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INITIATING COVERAGE

15 OCT 2013

Berger Paints
NEUTRAL
INDUSTRY

FMCG

CMP (as on 15 Oct 2013)

Rs 220

Target Price

Rs 240

Nifty

6,089

Sensex

20,548

KEY STOCK DATA


Bloomberg /Reuters

BRGR IN/BRGR.BO

No. of Shares (mn)

346

MCap (Rs bn) / ($ mn)

76/1,234

6m avg traded value (Rs mn)

58

STOCK PERFORMANCE (%)


52 Week high / low

Rs 256/136
3M

6M

12M

Absolute (%)

(8.7)

16.3

53.8

Relative (%)

(11.3)

4.3

44.0

SHAREHOLDING PATTERN (%)


Promoters
FIs & Local MFs

74.96
3.00

FIIs

11.35

Public & Others

10.69

Bigger, better, BERGER!


Berger Paints (Berger), the second largest
decorative paint company in India, holds
tremendous growth potential thanks to (1)
increasing distribution reach (700-800 outlets every
year), (2) higher ad spends to enhance awareness
of its premium emulsions and (3) capacity
expansion (increasing by 25% in Nov-13).
Furthermore, low per capita consumption of paints
in India, increasing urbanization and shift towards
higher margin water-based products and premium
emulsions will foster secular growth in Paints.
Bergers plan to reduce inventory days (by ~5
days/yr) and expand margins infuses us with
confidence. We foresee resilient volume growth
along with market share gain.
We believe that valuation gap between Asian
Paints and Berger will persist at 10% (reduced from
50% in FY07). Recommend NEUTRAL rating on the
stock with a TP of Rs 240 (27x FY15E EPS).
Volume growth to remain strong
Despite the near term concern on demand scenario,

the company is confident to achieve 10% vol growth


in the decorative segment in FY14E. Shortened
repainting cycle (from 5 years to 3-3.5 years) will aid
volumes to grow at 2x GDP (normalized run rate
~1.7x). Also, uptrading from unbranded paint (25% of
total paint market) will aid growth. The companys
aggressive capacity addition underscores its belief.

Source : BSE

Harsh Mehta
harsh.mehta@hdfcsec.com
+91-22-6171-7329

years. We believe that Berger will continue to gain


share from smaller organized players.

Premiumisation to lead margin expansion


Transformation of consumer preference from solvent

based paints (lower margin) to water based paints


(higher margin) along with various cost cutting
initiatives will aid margins. In the past five years,
Berger intensified its focus on the high margin
premium emulsion segment and backed it with
aggressive A&P (EBITDA margin expanded from 8% in
FY09 to 11% in FY13). Furthermore, the company
expects the mix to improve by 2% p.a. in favor of
emulsions. With four players accounting for
significant chunk of branded paint market, pricing led
competition is improbable. Turnaround in Bolix
(Poland) and synergies derived from acquisition of
Sherwin Williams (India) would bolster margins.

Valuation will sustain


It trades at 30.6/24.9x our FY14E/FY15E. Recommend
NEUTRAL with a TP of Rs 240 (27x FY15E).

FINANCIAL SUMMARY
Particulars (Rs mn)
Net Sales

FY11

FY12

FY13

FY14E

FY15E

23,407 29,477 33,464 37,823 44,330

EBIDTA

2,503

3,034

3,712

4,218

5,086

Net profit

1,501

1,800

2,184

2,491

3,060

EPS (Rs)

4.3

5.2

6.3

7.2

8.8

P/E (x)

50.8

42.4

35.0

30.6

24.9

EV/EBITDA

31.0

25.6

21.4

18.5

15.0

25.2
Bergers market share in domestic decorative paint
Source: Company, HDFC sec Inst Research
business has surged from 15% to 19% in the past five
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
RoE (%)

23.3

24.3

25.1

24.1

BERGER PAINTS : INITIATING COVERAGE

Berger seems confident to


achieve 10% volume growth in
the decorative business in
FY14E

VOLUME GROWTH TO REMAIN BUOYANT

Despite the near term concern on the volume growth


scenario, the company seems confident to achieve
10% volume growth in the decorative business (which
constitutes 80% of consol sales) in FY14E.

Favourable demographics in India

Resilient revenue (consol) growth


30.0

25.0
20.0
15.0

100%

23.8
19.5

19.3

13.9

14.5

17.2

16.2 16.5

15-60 years

<15 years

25.9
20.6

Industry has experienced dynamic changes in the last


decade in terms of changing environment and
structure which propelled it to a high growth
trajectory.

13.5

13.0

10

57

57

58

60

62

63

37

36

34

32

30

28

CY90

CY95

CY00

CY05

CY10

CY15E

80%
60%

10.0

>60 years

40%

5.0

20%

FY15E

FY14E

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

0.0
0%

Source : McKinsey, HDFC Sec Inst Research

Source: Company, HDFC Sec Inst Research

Shorter repainting cycle

The economic growth in India has lead to higher


disposable income, increasing urbanization, easy
availability of credit and a concurrent growth in
construction, automobiles and consumer durables
segment which have emerged as the driving force
behind the rise in current consumption of paints.

56.0
42.0
28.0
14.0
0.0

Japan

provides

70.0

Age 60 +

USA

consumption

Age 24 and under


% of total population

China

Low per capita


opportunity

Indias working population to outpace China

Europe

There has been a massive transformation in the


Indian consumer. Earlier, people used to paint when
the walls were peeling. Now its about decor. As per
the management, the repainting cycle has shortened
from 5 years to 3-3.5 years. Repainting constitutes
80% of total paint demand.

Indonesia

India

The repainting cycle has


shortened from 5 years to 3-3.5
years

Source : McKinsey, HDFC Sec Inst Research

Page | 2

BERGER PAINTS : INITIATING COVERAGE

Third largest economy after US and China by 2040

In 2040 there will be around 1


billion working age people in
India compared with 0.9 billion in
China

Brazil
71.0

China

India

India to witness surge in average national income

Russia

% of total population

68.0

200

65.0

150

62.0

Urban

50

CY40E

CY35E

CY30E

CY25E

CY20E

CY15E

CY10

CY05

CY00

56.0

Source : Global Insight database, HDFC Sec Inst Research

Big middle class, increasing disposable incomes

households (having per capita


income <USD 3,300) is quickly
becoming a diamond, as
household incomes of the
middle income groups grow

All India

INR '000

100

59.0

The income pyramid in India


which typically had a wide
base of struggler

Rural

250

13mn (6%)

CY90

CY10

CY20E

CY30E

Source : India Urbanization Econometric Model, McKinsey Global


Institute analysis, HDFC Sec Inst Research

Average MPCE (Rs.): Sustained growth in consumption


3,000

Affluent >$18.5k

CY00

Rs

Rural

Urban

2,500
34mn(14%)

Aspires $7.4k-18.5k

2,000
1,500

72mn(30%)

Next Billion $3.3k-$7.4k

1,000
500

121mn(50%)

Source : Euromonitor, BCG, HDFC Sec Inst Research

Strugglers<$3.3k

0
July 2004June 2005

July 2009-June
2010

July 2011-June
2012

Source : NSSO, HDFC Sec Inst Research

Page | 3

BERGER PAINTS : INITIATING COVERAGE


Per capita income
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

100

Mn

87

80
60

47

40
20

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Source : CSO, HDFC Sec Inst Research

7
CY05

CY15E

CY25E

Source : Industry, HDFC Sec Inst Research

High disposable income + low credit = recipe for higher spending


40.0

% of disposable income

32.0
24.0
16.0

Indonesia

Malaysia

South Korea

Thailand

0.0

India

8.0

China

Higher per capita disposable


income and Monthly per Capita
Expenditure (MPCE) creates a
strong case for sustained FMCG
market enlargement

Middle class households

USA
NZ
Aus
UK
Malayasia
Taiwan
Sing
Korea
Japan
Thailand
China
India
Indonesia

23
19
17
10
8
0

39

55
49

63

78
71

97
96

Consumer credit/GDP(%)
50

100

150

Source : McKinsey Global Institute analysis, HDFC Sec Inst Research

Page | 4

BERGER PAINTS : INITIATING COVERAGE

Rapid urbanisation

By 2020 the percentage of


Indias population living in cities
will rise to 35% from 31% in
2010

700

Statewise urbanization analysis


CY30E

Mn

Tamil Nadu
Gujarat
Maharashtra
Karnataka
Punjab
Haryana
West Bengal
Kerala
Andhra Pradesh
Madhya Pradesh
Jharkhand
Rajasthan
Chhattisgarh
Uttar Pradesh
Orissa
Himachal Pradesh
Bihar

600
500
400
300
200
100
0

CY91

CY01

CY08

CY30E

Source : McKinsey Global Institute analysis, HDFC Sec Inst Research

Asset price inflation, hike in


MSP, Popoulist schemes by
government in election year
and good monsoon will
bolster rural demand

70% of GDP to come from urban India


100
80

Rural

46

Urban

54

58

69

40

54

CY90

67

53
44

58

44
37
36
31
29
28
28
32
25
31
25
33
24

12
9

24
26
21
24
18
20
17

66

57
52

45

40
41
46

40

% of total population

Source : India Urbanization Econometric Model, McKinsey Global


Institute analysis, HDFC Sec Inst Research

60

20

CY08

46

42

CY01

CY08

Rural India will bolster demand

India's vast "media dark" rural market over the past


decade experienced significant exposure to branded
paints due to the surge in reach of satellite television.
As per the industry sources, 60% of DTH addition
comes from rural India which emphasizes on everincreasing reach of media. Thereby driving the
aspirations of rural India to use branded paints.

Asset price inflation (largely land and gold) drove an


increased sense of affluence amongst the masses.
Hike in Minimum Support Price for food grains and
continued support under NREGS, among other
factors, have driven rural incomes and demand. Good
monsoon will further boost rural demand.

31
CY30E

Source : India Urbanization Econometric Model, McKinsey Global


Institute analysis, HDFC Sec Inst Research

Page | 5

BERGER PAINTS : INITIATING COVERAGE

Volumes to grow above run-rate of 1.7x GDP

YoY% increase in MSP for Kharif crops (FY13)


60

Indias per capita consumption


of paints is still abysmally low
at 1.3kg/annum

% YoY

Indian paint industry has historically tracked GDP


with domestic paint volumes growing at a mean of
~1.7x GDP. But with the change in consumer
preferences and shorter repainting cycle we expect
the correlation between domestic decorative paint
volumes growth and GDP to adjust to a higher level
(volumes to grow 2x GDP).

50
40
30
20

Cotton

Indias per capita consumption of paints is still


abysmally low at 1.3kg/annum. It is less than third of
China, which has per capita consumption of 4
kg/annum. This however indicates tremendous
opportunity for paint industry which is currently
highly under-penetrated.

Per capita consumption of Paint


16

10
5
0

Source: Shalimaar Paints, Akzo Nobel Paints, HDFC sec Inst Research

Kg

Decorative Industry to double in 5 years

14

350

300

250

200

Source: Akzo Nobel, HDFC sec Inst Research

North
America

Japan

400

Australia

450

East
Europe
Middle
East
Central
Europe

10

China

500

SE Asia

12

India

Volumes to grow 2x GDP

GDP growth

Paint Industry volume growth


20
15

Source : Press Information Bureau, HDFC Sec Inst Research

Paint industry volume growth vs GDP growth

FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13

Urad

Ragi

Maize

Bajra

Soyabean

Sunflower
Seeds

Jowar

Paddy

10

Rs bn
CAGR 15%

150
100
50
0
2010

2011

2012

2013

2015

2020

Source: Akzo Nobel, HDFC sec Inst Research

Page | 6

BERGER PAINTS : INITIATING COVERAGE

WELL PLACED TO CAPTURE FUTURE GROWTH


Berger has planned 25% capacity
addition over the existing
capacity of 3,25,000 MTPA
(excluding 24,000 MTPA capacity
of Sherwin Williams)

Capacity addition enough to sustain next 5


years

The company has spent Rs 2bn on


the Hindupur plant

The company plans to add 700800 outlets and 1000 tintin


machine every year

With an eye on future demand growth, Berger has


invested heavily in enhancing its capacity. Berger has
planned 25% capacity addition over the existing
capacity of 3,25,000 MTPA (excluding 24,000 MTPA
capacity of Sherwin Williams).
The company has planned a Greenfield expansion at
Hindupur (AP) with a total capacity of 3,20,000 MTPA
primarily for water based paints. First phase at
Hindupur (80,000 MTPA) is in the last leg of
development viz. under test phase and likely will be
commissioned by Nov 2013. The company has spent
Rs 2bn on the Hindupur plant. Subsequent phases of
expansion will happen depending on requirement
and would need much lower capital.
The company is also working on brownfield
expansion at its Rishra (WB) and Goa plants. Berger
intends to increase the capacity at these plants from
current 40,000 MTPA to 60,000 MTPA each. These
expansions are carried out in phased manner and
would be completed by FY15.

Capacity utilization for major paint companies is


~70% and Berger is confident to maintain the level of
utilization. Berger can reduce the amount of
outsourced/contract manufactured paints to keep
capacity utilization at normalized level of 70% during
the initial years of commissioning of plants.

Not just Berger, but all major players (Asian Paints,


Kansai Nerolac, Akzo Nobel) are aggressively
investing in capacity addition. However, the company
does not seem to be concerned about overcapacity
and price led competition as demand is expected to
remain robust over the medium term.

Increased distribution reach will yield results

Large global players like Jotun, Nippon and Sherwin


Williams (Indian business now acquired by Berger)
with superior technical know-how and global
experience have failed to make a significant impact in
Indian paint market. This is at a time when Indian
players reported robust growth.

Retail reach is the prime reason for below par


performance of the global players. In a vast and
diverse country like India, setting up dealer network
and support it with strong supply chain management
is time consuming and the biggest entry barrier.

Berger has been focusing on increasing its


distribution reach. While Asian Paint is the leader
with reach of 35,000 outlets, Berger is working overtime to narrow the gap (current reach is 15,000
outlets). The company plans to add 700-800 outlets
each year. Of the 15,000 outlets where Berger is
available at, 12,000+ outlets have tintin machine. The
company plans to add 1000 tintin machine every
year. Consequently, Berger has been rewarded with
market share gain (from 15% in FY10 to 20% in FY13).

Sherwin Williams acquisition to


presence in West and South India

increase

In March, Berger acquired the decorative or home


paints business of the Indian subsidiary of US-based
Sherwin Williams. The takeover will help the
company to gain market share in the western and
southern markets, where Berger has limited
presence.

Bergers acquisition will also give it access to Sherwin


Williams technology and skilled manpower.
Manufacturing will continue from Sherwin Williams
existing facility at Taloja, Mumbai which has capacity
of 24,000 MTPA . While texture coating-enabled paint
is unique to Sherwin Williams, emulsion paints
Page | 7

BERGER PAINTS : INITIATING COVERAGE

The takeover will help the


company to strengthen its
presence in the western and
southern markets

(premium paint segment) will be a focus area posts


its acquisition.

MARGIN EXPANSION TO CONTINUE

Acquisition of Sherwin Williams will also bolster


project business as Sherwin Williams has strong
presence in project business segment. Project
business contributes 15% of Bergers decorative sales
prior to acquisition.

Market share gain to continue

Berger has augmented its


market share in domestic
paint business from 15% to
19% in the past 5 years

EBITDA margin surges from


8.2% in FY09 to 11.2% in
FY13

Berger has augmented its market share in domestic


paint business from 15% to 19% in the past 5 years.
We believe that company will continue to take share
from smaller organized players. Movement from
unorganized market (25% of total paint market) to
branded/organized will also aid growth. With top four
players accounting for significant chunk of branded
paint market, pricing led competition is improbable.
The company has been traditionally strong in East
and North India. The company is planning to increase
its presence in West and South India which would aid
market share. Sherwin Williams to aid in this effort.

Ad spends to remain at elevated level


7.0

6.0
5.0
4.0

4.0

4.2

4.6

4.9

5.1

5.6

6.1

6.0

3.0

Decorative Paints Market share


Akzo Nobel
10%

Traditionally Berger has been strong in the low


margin distemper segment. However, in the past five
years, Berger intensified its focus on the high margin
premium emulsion segment (Silk, Rangoli,
Weathercoat) and backed it with aggressive
advertisement. With paints becoming a high
involvement purchase for the end consumer, the
brand plays a key role in determining his choice both
for new construction & repainting activities. The
companys focus on brand building is evident from
highest ad spends (as % of sales) among all the paint
companies.

2.0
Others
2%

1.0
0.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Kansai
Paints
15%

Source : Company, HDFC Sec Inst Research


Asian Paints
54%

The companys strategy has done wonders as EBITDA


margin surged from 8.2% in FY09 to 11.2% in FY13.

Berger
Paints
19%

Source : Industry, HDFC Sec Inst Research

Page | 8

BERGER PAINTS : INITIATING COVERAGE


EBITDA margin
11.5

11.2

11.1

10.3

10.7

10.5

8.0
6.0

Raw material prices are largely stable but hurt on


account of steep rupee depreciation. Currency is a
key monitorable, since import-linked RMs are 45-50%
of COGS.

TiO2 prices are down YoY in dollar terms, primarily on


account of slowing demand in Europe and China. But
due to rupee depreciation, TiO2 prices are up 9% YoY
(rupee term). The management feels that supply side
is well under control to keep the cost of TiO2
manageable.

Also, concerns with regards to rupee depreciation


hurting margins are overdone. The 4.2% price hike
that the company has undertaken will be enough to
maintain margins if the rupee stays at 62-63 level for
a dollar.

4.0
2.0

Source : Company, HDFC sec Inst Research

TiO2 prices, on the back of


rupee depreciation, is up 9%
YoY in rupee term

Changing consumer preference from solvent based


paints (lower margin) to water based paints (higher
margin) along with various cost cutting initiatives will
aid higher margins. With intent to capture the
changing trend and increase the share of emulsions in
total revenues, the company has deployed tintin
machine in 12000+ outlets with a target to add 1000
tintin machine every year. The company expects the
mix to improve by 2%p.a. in favor of emulsions.
We expect margins to improve further owing to
operating leverage, sourcing benefit on account of
economies of scale and as ad spends normalize to
industry average over coming years. Also, turnaround
in Bolix (7% of consol revenues) can provide upside to
the margins in longer term. Further in FY15E, we
expect synergies derived from acquisition of Sherwin
Williams (loss making) would aid margins.

TiO2 : Impacted by rupee depreciation


INR/kg
270
220
170
120

Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13

FY15E

FY14E

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

Berger intensified its focus on


the high margin premium
emulsion segment (Silk, Rangoli,
Weathercoat) and backed it
with aggressive advertisement

8.2

10.0

10.5

9.8

10.0

9.8

12.0

INR weakness wipes out RM benefit

10.0

14.0

9.4

Changing consumer preference


from solvent based paints
(lower margin) to water based
paints (higher margin)

Source : Bloomberg, HDFC sec Inst Research

With top four players accounting for significant chunk


of branded paint market, pricing led competition is
improbable.

Page | 9

BERGER PAINTS : INITIATING COVERAGE


Crude : Global crude prices on the upmove

The 4.2% price hike that the


company has undertaken will be
enough to maintain margins if
the rupee stays at 62-63 level for
a dollar

7,500

RETURN RATIOS CLOSING IN ON ASIAN PAINTS

INR/barrel

The company is cognizant of its high cash conversion


cycle (47 days) and has planned strategy to reduce it
to reasonable level. The company plans to reduce
inventory days (by 5 days per year) which would aid
in narrowing the gap of inventory days with Asian
Paints. The company is investing in supply chain
management, material handling capabilities, CRM
tools and warehousing. Increase in the number of
tintin machine (1000 every year) improves the
operational efficiency. Tintin machine helps in
keeping inventory under check as only base color
inventory needs to be maintained and color/tints are
mixed depending on customer requirement.

This would help improve asset turnover which along


with higher margins will boost return ratios in the
longer term. Thereby we expect the return ratio gap
to narrow with that of Asian Paints.

6,000
4,500
3,000
1,500

Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13

Source : Bloomberg, HDFC sec Inst Research

The company plans to reduce


inventory days (by 5 days per
year) which would aid in
narrowing the gap of inventory
days with Asian Paints

Gross margin : Mix improvement visible


40.0

39.4
38.5

38.0
36.0
34.0

36.9
34.5

39.1

37.3
36.4

33.9

ROE with Asian Paints (consol)


50.0

Asian Paints

Berger Paints

40.0
30.0

32.0

20.0

30.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Source : Bloomberg, HDFC sec Inst Research

10.0
0.0
FY11

FY12

FY13

FY14E

FY15E

Source : Company, HDFC sec Inst Research

Page | 10

BERGER PAINTS : INITIATING COVERAGE


Berger versus Asian Paints

Asian Paints
1.0
0.8
0.6
0.4
0.2

Oct-13

Apr-13

Oct-12

Apr-12

Oct-11

Apr-11

Oct-10

Apr-10

Oct-09

Apr-09

Oct-08

Oct-13

Apr-13

Oct-12

Apr-12

Oct-11

Apr-11

Oct-10

Apr-10

Oct-09

Source : Bloomberg, HDFC sec Inst Research

KEY RISKS

Susceptible to forex fluctuation : Exchange rate


fluctuation may negatively impact the companys
profitability as it is a net importer. 45-50% of RM is
directly/indirectly dollar linked. Rupee depreciation
will entail higher input cost, straining margins.

Economic downturn : A slowdown in economic


growth may adversely affect the companys business
as volume growth in paints closely tracks GDP.

Increase in aggression from large global MNC :


Global MNCs like Jotun and Nippon have been
present in Indian market since 2-3 years. Increased
aggression in terms of disruptive pricing, higher A&P
or setting up dealer network can impact profitability.

Headwinds persist on global front : International


operations may require further capital infusion (it
being loss making) and may be return dilutive.

Berger is the price-taker : It is the second largest


player (Asian Paints is still more than double the size
of Berger) and hence the pricing power remains
restricted. Any destructive pricing by Asian Paints
(not witnessed in the past) will remain a concern.

Apr-08

Apr-09

0.0

One-year forward PE chart


36.0
32.0
28.0
24.0
20.0
16.0
12.0
8.0
4.0
0.0

Berger

1.2

Oct-08

We remain optimistic about the demand scenario in


paints industry over the medium term due to various
structural opportunities. We are enthused by gradual
improvement in margin profile of the company due
to the companys thrust on emulsions. Moderation in
capex would generate higher cashflow yield. Also,
investment in supply chain, warehousing and CRM
tools will lead to lower inventory days and thereby
higher return ratios.
In FY07, Berger used to trade at 50% discount to
Asian Paints. Berger witnessed expansion in margins,
improvement in return ratios and market share gain.
Also, faster revenue growth as compared to Asian
Paints has led to narrowing down of discount to
~10%. We believe that it should continue to trade at
10% discount to Asian Paints (market leader). We
value Asian Paints at 30x FY15E EPS.
Our target multiple for Berger is 27, which on FY15E
EPS of Rs 8.8 gives us a TP of ~Rs 240. We believe this
multiple is justified given it is the second largest paint
company with gradually increasing market share and
oligopolistic nature of paint business. Hence, we
initiate coverage on the stock with a NEUTRAL
recommendation with positive bias.

Apr-08

Oct-07

VALUATION

Oct-07

We believe that it should


continue to trade at 10%
discount to Asian Paints
(reduced from 50% in FY07)

Source : Bloomberg, HDFC sec Inst Research

Page | 11

BERGER PAINTS : INITIATING COVERAGE

COMPANY DESCRIPTION

With modest beginnings in India in 1923, Berger is


the second largest paint company in the country
presently. Dhingra family, current promoter of
Berger, bought the controlling stake from UB group in
1991. The company has always been professionally
managed.

Decorative paint segment (80% of domestic


business)

Berger is the second largest player in domestic


decorative paints segment (~75% of companys
consolidated revenues). This segment has witnessed
resilient growth over the past few years.
Consequently, Bergers share in domestic decorative
paints has jumped from 15% in FY09 to 19% in FY13.
Share gain is primarily from smaller organized players
(market leader Asian Paints continues to gain share).
Traditionally Berger has been fairly strong in North
and East markets and the company aims to increase
its presence in South and West markets.

Despite the near term concern on the volume growth


scenario, the company seems confident to achieve
10% volume growth in the decorative business in
FY14E. Higher paint consumption in tier 2 & tier 3
towns along with higher rural growth to benefit
decorative paint business. Over medium to longer
term we expect, 15% revenue growth in decorative
paint business on the back of favorable
demographics, rising urbanization and increasing per
capita income.

In March, Berger acquired the decorative or home


paints business of the Indian subsidiary of US-based
Sherwin Williams. The takeover will help the
company to gain market share in the western and
southern markets, where Berger has limited
presence.

Headquartered in Kolkata, the company has 7


strategically located manufacturing units, and over 85
sales offices. With employee strength of over 2,500
and a countrywide distribution network of 16,000+
dealers, it enjoys ~19% share of organized domestic
decorative market.

Berger has grown its international presence through


acquisitions and setting up manufacturing facilities
and sales offices in important regions around the
world. The company has operations in Nepal,
Bangladesh, Russia, Poland and Cyprus and
collaborations with Becker of Sweden and Japans
Nippon Paints.

In March 2013, it acquired the decorative paints unit


from the Indian arm of US-based Sherwin Williams
Paints for an undisclosed sum.

Buisness mix
Overseas
7%

JV with intl
majors
3%

Domestic
industrial
15%

Industrial Paint segment (20% of domestic


business)
Domestic
decorative
75%

Source : Company, HDFC sec Inst Research

Industrial segment contributes ~15% to the


consolidated revenue. The Companys Industrial
business comprises General Industrial, Automotive,
Protective Coatings and Powder Coatings with
Protective coatings being the biggest contributor. The
Page | 12

BERGER PAINTS : INITIATING COVERAGE


reversal in the industry and infrastructure sector
affected these businesses in varying degrees. Despite
these challenges, it needs to be mentioned that the
company posted growth in revenues in all these
segments by venturing into new areas with higher
values, distributing new products, taking measures to
improve quality and offering customers certain
unique properties in regard to its products. Weak
macro environment continues to pose a challenge to
this segment. Due to weak bargaining power and
being a small player, the company has not been able
to take price hike in this segment.

As uncertainty prevails in the economic environment


(IMF cuts GDP estimate to 3.8% in FY14E) and a pickup in the investment cycle is not in sight, we expect
challenging times for protective coatings. Auto sales
YTDFY14 have registered moderation in demand.
While PVs reported 2% decline, 2W has grown at 3%
YoY (tractors only segment to have registered strong
22% growth).
Industrial segment can provide reasonable growth
opportunities
once
government
increases
infrastructure related investments.

Berger is a significant player in decorative market


with brands like Jenson & Nicholson and Lewis
Berger.

Nepal contributes ~30% to international business.


The company has two manufacturing unit in the
region.

Market is dominated by Indian players like Asian


Paints, Kansai Nerolac and Berger. Pashupati Paints
also has significant presence in Nepal.

Nepal is witnessing buoyant growth (25-30% YoY) and


enjoys higher margin than domestic business.

Poland

In 2008, the company acquired Poland based Bolix SA


- a leading provider of external insulation finishing
systems.

Poland contributes ~70% to international business.

Bolix SA, manufactures external insulation systems in


which a thick layer of foam is put on the wall, which is
subsequently painted. This finishing protects the
house from cold and heat and enhances energy
efficiency of a building. The company is the secondlargest player and enjoys 11-12% market share.

Weakness in the EU region has affected revenue


growth in this market; however, profitability
continues to improve.

Turnaround in Bolix subsidiary should aid growth. We


expect the margins to improve over next two years.

International business stabilizing

Berger has grown its international presence through


acquisitions and setting up manufacturing facilities
and sales offices in important regions around the
world. The international segment accounts for ~7% of
consolidated revenue.

Nepal

In 2000, the company acquired the Nepal subsidiary


of Jenson and Nicholson and subsequently renamed
it Berger Jenson and Nicholson (Nepal) Pvt Ltd.

Page | 13

BERGER PAINTS : INITIATING COVERAGE

ANNEXURE

organized players resulted in transformation of


consumer preference for better quality branded
product.

Industry overview

The Indian paint industry is pegged at Rs 280bn and


has grown at a CAGR of ~15% in last three years and
expected to grow at a CAGR of ~14% to become INR
630bn industry in FY20. Indian paint industry has
historically tracked GDP with domestic paint volumes
growing at 1.7x GDP. But with the change in
consumer preferences and shorter repainting cycle
we expect the correlation between domestic
decorative paint volumes growth and GDP to adjust
to higher level (volumes to grow 2x GDP).

Decorative paints (INR ~196bn)

Paint industry volume growth vs GDP growth


Paint Industry volume growth

GDP growth

20

Indian paint industry can be split into two broad


categories : decorative paints (70% of Indian paint
market) and industrial paints (30%).
Decorative paints dominate the Indian paint market
with the size Rs 196bn. It includes interior and
exterior paints, enamels, wood finishes and ancillary
products such as primers, putties, etc. The decorative
segment is the faster growing paints category, having
registered a CAGR of 16% over past 3 years.

Decorative Industry doubling in 5 years


500

15

Rs bn

450
400

CAGR 15%

350

10

300
250

200
150

FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13

100
50
0

Source: Shalimaar Paints, Akzo Nobel Paints, HDFC sec Inst Research

Indian paint industry is dominated by organized


sector which currently captures 75% market share.
Organized sector continues to grow at a higher rate
vis--vis unorganized sector. The unorganized sector
(~25%) is highly fragmented with ~1,000 small scale
players and mostly offers lower end products like low
end enamels, distempers, lime wash, cement paint
etc. Burgeoning middle class, increasing urbanization,
higher per capita income and expansion of
distribution reach backed by brand investment by

2010

2011

2012

2013

2015

2020

Source: Akzo Nobel, HDFC sec Inst Research

Decorative paints can be further classified into water


based (emulsions and distemper) and solvent based
(enamels). While solvent based paints i.e. enamels
are the largest segment, water based paints esp.
emulsions are the fastest growing category.

Margins of enamels are lowest whereas that of


distemper lie between emulsions and enamels.
Page | 14

BERGER PAINTS : INITIATING COVERAGE


Thereby, shift towards higher margin water-based
products and premium emulsions augur well for the
paint companies. Emulsions are growing at much
faster rates as compared to enamels (almost double
the pace) in past 5 years. In emulsions, exterior
emulsions are growing faster than interior emulsions.

Greater growth in the premium and mid-range paint


categories, led by a young, affluent, urban consumer;
differentiated products such as textured shades etc.
are being introduced in the market.
Repainting constitutes 80% of total paint demand
which is seasonal as repainting is preferred during
festive and wedding season.

Industrial Paints (INR ~84bn)

Industrial paints constitute 30% of Indian paint


market. This is significantly low as compared to some
of the developed countries in world where industrial
segment is as high as 50%.
Industrial paints segment mostly offers products like
automotive coatings (40%), powder coatings (10%),
and protective coatings & general industrial coatings
(35%).

As uncertainty prevails in the economic environment


(IMF cuts GDP estimate to 3.8% in FY14E) and a pickup in the investment cycle is not in sight, we expect
challenging times for protective coatings. While PVs
reported 2% decline, 2W has grown at 3% YoY
(tractors only segment to have registered strong 22%
growth).

Industrial segment can provide reasonable growth


opportunities
once
government
increases
infrastructure related investments.

KEY ASSUMPTIONS
Company
Assumptions
Consol. Revenue
growth
Domestic volume
growth
Domestic pricing
change
COGS as % of sales
Ad spends as % of
sales
EBITDA Margin

FY11

FY12

FY13

FY14E

FY15E

24

26

14

13

17

19.5

12.3

7.8

8.4

11.3

5.1

11.3

6.6

5.0

6.0

62.7

63.6

61.5

60.6

60.9

4.8

5.1

5.5

5.9

5.8

10.7

10.3

11.1

11.2

11.5

Source : HDFC sec Inst Research

Page | 15

BERGER PAINTS : INITIATING COVERAGE


BALANCE SHEET

INCOME STATEMENT
(Rs mn)
Net Sales
Growth (%)

FY11

FY12

FY13

FY14E

FY15E

23,407

29,477

33,464

37,823

44,330

(Rs mn)

FY11

FY12

FY13

FY14E

FY15E

692

692

693

693

693

SOURCES OF FUNDS

23.8

25.9

13.5

13.0

17.2

Material Expenses

14,687

18,754

20,586

22,938

26,992

Reserves

6,203

7,223

8,839

10,456

12,442

Employee Expenses

1,432

1,640

1,871

2,184

2,555

Total Shareholders Funds

6,895

7,915

9,532

11,148

13,135

A&P Expenses

1,130

1,496

1,833

2,246

2,577

Minority Interest

Other Operating Expenses

3,655

4,552

5,461

6,237

7,119

Long Term Debt

1,834

1,444

2,152

1,799

1,399

EBIDTA

Share Capital

2,503

3,034

3,712

4,218

5,086

Short Term Debt

1,339

1,966

3,344

2,698

2,098

EBIDTA (%)

10.7

10.3

11.1

11.2

11.5

Total Debt

3,173

3,410

5,497

4,497

3,497

EBIDTA Growth (%)

25.7

21.2

22.3

13.6

20.6

Deferred Taxes

263

312

408

408

408

Other Income

302

305

314

334

355

Long Term Provisions

Depreciation

401

472

567

639

723

TOTAL SOURCES OF FUNDS

2,404

2,868

3,459

3,913

4,719

243

324

377

401

376

PBT

2,161

2,544

3,082

3,511

4,343

CWIP

Tax

660

744

898

1,020

1,283

Investments

LT Loans & Advances

EBIT
Interest

Minority Interest
Core PAT

30

30

30

10,340

11,647

15,465

16,082

17,068

4,341

5,089

5,989

8,350

8,327

818

729

1,725

113

63

526

40

108

108

108

133

447

545

545

545

Inventories

4,438

5,552

6,364

6,527

7,407

Trade Receivables

2,728

3,586

4,114

4,300

4,979

Cash & Equivalents

1,253

1,824

2,270

2,621

3,334

APPLICATION OF FUNDS
Net Block

1,501

1,800

2,184

2,491

3,060

Core PAT Growth (%)

24.7

19.9

21.3

14.1

22.8

EO items (net of tax)

1,501

1,800

2,184

2,491

3,060

ST Loans & Advances

420

542

649

649

649

24.7

19.9

21.3

14.1

22.8

Other Current Assets

44

61

103

103

103

RPAT
RPAT Growth (%)
EPS
EPS Growth (%)

4.3

5.2

6.3

7.2

8.8

Current Assets

8,883

11,566

13,500

14,199

16,471

18.5

19.9

21.2

14.1

22.8

Trade Payables

3,879

5,531

5,514

6,345

7,558

482

704

893

893

893

Source : Company, HDFC sec Inst Research

Other Current Liabilities & Provs


Current Liabilities

4,361

6,235

6,407

7,238

8,451

Net current Assets

4,522

5,331

7,093

6,961

8,020

10

4.5

10,340

11,647

15,465

16,082

17,068

Misc Expenses
TOTAL APPLICATION OF FUNDS
Source : Company, HDFC sec Inst Research

Page | 16

BERGER PAINTS : INITIATING COVERAGE

CASH FLOW STATEMENT

KEY RATIOS

(Rs mn)

FY11

FY12

FY13

FY14E

FY15E

Reported PAT

1,501

1,800

2,184

2,491

3,060

210

216

223

237

250

1,291

1,584

1,961

2,254

Non-operating & EO items


PAT from Operations
Interest, Dep & Others
Working Capital Change
OPERATING CASH FLOW ( a )

FY11

FY12

FY13

FY14E

FY15E

GPM

37.3

36.4

38.5

39.4

39.1

2,810

EBITDA Margin

10.7

10.3

11.1

11.2

11.5

PROFITABILITY (%)

462

315

606

1,040

1,099

EBIT Margin

9.0

8.7

9.4

9.5

9.8

(702)

(355)

(1,584)

483

(346)

APAT Margin

6.4

6.1

6.5

6.6

6.9

1,051

1,545

983

3,777

3,563

RoE

23.3

24.3

25.1

24.1

25.2

(1,025)

(1,336)

(2,149)

(1,388)

(650)

Core RoCE

16.7

16.9

16.5

16.2

18.7

26

208

(1,166)

2,390

2,913

RoCE

17.4

18.5

18.1

17.6

20.1

Non-operating income

210

216

223

237

250

Investments & Others

913

631

108

Tax Rate (%)

31

29

29

29

30

Asset Turnover (x)

2.4

2.7

2.5

2.4

2.7

Inventory (days)

60

62

65

63

61

Debtors (days)

40

39

42

41

41

Capex
Free Cash Flow

INVESTING CASH FLOW ( b )

98

(489)

(1,818)

(1,151)

(400)

349

196

2,092

(1,000)

(1,000)

(237)

(274)

(327)

(401)

(376)

Debt Issuance
Interest

EFFICIENCY

Dividend

(421)

(406)

(484)

(874)

(1,074)

Payables (days)

54

58

60

61

62

FINANCING CASH FLOW ( c )

(309)

(484)

1,281

(2,276)

(2,450)

Cash Conversion Cycle (days)

47

43

47

43

40

840

571

445.8

351

713

Debt/EBITDA (x)

1.3

1.1

1.5

1.1

0.7

1,253

1,824

2,270

2,621

3,334

Net D/E

0.2

0.2

0.3

0.2

0.0

Interest Coverage

8.7

7.9

8.4

8.9

11.6

4.3

5.2

6.3

7.2

8.8

NET CASH FLOW (a+b+c)


Closing Cash

Source : Company, HDFC sec Inst Research

PER SHARE DATA


EPS (Rs/sh)
CEPS (Rs/sh)

5.5

6.6

7.9

9.0

10.9

BV (Rs/sh)

19.9

22.9

27.5

32.2

37.9

DPS (Rs/sh)

1.3

1.4

1.8

2.2

2.7

P/E

50.8

42.4

35.0

30.6

24.9

P/BV

11.1

9.6

8.0

6.8

5.8

EV/EBITDA

31.0

25.6

21.4

18.5

15.0

OCF/EV (%)

1.4

2.0

1.2

4.8

4.7

FCF/EV (%)

0.0

0.3

(1.5)

3.1

3.8

FCFE/mkt cap (%)

0.0

0.3

(1.5)

3.1

3.8

Dividend Yield (%)

0.6

0.6

0.8

1.0

1.2

VALUATION

Source : Company, HDFC sec Inst Research

Page | 17

BERGER PAINTS : INITIATING COVERAGE

Rating Definitions
BUY

Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL

Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL

Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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