Valuation gap between Asian Paints and Berger Paints should narrow: Experts

Berger trading at more than 25% premium to Asian Paints

There is little doubt that the two decorative paint majors — Asian Paints and Berger Paints — have done well in recent times despite muted consumption sentiment. 

This trend is expected to continue for now. In the last six months, the two stocks have gained 19-60 per cent, against a 12 per cent rise in the Sensex. 

Analysts, however, say the gap in valuation is unsustainable and either Asian Paints will soon catch up, or Berger will witness a correction in share price.

Berger Paints, which used to trade at a near-15 per cent discount to Asian Paints in the past, is now trading at an over 25 per cent premium to the market leader. Though part of it could be attributed to technical reasons such as the inclusion of Berger in the MSCI (Morgan Stanley Capital International) index in November last year, fundamentals still indicate that Asian Paints deserves a premium over its smaller peer. 

According to Abhijeet Kundu, vice-president (research), Antique Stock Broking: “The current situation of Berger Paints enjoying a rich premium over Asian Paints is not driven by fundamentals. We believe the gap should reduce.”

Asian Paints’ compound annual growth rate (CAGR) in top line and net profit in the last 5 years (FY14-19) is marginally lower than that of Berger Paints. 

Even in the December 2019 quarter (Q3), a similar trend was observed. However, analysts say Asian Paints’ growth is commendable and growth rate differential not significant, considering its higher base and size. 

In fact, JM Financial analysts say that a firm (Berger Paints) at one-third the size (of Asian Paints) with nearly the same growth profile does not deserve to trade at a premium to the latter. What is noteworthy is Asian Paints’ ability to consistently earn higher Ebitda margin (over 400 bps higher in Q3). 

Though its asset turnover ratio (indicates asset utilisation efficiency) is a tad lower, it could be attributed to a 50 per cent rise in capacity last fiscal. All this, in turn, is providing strong impetus to Asian Paints’ return profile.

Further, Asian Paints’ vast distribution network (more than double that of Berger) will help reap maximum benefits if sales of decorative paints and water proofing products grow hereon. 

While outlook for the decorative paints segment remains good and both players are expected to post similar growth in earnings, Berger’s rich valuations may cap fresh gains in the stock. 

Therefore, after a good set of Q3 results announced last month and despite a strong earnings outlook, most analysts have a ‘sell’ rating on Berger Paints.

The industrial segment, however, remains under pressure, owing to the struggling automobile sector. Kansai Nerolac, which has a higher share in industrial paints, reported a 7.6 per cent year-on-year decline in net sales and a 2 per cent fall in pre-tax profit in Q3. Asian Paints and Berger, though, have a small exposure to this segment.

Asian Paints’ higher dividend yield of 0.6 per cent, in comparison to Berger Paints’ 0.3 per cent, is also working in its favour.

In this backdrop, analysts prefer Asian Paints over Berger.