Sell Berger Paints; target of Rs 300: Dolat Capital


Dolat Capital’s research report on Berger Paints

Berger’s Q3FY19 revenue was in line with our estimate, but EBITDA and APAT missed expectation. The company’s volumes grew a strong 18% (our analysis) in the decorative paints business, but a significant fall in margin was a negative surprise. APL reported marginally higher growth than Berger for the first time after almost eight quarters. This hints at an improvement in rural growth, compared to urban. As most of the companies operating in the domestic market reported a strong growth in the decorative business, we believe demand is trending up and should sustain with higher urban and rural demand. As the second-largest company in the domestic decorative paint industry, Berger is likely to benefit more, due to (1) rising distribution reach (2) strong presence in urban markets and (3) attractive product offering in all categories (4) reduction in GST rates and (5) calibrated pricing. We expect Berger to report double digit volume growth in the next few quarters, on the back of ongoing construction activities and rural stimulus. Margin pressure is likely to ease sequentially due to reduction in crude prices and rupee appreciation. In addition, absence of high cost inventory at the end of Q3 is likely to support margin improvement.


Outlook

We revise our estimates down to factor in higher than expected jump in RM in Q3. Given the recent rise in the stock price and revision in earnings estimate, we maintaining SELL, with a TP of ` 300 (40x FY21E).

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First Published on Feb 8, 2019 03:15 pm