Demand remains strong, expect 4QFY21 to be better than 3QFY21 – Berger PaintsMaitreyee Vaishampayan
Update on the Indian Equity Market:
On Wednesday, Nifty50 ended in the green at 15,246 (+2.2%), lifted by heavyweight Reliance Industries which gained after winning INR 571 bn worth of airwaves in the recently concluded spectrum auction. The stock gainers in Nifty50 were TATASTEEL (+5.3%), BAJAJFINSV (+5.0%), and RELIANCE (+4.8%) while the auto companies HEROMOTOCO (-1.5%), MARUTI (-1.2%), and BAJAJ-AUTO (-1.2%) topped the losers. Among the sectoral indices, METAL (+3.3%), PSU BANK (+3.2%), and FINANCIAL SERVICES 25/50 (+2.9%) led the gainers. AUTO (-0.7%) was the only index to close in the red.
Excerpts of an interview with Mr. Abhijit Roy, MD &CEO, Berger Paints (BERGEPAINT) with CNBC TV18 on 2nd March 2021:
- In 3QFY21, BERGEPAINT reported a 32% rise in volumes. The demand scenario is quite similar to 3QFY21 and with a low base of 4QFY20, the company expects to report strong growth in 4QFY21.
- The management expects good growth from the waterproofing business and construction chemicals.
- A part of the volume growth was partly on account of pent-up demand.
- There is a shift towards premium and luxury categories which were suffering in the initial Covid-19 days. Overall, the demand scenario is strong, though 30%+ growth may not be sustainable.
- There has been an increase in input costs, especially for solvent-based products and the industrial segment is affected. To compensate for the higher input costs, they have received price hikes from some customers. Discussions with some clients regarding price hikes is still pending.
- The impact of cost hikes has been lesser on the decorative paints. The management expects an impact on gross margins but EBITDA margins are expected to be retained on account of cost-saving measures undertaken. The management believes a price hike may have to be taken for decorative paints as well if the material cost uptrend continues.
- The company is currently operating at ~95% of its capacity due to the uptick in volumes. Hence, they are undertaking both brownfield and greenfield expansion projects. A new plant at Lucknow is being commissioned for ~Rs 7,000 mn. The new plant is expected to be operational by Jan 22.
- The decorative paints segment is growing at a faster rate compared to Automobiles. The Auto segment is a mixed bag, with Commercial vehicles, and Tractors doing well and passenger vehicles and 2-wheeler lacking compared to expectations.
- The protective coatings category is growing in double digits, albeit at a slower pace compared to decorative and automotive.
- The premium category has picked up significantly after Oct-20.
Asset Multiplier Comments
- The paint companies reported strong growth in the decorative paints segment due to pent-up demand, delayed festive season, strong momentum in tier 3-4 markets, and share gains from small, unorganized players.
- The weak macro environment impacted the industrial coatings while auto coatings did well. The auto coatings recovery was in line with the recovery in the Passenger and Commercial vehicles.
- We believe as the metros and cities return to normalcy, the premiumisation trend will be stronger.
Consensus Estimate: (Source: market screener website)
- The closing price of BERGEPAINT was ₹ 729/- as of 03-March-2021. It traded at 101x/ 77x/ 65x the consensus earnings estimate of ₹ 7.2/ 9.5 /11.3 per share for FY21E/FY22E/FY23E respectively.
- The consensus target price of ₹ 620 implies a PE multiple of 55x on FY23E EPS of ₹ 11.3/-.
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