1/Strong volume growth in the decorative segment; 2/ stable volumes in the industrial segment; 3/ decrease in realizations leading to weak sales growth; 4/YoY improvement in operating margins with benign raw material situation and 5/ strong earnings growth due to lower ETR, were the highlights of the results for Berger in Q2FY20. However, the valuations at the current price and factoring growth prospects looks stretched. Maintain SELL with an unchanged TP of Rs 400 at 50x FY21E earnings in line with valuation of larger peers.
We estimate that branded paint demand will remain robust in a country like India where per capita consumption is very low and 30% paint market is still unorganised. Management of Berger also indicated that the volume trends remain strong for the company and expect the trend to continue in medium term.
Berger’s performance has been better than peers and is indicative of continuedmarket share gains. Reduction in GST rates can drive further improvement in demand. Continued strong quarterly performance, ahead of the peers has impelled us to increase our estimates for Berger. For Berger, now we estimate 10% volume CAGR over FY19 – FY21E with improvement in operating margins and return ratios. However, the valuations at the current price and factoring growth prospects looks stretched. Maintain SELL with an increased TP of Rs 325 (from Rs 300) at 46x FY21E earnings in line with valuation of peers.
We are positive on the long term fundamentals of the domestic decorative business on account of Housing for all, Swachh Bharat Abhiyan and premiumisation; however, benign real estate demand will continue to act as a headwind for domestic decorative demand in the near term. At CMP of INR 316, the stock is trading at 48.4XFY20E and 40.2XFY21E earnings. We are valuing the company 44XFY20E EPS to arrive at a target price of INR 346 (earlier: INR 353) and maintain OUTPERFORMER rating.