Buy Berger Paints :: ICICI Securities, link

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 Buy Berger Paints in the range of | 390.00–382.00 for a target price of | 480.00 with a stop loss below
| 348.00 on a closing basis

Fundamental view
• The Indian paints industry is worth ~| 35000 crore with decorative paints constituting 71% and industrial
paints 29%. Decorative paints can be divided into high end acrylic exterior, interior emulsions, medium range
exterior, interior emulsion, low end distemper and enamels paints. On the other hand. industrial paints
constitutes automotive paints, protective coating, powder coating, other industrial paints like for consumer
durable. Over the years, the Indian paint industry has grown 2x of GDP and has been growing in double digits
in the last eight to 10 years. Per capita consumption of paints in India is 2.6 kg compared to average 10-13 kg
in developed countries. With the slow and steady recovery in urban demand and revival in GDP growth, the
Indian paint industry is estimated to be more than | 50,000 crore by FY17
• Berger is the second largest player in the decorative paint segment with a market share of ~18%. The
company drives 80% of its revenue from decorative paints with a product portfolio largely catering to middle
premium category amongst urban consumers. During 2006-14, Berger's revenues grew at 18.1% CAGR to
| 3869 crore and is likely to witness double digit growth, going forward. Operating margins for the company
have been in the range of 9-11% in the last eight years. With crude prices sharply falling below US80$/barrel,
we believe the company would benefit as crude based raw material prices would follow this sharp fall,
providing an uptick in operating margins. Simultaneously, we believe the company would be able to spend
more towards A&P to further boost volumes in the decorative paints segment. Net profit for the company has
grown at a CAGR of 16.3% during FY06-14 to | 249 crore. The company has strong brands like Rangoli and
Weather Coat. Its dealer network of 13000-15000 largely concentrated in eastern India. However, the company
is aggressively expanding its dealer network in other areas also mainly to expand its volume from non-eastern
region
• The current capacity of Berger Paints stands at 275,000 tonnes. The company has aggressive capacity
expansion plans in greenfield (Hindupur, AP). Berger has already expanded capacities of existing plants (Rishra
& Goa) funded mostly through internal accruals. The first phase of the state-of-the-art and fully automated
water based paint plant at Hindupur in Andhra Pradesh will commence commercial production in FY15. After
the first phase, the capacity of the plant is expected at 80,000 tonne per annum. Once fully complete, the
capacity of the plant will be 3,20,000 tonne per annum (TPA) of water based paints and 1,00,000 TPA of
emulsions. We believe the company’s asset turnover would improve from current 2.2x as utilisation of
expanded capacity is expected to increase in the next two or three years. Currently, its dividend payout is
30%, which would also increase post completion of capacity expansion. This would help in generating higher
free cash flows & improvement of return ratios above current 22%


LINK
http://content.icicidirect.com/mailimages/IDirect_Gladiatorstocks_Series7.pdf