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Gearing up for higher scale…
June 27, 2011
Reco Accumulate CMP Rs 100
¾ Berger Paints, the second largest player in the decorative
Target Price Rs109
paints market with a 17% market share, is expected to benefit from the long-term steady demand in paints industry
¾ Expect revenue and earnings CAGR of 19% and 20% over
FY11-13E, leading to a comfortable cash flow position; Rule out additional fund raising despite planned capex of Rs1.4bn
¾ Increasing shift towards water-based paints to augur well for
(%) Absolute Rel. to Nifty
1M (3) 1
3M 19 21
6M 12M (5) 8 32 34
operating margins, not factored in margin expansion due to higher raw material cost; Expect margins at 10.4% in FY13E price of Rs 109/share, valuing it at 17.5x FY13E (30% discount to Asian Paints) EPS of Rs 6.2/share
¾ Initiate coverage with an ACCUMULATE rating and a target
Relative Price Chart
125 Rs % 50 114 38
Second largest player with 17% market share…
Berger Paints is the second largest player in the decorative paints market with a 17% market share. Decorative paints constitute 80% of its sales and enjoy strong brand equity in the eastern regions. It has a pan India distribution network of 14,000 dealers and 7,700 tinting machines. Further, the company also has a strong foothold in the protective coatings market, which contributes nearly 10% to its total sales.
-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
Berger Paints (LHS)
Rel to Nifty (RHS)
Decorative paints market to grow at a healthy rate in the future…
Decorative paints constitute 70% of the Rs 170bn paints market. The per capita consumption of paints in India is very low at 1.5 kgs/year compared to 15-20 kgs in developed countries. While the short term macro environment could result in lower velocity of paint consumption growth to GDP growth, we believe, in the long term, with increasing per capita income and healthy economic growth, paints sector demand is poised for robust growth.
Sector Bloomberg Equity Capital (Rs mn) Face Value(Rs) No of shares o/s (mn) 52 Week H/L Market Cap (Rs bn/USD mn) Daily Avg Volume (No of sh) Daily Avg Turnover (US$mn) Consumers BRGR@IN 692 2 346 123/73 34/756 165353 0.4
Berger Paints to benefit from increasing size and scale…
Berger is poised for a strong growth ahead, given the inherent growth in the decorative as well industrial paint segment and the company’s increasing aggression to enhance its capacity and distribution reach, especially in the southern region. We expect revenue and earnings to grow at 19% and 20% CAGR respectively, over FY11-13E, driven by a healthy 15% increase in volumes. Moreover, the cash flow position remains strong with a healthy growth of 26% in operating cash flows over the same period.
Share Holding Pattern (%)
Mar -11 Dec-10 Sep-10 Promoters FII/NRI Institutions Private Corp Public
75.6 7.6 4.0 2.0 10.8
75.6 7.3 4.5 2.0 10.7
75.6 7.3 4.5 1.9 10.8
Initiate coverage with an ACCUMULATE rating and a TP of Rs 109/share
We expect the historical discount in valuations of Berger Paints to Asian Paints to narrow in the future due to 1) It gaining considerable size and scale with healthy revenue CAGR and 2) increasing shift towards premium products enhancing operating margins. We have valued the company at 17.5x FY13E EPS of Rs 6.2/share, a discount of 30% to Asian Paints target PER of 25x FY13E EPS. Our target price of Rs 109/share, provides 9.5% upside from current levels. Hence, we initiate coverage with an ACCUMULATE recommendation. Valuation Table (Consolidated)
Pritesh Chheda, CFA email@example.com +91 22 6612 1273 Sweta Jain firstname.lastname@example.org +91 22 6624 2479
YEMar FY10 FY11 FY12E FY13E
Net Sales 18,913 23,281 28,967 33,174
EBITDA (Core) 1,991 2,373 2,802 3,456 (%) 10.5 10.2 9.7 10.4
EPS APAT 1,204 1,501 1,733 2,153 (Rs) 3.5 4.3 5.0 6.2
EPS % chg 33.9 24.7 15.5 24.3
RoE (%) 24.7 23.3 23.1 24.3
P/E (x) 28.6 22.9 19.9 16.0
EV/ EBITDA (x) 16.6 13.4 11.6 9.6
P/BV (x) 7.4 5.6 4.7 3.9
Emkay Global Financial Services Ltd
Jenson Nicholson Ltd in 1969. The current promoters. Technology leaders in External Insulation Finishing Systems (EIFS) in the B2B segment in Poland and neighbouring countries such as Ukraine. Bose is a B. the company was rechristened as Berger Paints India and it started using the trade name of Berger. it offers a range of wood coating products The Company’s joint venture with Nippon Bee Chemicals Co. Berger Rangoli. India Berger Jenson & Nicholson. Russia Holding 100% 100% 100% 100% Remarks Entire facility dedicated to processing of company unit's. has been a director of the company since July. he was associated with ICI (India) Limited.In 1947.Berger Paints Initiating Coverage Company Background Second largest paints company in India Berger Paints started operations in 1923 in a small unit in Kolkata as Hadfields India Ltd. Dhingra.. Recorded sales of Rs 102 mn and PAT of Rs 6 mn in FY10.E (Mech) from Jadavpur University. it was acquired by British Paints (Holdings). Ahmedabad having over 36 years of work experience. Russia and the Baltic states. Berger Paints has six subsidiaries and two JVs located across geographies including Cyprus. It has 82+ depots with a widespread distribution network of 14. Emkay Research Snapshot on subsidiaries and joint ventures Name Beepee Coatings Private Limited. especially in its technical aspects.000 dealers across the country.000 MT in FY10. Subir Bose Managing Director Abhijit Roy Director and Chief Operating Officer Director and Chief Financial Officer Srijit Dasgupta Source: Company. Berger Paints is the second largest decorative paints company in the country. Nepal Berger Paints (Cyprus) Limited. Commenced its second decorative plant with a capacity of 18. Mr. Berger Weather Coat. India BNB Coatings India Limited. Poland and Nepal. Recorded sales of Rs 305 mn with PAT of Rs 34 mn. The UK company was then acquired by Celanese Corporation. AICWA & Company Secretary having over 27 years of work experience. The company has undergone many change of hands . of Japan (NBC) for manufacture of coatings for plastic substrates of automobiles. Dasgupta is a B. he was associated with Abukon Nigeria Ltd.Tech (Chemical) from IIT. Emkay Research Lusako Trading Limited. In 1983. Poland 100% 100% 49% 49% A joint venture with Becker Industrial Coatings. It has strong and well established brands like Berger Silk. Bangalore having over 19 years of work experience. 1991. Ltd. Cyprus Berger Paints Overseas Limited. Management profile Name Kuldeep Singh Dhingra Designation Chairman Remarks Mr. which renamed the company as British Paints (India).Sc (Hons) from Calcutta University. It has a wide variety of product portfolio including interior and exterior wall coatings as well as metal and wood paints. India Source: Company. Cyprus Bolix S. It derives almost ~80% of revenue from decorative paints and the balance from industrial paints -largely automotive and protective coatings. UK. It is a SPV for overseas investments for Berger Paints Acquired in FY09 for USD 38 mn. recorded a net loss of Rs 15 mn in FY10. Roy is a B. It is a SPV for overseas investments for Berger Paints It was affected by the global slowdown in FY10 and hence. Dhingra has been the director of the company since 1993. Berger Illusions. Dhingra is a graduate and promoter of the company and has a long standing experience in paints and related industries. which later sold the Indian company to Berger. Jadoo Enamel. He started his career with Asian Paints Limited and prior to joining Berger. It has eight manufacturing facilities with a total capacity of 306. Mr. Gurbachan Singh Dhingra Vice Chairman Mr.A. Berger Becker Coatings Private Limited. He is a graduate and has considerable experience in the paint industry. Mr. Russia.000 MT across India and four facilities overseas. the Chairman. etc that span across mass to premium category of the market. Emkay Research 27 June 2011 2 . the Dhingra’s . entered the company in 1991 after acquiring UB Group’s stake in the company. He started his career with Asian Paints and prior to joining Berger in 1984. Mr. Kanpur & PGDM from IIM. Kolkata & PGDM from IIM.
and we believe Berger Paints is well placed to benefit from this.000 dealers to service the decorative paint market across India. Industrial paints constitute 20% of FY11 sales 20% 80% Decorative paints Source: Company Industrial paints Growing stronger…with considerable size and scale Increasing its capacity by 52% over the next two years Berger Paints has developed a strong dealer network of 14.4 bn) capacity plant (scalable to 320.000 MT) in Andhra Pradesh over the next 2 years. Emkay Research 27 June 2011 3 . Further.700 tinting machines Berger Paints . Industrial paint market is worth Rs 50 bn and growing at 10-12% every year. expect industrial paints growth at 14% Industrial paints constitute 20% of total sales for Berger Paints.000 dealers and 17. in the coming years. Moreover. Berger Paints has a strong foothold in the eastern markets with strategically located plants there.000 dealers with 7. which contributes 50% of its industrial sales . Emkay Research Strong place in protective coatings. It plans to scale these stores by 40-50 nos.Berger Paints Initiating Coverage Investment Rationale Second largest player in the decorative paints market… Holds 17% market share with 14. Berger Paints is gaining momentum in the southern markets with its franchisee stores (40+ in nos.). we have modeled a 14% growth rate for industrial paints segment in our FY13E estimates. Competitive landscape Company Berger Paints Asian Paints Kansai Nerolac Akzo Nobel Decorative market share 17% 53% 10% 9% Competitive position Second largest player in the decorative market.000 dealers and 7. with a 17% market share. Rising consumerism in the country is expected to drive higher demand for decorative paints in future. With a strong market foothold in the eastern and northern regions. is the second largest company in the Rs120bn worth decorative paints market. The company has strong technical collaborations with DuPont Performance Coatings for automotive coatings. the company has embarked on an aggressive expansion plan to increase its production capacity by 52%. This market is characterized as an oligopoly with 4-5 players constituting majority of the market. It also commands a strong leadership position in the protective coatings segment. through the addition of 160. In industrial coatings. it is the leader in the protective coatings market It is the market leader in the decorative segment but lags second in the industrial segment Kansai is the largest player in the industrial segment and is the third largest player in the decorative segment Strong player in the premium decorative paint segment Source: Company.000 MT (Phase I and II at a cost of Rs 1.000 tinting machines with Asian Paints. Taking cue from our capital goods and auto team estimates of 17% and 12% growth.700 tinting machines compared to 27. it has a strong distribution network including 80+ exclusive stock points and 14.
Distempers Solvent-based paints . The paints market is poised for a robust growth momentum in the long term. it had recorded a 21% CAGR over FY06-11.000 MT* Asian Paints South and West with a pan India presence 27. Emkay Research Industry Mix 60% Remarks growing at 20-25% 40% growing at 6-10% Emkay Research 27 June 2011 4 . Increasing contribution from this segment will drive higher revenue growth and also expand operating margins in the future. Berger Paints has recorded strong 18% revenue CAGR over FY06-11 and we expect it to sustain its growth momentum going ahead. (When Asian Paints was at this run-rate in FY06/07. we believe the inherent growth in paints industry and the company’s aggressive focus on increasing its distribution reach will aid Berger Paints in attaining considerable size and scale in the future.000 MT We expect revenue momentum to continue with 19% revenue CAGR over FY11-13E Moreover. through the introduction of premium products in the water-based paints. Gaining considerable revenue size… 120 100 80 Rs bn 60 40 20 - Berger Paints Asian Paints FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Source: Company.) While we are not factoring market share gains for Berger Paints. Water-based paints to record higher growth… Category Water-based paints .5 kg/year compared to 20 kg/year in developed countries .000 MT 300. Emkay Research Shift in product mix to augur well… Berger Paints is focus ing on raising the share of water-based paints in its total product portfolio and has also filled the product gap that existed with Asian Paints.Emulsions. This shift of focus towards emulsions augurs well for the company as water-based paint is not only a high growth category. but also a higher margin product segment compared to solvent-based paints.000 17. Primers. gaining a critical size of Rs 77 bn. driven by increasing per capita consumption.Enamels. We expect the company to post a 19% revenue CAGR over FY11-13E. with a strong second position in the decorative paints market. gaining a considerable revenue base of Rs 33 bn.000 595. Thinners Source: Company. is well placed to benefit from the rising paint consumption in the country.000 MT Initiating Coverage Berger Paints East and North with increasing presence in South 14. we believe Berger Paints.000 MT 160.700 306.currently at 1.Berger Paints Gaining strength… in comparison to Asian Paints Particulars Stronger regions Dealer network Tinting machines Total current capacity Expansion plans * Scalable to 320.000 7.
150 MT) Sikandrabad (21.916 MT) Source: Company.0 Rs bn 8.920 MT) Surajpur (14. with revenue of Rs 23 bn has EBITDA margin of 10.0 Howrah (28.) (160. not only sustain volume growth but also give it a stronger presence in the southern markets and increase its capacity in water-based paints. we do not rule out a possibility that Berger Paints could narrow the margin gap to Asian Paints in its growth phas e.560 MT) V V N (48.000 MT Healthy demand has led Berger Paints to embark on a strong expansion plan to enhance its manufacturing capacities.000 MT) from FY14. We believe this will help Berger Paints. owing to higher raw material costs environment.P. This plant. backward integration of its emulsion requirements and higher operating efficiencies as the company gains size and scale could possibly result in higher operating margins in the future.129 MT by 52% over a period of 2 years.000 MT.0 10. with an initial capacity of 160.0 5 .000 MT) 11.000 MT and scalability to 320.5%. While it has already expended Rs 1. Emkay Res earch Strong capex plans provide visibility to sustainable volume growth Setting up a 160. is expected to commercially start production (Phase I and II with a capacity of 160. However.639 MT ) Goa (44. Substantial increase in gross block Network of its production facilities Proposed unit in Hindupur (A. whereas Berger Paints.000 MT capacity plant in AP – scalable to 320.0 FY12E Emkay Research 27 June 2011 FY13E FY09 FY10 FY11 5.Berger Paints Initiating Coverage Scope for expansion in operating margins… Increasing focus on water-based emulsion paints . in FY11.000 MT in Phase I & II) (Scalable to 320. EBITDA margin gap with the leader…could narrow in future 25 20 15 10 5 FY06 FY07 FY08 FY09 FY10 FY11 % Berger Paints Asian Paints Source: Company. (In FY04.2%). which is a faster growing segment with a higher margin profile. we have modeled in a flat operating margin scenario over FY11-13E.450 MT) Jammu (95. The company plans to increase its capacity from 306.840 MT) Pondicherry (18. it plans to spend an additional Rs 1. Emkay Research 6.3 bn towards expansion in its Rishra and Goa plants.4 bn in a greenfield plant in Andhra Pradesh over the next 2 years. Given its increasing focus on enhancing its margins.654 MT) Rishra (33. Asian Paints with revenue of Rs 25 bn had EBITDA margin of 13.0 7.0 9.
We do not expect Berger Paints to dilute further equity.000 MT. We believe its cash position for the next two years is comfortably placed to meet its capex requirement for Phase I and II of Andhra Pradesh plant with an initial capacity of 160. we expect operating cash flow to register strong CAGR of 26% over this period. Cash flow position to remain healthy… 2. Jenson and Nicholson and issued additional 7. leading to a total dilution of 8% on the expanded equity capital. Hence.5/share to fund its growth prospects.400 -2.100 1.2 mn shares to Nalanda Fund at Rs 50. Emkay Research FY09 FY10 FY11 FY12E FY13E Cashflow from operations Free cashflow Emkay Research 27 June 2011 6 . we do not expect the company to raise additional funds from outside over the next two years.400 700 Rs mn 0 FY08 -700 -1. it had issued 20mn shares on warrant conversion to a promoter group company. In FY10.Berger Paints Initiating Coverage Strong cash flow position… Strong cash flow position to fund the planned capex over the next two years With healthy profit growth over FY11-13E. as it has sufficient internal accruals to fund its growth plans over the next two years.100 Source: Company.
6 16. in turn. 23% of raw material costs. constituting 23% of the total input cost and 10% of sales in FY10.5 1.Berger Paints Initiating Coverage Key Risks Raw material cost volatility TiO2.8 1. Asian Paints. Nevertheless.6 17.3 2. being a price-taker.7 FY08 9.4 1. affecting the velocity for paints demand.4 FY07 9. is subject to the perils of not being the leader with a pricing power in the market place. This could result in lower volumes and consequently. current high inflationary environment could lead to interest rate hike. continue to witness an inflationary scenario.8 10. firm prices will keep margins under pressure.6 FY10 8.8 FY09 6. will always stand a risk to the pricing decisions of Asian Paints. Change in velocity could influence earnings estimates While the Indian economy has registered a healthy growth over the last decade. provides ample growth opportunities driven by increasing per capita income over a longer time period and rules out catastrophic impact in short-term. taking an unwarranted move to disrupt the market structure. at 1.1 1. Uptrend in vegetable oil (index) price movement 700 Indexed Rs/ 10kg 650 600 550 500 450 400 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Trend in TiO2 price movement – Structural uptrend 220 200 Rs/kg 180 160 140 120 100 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 Source: Bloomberg. being second. Thus .3 16. etc.0 2.5 13. Emkay Research Berger Paints volume gowth Emkay Research 27 June 2011 7 . The prices of titanium dioxide have been on an uptrend since FY10 and have increased by 32% YoY for 1QFY12. is on a structural uptrend Titanium dioxide (TiO2) is one of the main raw material inputs . Capital line Berger Paints. Trend in velocity of volumes: GDP growth FY06 GDP growth (%) Volume growth (%)* Velocity (x) 9. While in the past. owing to lag in product price increases .0 16. prices of other raw materials like vegetable oils.0 FY11 8. Berger Paints. crude oil. While c ontinuing demand-supply mismatch is likely to keep the prices of titanium dioxide firm in the near future. the low per capita consumption of paints in India. profit growth for the paint companies.5 kgs against 15-20 kgs in the developed countries.0 % 15 10 5 0 FY06 FY07 FY08 FY09 FY10 FY11 Paint volumes highly correlated with GDP growth 20 * Volume growth is a combination of Asian Paints and Berger Paints GDP growth Source: Co mpany. is the price-taker… Berger Paints is the second largest player and hence. which can hamper the demand for housing and new infrastructural development. there have not been any significant instances of the leader.
0 PAT to grow at 20 % CAGR over FY11-13E 2. The company has already undertaken a 7% price hike in 1QFY12.5 5.9 FY10 14.0 FY08 FY09 PAT FY10 FY11 FY12E FY13E % 8. With no incremental debt.0 0.9 15.5 4.5 1.0 Rs bn EBITDA Source: Company.0 Rs bn 1.0 7. the company is poised for a healthy growth.8 24.0 15.0 FY09 3. PAT to grow at 20% CAGR over FY11-13E. there is scope for margin expansion in the future.0 4.5 0.0 2. We expect the subsidiaries to contribute 7% to the consolidated sales by FY13E. could keep margins under pressure.7 -5.5 7.9x GDP growth assumption of 8%).4% for FY13.7 FY12E 14.0 0. We have estimated 19% revenue CAGR over FY11-13E aided by healthy volume growth of 15% (at 1.5 6.5 1.Berger Paints Initiating Coverage Financials Revenues to register 19% CAGR over FY11-13E We expect volume growth of 15% over FY11-13E Berger Paints witnessed 18% CAGR over FY06-11.0 3. driven by a strong up-tick in the paints demand leading to a healthy volume CAGR of 13%.5 7. Emkay Research Consolidated revenue growth trajectory 35 30 25 Rs bn 20 15 10 5 0 Growth (RHS) (%) Volume growth % FY08 14. While the company has undertaken 7% price hike in 1QFY12 and is adequately covered for its raw material requirement for this season. we believe over a longer term. While concerns on the short-term demand scenario persist.0 7.5 2. continuing high prices . EBITDA margins to remain stable… 4.0 0.0 10.5 2.0 Price growth Value growth Operating margins to remain stable… We expect Berger Paints’ consolidated operating margin to remain stable at 10.2 7. especially of titanium dioxide.5 3.4 10.0 6.0 8. as the product mix shifts towards water-based emulsion paints. Nevertheless.0 1. Emkay Research PAT margin Emkay Research 27 June 2011 % 8 .5 9.0 FY13E 15.0 9.0 5.9 FY11 19. we expect interest costs to remain at similar levels and hence.5 8.9 7.6 10.5 10.5 0.0 0.0 4.0 FY08 FY09 FY10 FY11 FY12E FY13E EBITDA margin 11. Our assumptions for paints growth… 30 25 20 15 10 5 0 FY08 FY09 FY10 FY11 FY12E FY13E Sales (LHS) Source: Company.0 26. which will further aid overall sales growth in coming quarters.
3 44.1 11.2 7.6 49. * Bloomberg data Emkay Research % 27 June 2011 9 .2 FY11 23.4 16.3 38.1 15.8 21. Emkay Research.4 FY13E 24.3 FY09 22.3 35.5 16.Berger Paints Initiating Coverage Return ratios to remain at healthy levels… Berger Paints has lower RoE at 23% compared to Asian Paints’ RoE of 45% for FY11 due to the lower profitability that Berger Paints operates at.7 Source: Company.0 FY10 24.2 21.0 22.2 20.1 38. as against Asian Paints. Given our expectations of stable operating margins over the coming quarters.9 14. for FY13E.4 12.6 22. RoE and RoCE of the company is also likely to remain more or less flat at 24% and 28% respectively.9 FY12E 23.7 55. Return ratios to remain healthy… 31 29 27 25 23 21 19 17 15 FY08 FY09 RoE FY10 FY11 RoCE FY12E FY13E RoE compared to peers FY08 Berger Paints Asian Paints Kansai Nerolac* Akzo Noble* 28.
it has a strong distribution network of 14.3 RoE (%) FY12E 23.1 FY13E 9. we expect the company to post earnings CAGR of 20% over FY11-13E.5% upside from the current levels . Asian Paints. the inherent growth in the paints industry coupled with the company’s aggression to expand its geographical reach will help Berger Paints attain reasonable revenue size of Rs 33 bn by FY13E. this discount should narrow due to the following reasons: ¡ Gaining considerable size with a revenue CAGR of 19% over FY11-13E ¡ Product mix shifting towards higher growth and better margin business of water-based emulsion paints ¡ Increasing presence across India with rising penetration in the south …Initiate with ACCUMULATE and target price of Rs 109/share We have valued Berger Paints at 17.700 tinting machines across India.6 15.9 16.5 PER (x) FY12E 19.2/share. While high raw material costs continue to keep pressure on profitability and will lead to a flat operating margin over this period.2 11. This gives us a fair price of Rs 109/share. Historically. Gaining scale and size… Berger Paints is increasing its capacity by 52% over the next two years. which provides 9.3 35.5 2.0/share and 16. is increasing its reach in the southern markets through the franchisee stores. Berger Paints. the stock is trading at 19.9 EV/EBITDA (x) FY12E 11.2 29.2 18.9x FY12E EPS of Rs 5.5x FY13E earnings.Berger Paints Initiating Coverage Valuation and Recommendation Second obvious option… cannot be ignored Berger Paints is the second largest player (17% market share) in the decorative paints market and has recorded healthy revenue run-rate of 18% CAGR over FY05-11.4 285. Moreover.0 25.8 14.9 FY13E 16.9 14. with a strong presence in the eastern markets with strategically located plants there.8 18. which provides healthy volume growth visibility in the future.0 22.4 12.5 8.1 12.6 18. a 30% discount to Asian Paints target PER multiple of 25x.9 30.000 dealers with 7. At 16.4 FY13E 24.3 15.1 38.2 PAT (Rs bn) FY13E 2. Moreover.7 100 2976 858 902 Emkay Research 27 June 2011 10 . it is trading at 38% discount to the market leader. we initiate coverage on the stock with an ACCUMULATE rating and a target price of Rs 109/share.2 Sales (Rs bn) FY13E 33. Valuation gap to Asian Paints to narrow… Trading at 38% discount to Asian Paints… expect the gap to narrow At the current market price. the company has traded at an average discount of 40% to Asian Paints’ one-year forward mean PER. we believe Berger Paints cannot be ignored.3 46.2 21.5 1.3 11.6 11.1 21. Hence.5 17.0x FY13E EPS of Rs 6. Comparative valuations CMP Rs Berger Paints Asian Paints Kansai Nerolac* Akzo Nobel* * Source: Bloomberg Mcap Rs bn 34.1 17.2 33. We believe that going forward. …with healthy growth momentum We forecast 19% revenue CAGR over FY11-13E driven by 15% volume growth and 5% price-led growth.0 x FY13E EPS.2 108. With a strong second position in the decorative paints market.8 EPS CAGR (%) FY11-13E 19.
Berger Paints Initiating Coverage PER band 150 120 90 60 30 0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 20x 15x 10x 5x 1 Year forward PER band 25 20 15 10 5 0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 1 year forward PER band 35 30 25 20 15 10 5 0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Discount to Asian Paints 100% 80% 60% 40% 20% 0% Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 -20% Jun-10 Berger Paints Asian Paints PER discount Emkay Research 27 June 2011 11 .
While the demand for re-painting could be linked to the economic activity. which contributes 70% and industrial that contributes 30% to the total industry size. etc. Long term remains strong… For decorative paints Demand for decorative paints emanates from new house construction (30%) and repainting needs (70%). Demand drivers – Short term pain….5 kgs. Similarly. This industry is characterized with many players in the unorganized sector. The per capita consumption of paints in India remains very low at 1. the key demand driver for this category of paints depends on the industrial activity in its user-industries like automobiles. Emkay Research 27 June 2011 12 . demand for office space will be 55mn sq ft and hotels will witness a demand for 78mn room nights over the same period. Decorative paints (70% of total paint industry) Decorative paints constitute 70% of total paints market of Rs 170 bn and has witnessed a 17% CAGR over FY06-11. Encouraging economic growth and an improvement in business environment are likely to drive the demand for commercial space over a long run.Berger Paints Initiating Coverage Annexure . which forms 30% of the decorative segment. powder coatings and coil paints. The demand for decorative paints is highly co-related to the GDP growth of the country. Emkay Research Industrial paints (30% of total paint industry) The industrial paints category. estimated at Rs 50 bn constitutes 30% of the overall paints industry. against 15-20 kgs in developed countries. protective paints. This category is further sub-divided into different segments based on the user industry and constitutes automotive paints. over the ensuing years. Decorative paint demand led by re-painting requirements… 30% Driven by increasing middle class.8-2x GDP growth since the last few years. estimated at USD 3. demand for new house construction would depend on the construction activity in the commercial and residential space. While 70% of the decorative demand is from re-painting needs and is driven by rising purchasing power of the consumer and the economic growth in the country. This signifies the robust growth potential that the paints industry is poised for. is growing at 1. the organized segment that cons titutes 80% of total paint industry is concentrated with top 4 players commanding more than 90% share of the organized market. emergence of a sizeable middle class and growing urbanization drives the demand for new painting requirements . This industry is categorized in two segments – decorative. increasing re-painting cycle and higher economic growth Source: Industry. growing urbanisation and higher availability of affordable housing Re-painting Fresh painting 70% Driven by rising purchasing power. However. consumer durables.I Industry overview Per capita consumption of paints is low at 1.5 kgs/year The Indian Paints Industry.8 bn. Hence. 240mn sq ft of commercial property and 4. According to a report by Cushman & Wakefield in October 2010.25mn units of residential property will be required to meet demand over 2010-2014. power. marine.
Our auto team estimates a 10% YoY growth agains t ~30% growth in passenger cars and 9% YoY growth against 36% growth In M&HCV segment for FY12. Nevertheless. Emkay Research Trend in commercial vehicles segment 35% 30% 25% 20% 15% 10% 5% 0% 0.0 1. Trend in passenger car segment 3.25 mn units 240 mn sq ft 55 mn sq ft 78mn room nights For Industrial paints Demand for industrial paints is derived from its application in the user-industries like automotive.0 FY07 FY08 FY09 FY10 FY11 FY12e FY13e % YoY 60% 40% 20% 0% -20% -40% -60% M&HCV Trucks (mn units) Consumer durables segment According to CEAMA. As automotive segment constitutes 40% of total industrial paints. ports. the growth rates are expected to recover to 17% and 12% for passenger cars and M&HCV segment.3 0. consumer durables market is poised to grow at healthy double-digit growth driven by increasing per capita income and higher discretionary spend in the country. roads.5 2.Berger Paints Initiating Coverage Distribution of demand Residential property Commercial property Office space Hotels Source: Cushman & Wakefield Estimated demand for 2010-14 4. respectively. operating environment in this segment is a major demand driver for the industrial paints category.2 0.5 FY07 FY08 FY09 FY10 FY11 FY12e FY13e % YoY Cars (mn units) Source: Company.0 2. will be another key driver of volume growth in industrial paints. it is likely to recover from 2HFY11 once the consumer makes the psychological adjustment for higher fuel prices and interest rates.4 0.0 0. Emkay Research 27 June 2011 13 .3 0.1 0.5 1. fuel prices and inflation will lead to subdued demand in 1HFY11. over a longer period. In FY13E. it is likely to witness some short term pressure.1 0. consumer durables and the capital goods industries.4 0. infrastructural development in sectors like power. Further. However. oil and gas etc. We expect growth rates to revert to healthy levels from FY13E. the consumer durable market is currently pegged at around Rs 350 bn and has witnessed a growth of approximately 13% in the last few months.2 0. Automotive segment While rising macro headwinds like increase in interest rates. with tightening credit situation.
7 10.7 29.1 Pigments 11. Emkay Research 27 June 2011 14 .8 33.7 13.3 11. ¡ Similarly.1 20.9 13.0 8.9 RoCE 41.5 7.8 14.9 14.0 15.7 3.8 16.2 43.0 36.5 19. higher backward integration and shifting product mix towards premium -end of water based paints.1 70.2 16.4 16. respectively.8 26.9 16.3 45.1 12.2 17.0 16.5 PAT margin 7.0 RoE 29.3 10.4 8.9 Raw material mix comparison Berger Paints Raw material cost as a % to sales FY05 FY06 FY07 FY08 FY09 FY10 Note: Standalone financials Asian Paints Others 13.1 8.4 (3.7 15.9 13.9 Pigments 15.6 11.2% against 13.9 13.8 18.0 32.1 22.4 25.3 26.0 51.7 Volume 13.5 31.6 15.3 13.7 23.2 14. we expect it to remain at healthy levels of 24%.8 15.3 15.1 Asian Paints PAT margin 9.0 7.6 7. with increasing scale.4 10.0 18.4 16.1 11.0 47.3 11.7 17.2 23.1 6.5 10.3 29.6 15.4 EBITDA margin 15.Berger Paints Initiating Coverage Annexure .1 16.8 7.5 14.1 Highlights ¡ Volumes for Berger Paints and Asian Paints have grown at an average velocity of 1.9 49.1 6.3 8.8 17. the company has relatively lower RoE compared to Asian Paints.1 7.0 9.9 20.4 32.7 10.8 58.9 7.4 24.5 10.3 11.5 31.6 13.3 12.3 31.2 9.2 13.5 32.7 17.5 11.4 21. when Berger Paints witnessed a weak volume growth of 3.2 12.5 13.1 9.4 23.2 18.7 5. Only remarkable difference between the growth rates has been in FY09.1 39.3 38.0 16.7 53.8 59. there is a possibility that the margin gap could narrow in future.3 PAT 13.0 16.1 15.II Growth comparison Berger Paints Growth (%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Volume 15.4 13.8 17.7 24.3 RoCE 29.1 22.0 34.4 15.4 15.3 14.9 49.1 Asian Paints Revenue 15.1 17.7 21.1 Resins and Oils 14. ¡ Historically.0 Solvents 7.1 7.1 (3.4 8.3 19.9 15.2 24.8 Resins and Oils 7. due to Berger Paints’ lower margin profile.4% for Asian Paints.7 16.2 24.3 RoE 31.0 Margins and return ratio comparison Berger Paints Ratios (%) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E EBITDA margin 9.9 29. Nevertheless.6 9.8 17.8 50.0 Revenue 23.8 14.0 EBITDA 16.5 13.4 13.6 16.7 11.0 23.3) 86. However.9 12.5 26.1 7.1 7.9x to GDP.6 20.0 PAT 31.2 12.6 (5.5 17.6 14.8 11.9 5.7 19.0 14.1 13.1 40.6 23.4 75.5 11.2 Others 17.0 10.1 15.8 37.6 23.1 27. Berger Paints has witnessed lower margins than Asian Paints.7 21.2 Solvents 12.0 3.0 14.8 19.9) 35.2 7.6x and 1.3 16.6 35.8 18.9 12.8 EBITDA 8.0 12.6 8.6 10.4) 38.
567 3.295 326 0 1.022 263 0 12.265 560 0 4.9 1.605 Key Ratios Y/E.0 21.1 22.495 10.1 1.265 1.903 FY11 692 6.180 7.0 0 1.641 5.909 23.5 6.3 37.4 1.566 3.204 FY11 23.486 6.531 64.1 23.022 0 3.3 17.282 6.273 5.5 0 2. Mar (Rs.6 1.757 2.8 1.001 8.7 437 297 450 2.775 20.8 56.9 23.7 5.4 0. m) Net Sales Growth (%) Expenses Growth (%) Raw Materials % Of Sales Employee Cost % Of Sales Other Expenditure % Of Sales Ebidta Growth (%) Ebidta% Other Income Interest Depreciation PBT Tax PAT (Before EO Item) Growth (%) Net Margin% E/O Item Reported PAT FY10 18.2 4.733 FY13E 33.6 7.5 29.617 3.0 25.846 -622 1.4 1.305 1.002 -191 0 49 364 413 FY11 2.7 6.446 3.3 2.967 24.2 428 238 401 2.6 1.9 4.5 16.922 13.456 23.753 1.5 58.9 3.066 12.4 0 1.818 3.733 15.3 6.1 3.867 5.605 764 0 5.022 0 3.1 10.237 1.022 263 0 10.520 4.5 16.1 9.6 3.320 19.673 0 2.393 8.994 4.2 6.203 6.3 FY10 FY11 FY12E FY13E Emkay Research 27 June 2011 15 .936 65.1 0.204 45. m) Equity Share Capital Reserves Networth Secured Loans Unsecured Loans Loan Funds Net Deferred Tax Minority interest Capital Employed Gross Block Less: Depreciation Net Block Capital Work In Progress Goodwill Investments Current Assets Inventories Debtors Cash & Bank Loans & Advances Other Current Assets Current Liabilities & Prov Net Current Assets Miscellaneous Expenditure Capital Deployed FY10 692 5.5 238 152 358 1.6 37.4 26.255 -1.2 40.5 6.733 1.1 1.5 11.8 10.373 19.174 14.6 1.1 20.4 0. Mar (Rs.4 2.050 560 0 0 0 -520 0 40 1.022 0 3.4 6.153 Balance Sheet Y/E.165 25.501 FY12E 28.991 49.204 1.886 5.812 4.046 3.2 0.448 6.161 660 1.333 826 0 526 9.4 25.3 6.6 1.913 16.745 19.6 24.676 0 526 11.9 5.5 28.8 1.9 28. Mar Profitability % Ebidta Mgn PAT Mgn ROCE ROE Per Share Data EPS BVPS DPS Valuations (X) PER P/BV Ev/Sales Ev/Ebidta Dividend Yield (%) Turnover (X Days) Debtor TO Days Inventory TO Days Gearing Ratio Net Debt/Equity (X) Total Debt/Equity (X) 0.108 11.903 6.026 0 526 9.925 9.109 956 2.393 FY13E 692 8.314 4.305 FY13E 3.7 6.305 668 0 4.6 1.3 5.3 0.5 6.6 13.3 10.1 18.491 450 0 -573 -759 1.3 44.895 3.6 60.0 16.246 6.6 21.519 3.109 498 0 -657 -956 1.153 24.299 2.635 1.587 19.501 24.4 22. Mar (Rs.1 4.1 10.196 2.4 0.664 1.281 23.5 13.265 FY12E 2.180 FY12E 692 7.423 413 432 0 3.720 516 1. m) Pre-Tax Profit Depreciation Non Cash Chg in Working Cap Tax Paid Operating Cash Flow Capex Free Cash Flow Investments Equity Capital Loans Dividend Others Net Change in Cash Opening Cash Position Closing Cash Position FY10 1.7 1.674 264 0 8.9 10.3 11.802 18.0 3.994 -1.902 Cash Flow Y/E.9 1.6 14.6 6.022 263 0 11.686 63.551 5.4 0.718 13.462 4.107 3.2 25.0 24.3 1.902 8.863 4.4 0 1.415 8.161 401 0 -642 -660 1.Berger Paints Initiating Coverage Consolidated Financials Income Statement Y/E.965 2.224 -1.7 10.491 759 1.6 60.5 2.437 2.050 944 0 0 0 -644 0 300 1.3 19.610 -1.931 63.4 1.015 4.3 9.4 448 297 498 3.260 -940 320 756 -579 348 -450 458 852 413 1.1 9.720 358 236 35 -502 1.
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