Berger comes up with flying colours in Q1, stock gains 7% in 3 days

While distribution and expansion plans improve volume growth visibility, benign input cost could help push up profitability

Since Berger Paints announced a strong set of numbers for the June 2019 quarter (Q1) on Monday, the company's stock has shot up 7 per cent in just three days, outperforming the 2.6 per cent gains made by Asian Paints, the paints market leader, in the meanwhile. In fact, Berger hit its all-time high at Rs 356.95 apiece on Thursday. Sturdy volume growth and profitability in Q1, improving FY20 (fiscal 2019-20) earnings visibility, cheered the Street.

The company reported 12 per cent volume growth in Q1 driven by faster sales growth in tier-2 and tier-3 towns. Average price cuts of 0.5 per cent in solvent-based products and a focus on distribution pushed volume offtake. 70 per cent of its active dealers -- close to 20,000 in FY19 -- are in tier-2 and tier-3 cities. The management’s plan to expand the distribution network by 10 per cent every year will help reap benefits from supportive demand for paints.

Low goods and services tax rate and reduction in repainting cycle (from 7 years to 5 years now) are among factors improving volume growth visibility of organised paint makers like Berger Paints. In fact, major chunk of the overall demand for paint comes from re-painting. Analysts at Edelweiss Securities expect Berger Paints to clock a 12.5 per cent volume growth in FY20 -- marginally lower than 14 per cent in FY19.

Further, the 6 per cent price hikes taken in FY19 supported overall topline growth of 15.7 per cent, year-on-year to Rs 1,717 crore in Q1. The price hikes, alongwith benign input costs, propelled Berger’s operating profit. Ebidta (earnings before interest, tax, depreciation and amortisation) margin expanded by 164 basis points year-on-year to 17.8 per cent.

Prices of key raw materials such as titanium di-oxide and crude oil derivatives remained low in Q1. For instance, Titanium di-oxide prices plunged 14 per cent and 5 per cent year-on-year and sequentially, respectively, in Q1. A further margin support came from faster growth in high-margin premium products. Net profit thus, surged 31.8 per to Rs 176.4 crore in Q1 over the year ago period. The input price trend remains key going ahead, though prices are still supportive.

However, a stretched valuation may limit upside for the stock, which currently trades at 46 times its FY21 estimated earnings, or at a 21 per cent premium to its 5-year historical average one-year forward valuations.