With softening crude-oil prices cushioning the blow for paint companies, stocks of paint manufacturers have been resilient amid market volatility due to Covid-19. Since January this year, Berger Paints has corrected by just 1 per cent.

While the pandemic impacted the company’s performance in the March quarter, business has resumed in non-metros and rural areas.

The company is the second-largest paint-maker in the country and has a strong presence in select geographies, besides a good distribution network.

Competitive pricing has helped gain market share, particularly in non-metro cities and rural areas where Berger holds a dominant position. Also, with low-cost housing likely to see a better traction from home-buyers, it should help the company’s revenue grow going ahead.

Berger Paints’ fundamentals are strong, and negligible debt levels provide room for future expansion.

That said, high valuation, near-term growth headwinds and slow pick-up in real estate demand could limit the upside in the stock. Investors can continue to hold the stock and wait before picking up fresh positions in the stock.

At the current price, Berger Paints trades at 56 times its likely per-share earnings of FY22 (average valuation over the past three years is 67 times). The stock is expensive compared with its peer Asian Paints, which is trading at 49 times its likely per-share earnings of FY22.

In the March quarter, the lockdown measures implemented and demand destruction due to Covid-19 took a toll on the company’s performance. The revenue and profit fell 8 per cent and 6.5 per cent y-o-y, respectively, during the March quarter of FY20. Also, the management expects subdued growth in the June quarter and some improvement in the September quarter. Business in the metros is yet to pick up.

Hence, given the uncertainties in the near term and expensive valuation, investors can wait before buying fresh units of the stock.

Key product advantage

For Berger Paints, the decorative segment, its mainstay business, contributes 80 per cent of revenue, while the remaining 20 per cent comes from the coatings segment.

The company has a dominant position in rural and urban markets (other than metro cities) compared with its peers, which gives the company an advantage in pricing of products.

Therefore, the firm was able to push economy products such as putty, distempers and primers faster.

In the past few quarters, Berger was able to register double-digit volume growth, but that was predominantly due to economy products.

Also, in certain products, particularly in exterior paints such as weather-coating and wall-proofing products, Berger Paints holds a dominant position over Asian Paints. Better branding and competitive pricing have worked in favour of Berger Paints.

In the coatings segment, Berger is the market leader in protective coatings business, which contributes to around 10 per cent of coatings segment revenue, while the rest comes from automotive coatings and powder coatings.

The company continues to strengthen its core businesses.

Recently, it acquired STP, a construction chemical products company involved in waterproofing structures, anti-corrosive coatings and other protective coatings.

Benign raw material costs

For paint companies such as Berger, raw materials — including titanium dioxide, zinc oxide and solvents and additives (essentially crude-oil derivatives) — comprise around 50 per cent of sale value. Benign crude price since the beginning of 2019 has helped lower raw-material costs for paint companies and boost margins.

For Berger Paints, in the March quarter, the raw material cost (as a percentage of sales) stood at 56 per cent, about 4 percentage points lower than in the same quarter last year (60 per cent in March quarter FY19). The company has passed on some of this benefit to customers in the form of lower prices across products.

Operating margin for the company improved to 16 per cent in the March quarter 2020, up from 14 per cent from the same period last year.

While crude prices have been inching up recently, it is still at $40-45 per barrel (lower than the $66 per barrel in the beginning of FY20). This can help the company push stocks to dealers at better rates.

Financials

Though the March quarter was impacted by Covid-19, the overall performance for FY20 was quite healthy. The company registered revenue growth of 5 per cent at ₹6,366 crore, but the profit grew 33 per cent to ₹656 crore on the back of higher operating margins and shift to lower corporate tax rate.

However, near-term growth challenges could weigh on the earnings of the company over the next 2-3 quarters.

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