Long term story intact Berger Paints ::HDFC Sec, report

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Long term story intact Berger Paints reported muted revenue growth of 8.5% YoY on account of mere ~6% domestic volume growth (but better than 2% volume growth reported by Asian Paints). EBITDA margin expanded 57bps YoY to 13.3% primarily led by lower COGS. However, lower other income (+9.7% YoY) and higher depreciation (+41.4% YoY) and tax rates (+703 bps YoY) led to 0.2% YoY decline in APAT. Despite the near term pressure, we remain confident of a 14% volume growth in FY16E given the imminent revival in urban demand and industrial growth. Softening of global crude prices (~20% YoY) and TiO2 (~13% YoY) can provide a significant margin boost. Furthermore, Berger’s plan to reduce inventory days (by ~5 days/yr) and expand margins (ex-crude) boosts our confidence in the company. Retain BUY with a TP of Rs 240 (32x FY17E). Volume disappoints  3QFY15 consolidated net revenue grew 8.5% YoY to ~Rs 11.2bn. Standalone revenue grew a modest 10.8% YoY. Impacted by a sluggish demand environment and an early festival season, domestic volumes grew by ~6%. However, decorative paints continue to gain share. The subsidiary business de-grew by 5.6% YoY due to disappointment in Bolix (Poland), Nepal, BJN India (erstwhile Sherwin Williams) and Berger Becker Coatings.  The company expects BJN India’s (erstwhile Sherwin Williams) decorative business growth to normalize (in line with the parent’s decorative business) from 2HFY16. Margins to further benefit from fall in crude prices  EBITDA margin expanded 57bps YoY to 13.3% due to lower COGS (-244bps). This was partially offset by higher other exp. (+183bps) and staff costs (+4bps).  With a focus on future volumes, the company stepped up A&P (reflected in higher other expenses). Valuation and view  Berger Paints is trading at 38.8/29.2x our FY16/FY17E EPS. We would value the company at 32x FY17E EPS, which is a 10% discount to Asian Paints. Retain BUY with a TP of Rs 240.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011168