over 4 per cent in intra-day trade on Monday before ending the day at ~541.6, a decline of 1.6 per cent. The Sensex was up 0.5 per cent on Monday; Asian Paints rose 1.9 per cent.

Berger’s Q1 consolidated revenue was down 45.8 per cent year-on-year (YOY) to ~930.8 crore, better than the consensus estimate of ~842 crore. However, its pre-tax profit decline of 87.9 per cent YOY to ~32.7 crore was 45 per cent lower than the Street’s estimate of ~59.6 crore. The fall was higher than the 42.8 per cent and 70.2 per cent decline in revenue and pretax profit, respectively posted by Asian Paints. Notably,

Kansai Nerolac Paints, which has a higher exposure to the industrial segment, reported a fall of 81.4 per cent in pretax profit in Q1.

Berger’s poor profit showing was mainly due to muted gross profit margin. Despite benign input costs, Berger’s Q1 gross profit margin of 41 per cent was almost flat at the year-ago level, versus at least 110 bps expansion witnessed by Asian Paints and Kansai Nerolac. Berger’s Ebitda margin was down 788 basis points YOY to 9.9 per cent in Q1.

Besides the product mix deterioration, which is common across the sector, a larger inventory of high-cost raw materials weighed on Berger Paints’ gross margin in Q1.

According to Varun Singh, analyst at IDBI Capital, with Berger Paints’ underperformance and relatively smaller size, the stock’s premium valuation is not justifiable. ”While Berger Paints is also doing good, Asian Paints has the best execution and would see a faster recovery given its large distribution network, which is double than that of Berger Paints,” he added.

Analysts at JM Financial said Berger had underperformed Asian Paints through FY20 in terms of revenue growth and it continued in Q1FY21 and this did not justify Berger’s sustained premium valuation. JM Financial has maintained ‘sell’ rating on Berger’s stock. Although Berger’s management indicated benefits of low-cost raw material inventory would start flowing in Q2, the jury is out on to what extent it would lift its gross profit margin, given the competitive intensity by the market leader.