Rating: Buy; Target Price: Rs295; CMP: Rs248; Upside: 19.2%
Volume led beat in earnings, upgrade to Buy
We upgrade our rating on Berger Paints to Buy from Hold earlier as we
believe earnings will improve going forward led by better volume
growth, recent price hikes and rupee stability. The decorative paints
segment has defied the industry slowdown and continues to report
strong growth (8-9% volume growth in FY14). We believe the company’s
volume growth in decorative paints in Q4 was ~14-15%. The company
should also benefit from improving product-mix (focus on premium
products), focus on branding and better distribution/ logistics. In
Q4, the result was better than our estimates driven by higher volume
growth.
$ Result better than estimates led by higher volume growth: The
Company posted 19.5% YoY growth in consolidated Revenue to Rs9,660mn
(vs. est. Rs8,959mn). We believe that the revenue beat was primarily
due to higher volume growth of ~14-15% (vs. est. 6%) in the decorative
segment. Earlier, Asian Paints delivered ~16% volume growth in the
decorative segment. EBITDA increased 20.7% YoY to Rs1,060mn (vs. est.
Rs928mn). Adjusted profit increased 26.3% YoY to Rs553mn (vs. est.
Rs480mn).
$ OPM improves led by higher volume and lower opex: Consolidated Gross
margin declined 133bps YoY due to higher crude prices (up 4.5% YoY)
and rupee depreciation (~12% YoY). However, on a sequential basis,
gross margin improved 17bps. In the standalone segment, gross margin
was up 57bps QoQ to 39.6% (down 109bps YoY). Consolidated EBITDA
margin improved 11bps YoY to 11% primarily due to improvement in sales
volume, higher realization, lower employee costs (down 26bps YoY as %
of sales) and other expenses (down 1.9pp YoY as % of sales).
$ Price hikes, stable rupee to help going forward: Pricing power in
the decorative segment continues to be strong which is reflected by
the fact that organized players were able to raise prices four times
in FY14. Cumulative price hikes were ~6.3% in FY14. The company raised
prices by 1% from May 1 ’14 and we expect another hike of ~1% on June
1, ’14 (Asian Paints had announced this earlier). At the same time,
stability in rupee over past 2 months will restrict volatility in raw
material costs. We believe the current price hike will help margin
improvement in Q1FY15.
$ Valuation and key risks: The stock is trading at 30x/23.3x
FY15E/FY16E EPS. We believe the company will benefit from recent price
hikes and stability in rupee going ahead. The volume growth surprised
us in Q4 (~14-15% in the decorative segment) and the paint industry
has recorded robust growth in FY14 defying economic challenges. The
stock deserves to trade at premium and we value it at 28x FY16E EPS
against 25x earlier. Our target price offers an upside of 19.2% from
CMP. Key downside risk could be slowdown in economy leading to lower
volume and rupee depreciation.
Thanks & Regards
--
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Volume led beat in earnings, upgrade to Buy
We upgrade our rating on Berger Paints to Buy from Hold earlier as we
believe earnings will improve going forward led by better volume
growth, recent price hikes and rupee stability. The decorative paints
segment has defied the industry slowdown and continues to report
strong growth (8-9% volume growth in FY14). We believe the company’s
volume growth in decorative paints in Q4 was ~14-15%. The company
should also benefit from improving product-mix (focus on premium
products), focus on branding and better distribution/ logistics. In
Q4, the result was better than our estimates driven by higher volume
growth.
$ Result better than estimates led by higher volume growth: The
Company posted 19.5% YoY growth in consolidated Revenue to Rs9,660mn
(vs. est. Rs8,959mn). We believe that the revenue beat was primarily
due to higher volume growth of ~14-15% (vs. est. 6%) in the decorative
segment. Earlier, Asian Paints delivered ~16% volume growth in the
decorative segment. EBITDA increased 20.7% YoY to Rs1,060mn (vs. est.
Rs928mn). Adjusted profit increased 26.3% YoY to Rs553mn (vs. est.
Rs480mn).
$ OPM improves led by higher volume and lower opex: Consolidated Gross
margin declined 133bps YoY due to higher crude prices (up 4.5% YoY)
and rupee depreciation (~12% YoY). However, on a sequential basis,
gross margin improved 17bps. In the standalone segment, gross margin
was up 57bps QoQ to 39.6% (down 109bps YoY). Consolidated EBITDA
margin improved 11bps YoY to 11% primarily due to improvement in sales
volume, higher realization, lower employee costs (down 26bps YoY as %
of sales) and other expenses (down 1.9pp YoY as % of sales).
$ Price hikes, stable rupee to help going forward: Pricing power in
the decorative segment continues to be strong which is reflected by
the fact that organized players were able to raise prices four times
in FY14. Cumulative price hikes were ~6.3% in FY14. The company raised
prices by 1% from May 1 ’14 and we expect another hike of ~1% on June
1, ’14 (Asian Paints had announced this earlier). At the same time,
stability in rupee over past 2 months will restrict volatility in raw
material costs. We believe the current price hike will help margin
improvement in Q1FY15.
$ Valuation and key risks: The stock is trading at 30x/23.3x
FY15E/FY16E EPS. We believe the company will benefit from recent price
hikes and stability in rupee going ahead. The volume growth surprised
us in Q4 (~14-15% in the decorative segment) and the paint industry
has recorded robust growth in FY14 defying economic challenges. The
stock deserves to trade at premium and we value it at 28x FY16E EPS
against 25x earlier. Our target price offers an upside of 19.2% from
CMP. Key downside risk could be slowdown in economy leading to lower
volume and rupee depreciation.
Thanks & Regards
--
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