Sell Berger Paints, target price Rs 430: Emkay Global


Emkay Global has given a sell rating to Berger Paints (India) with a 12-month target price of Rs 430. The share price moved down by -1.68 per cent from its previous close of Rs 510.80. The stock’s last traded price is Rs 502.20.

Berger Paints domestic sales fell 13 per cent to Rs 12 billion, indicating a high-single digit volume decline. Management indicated a steep decline in March sales volumes due to the lockdown. The brokerage says consolidated sales declined 8 per cent to Rs 14 billion, due to better performance of international subsidiaries and acquisition of STP in Q3FY20. Poland and UK subsidiaries grew as the impact of the lockdown was less, whereas Nepal declined. Auto and industrial segments (8 per cent of revenues) continue to de-grow.

While April had no sales, management commentary indicated a quicker recovery in May-June led by strong demand in smaller towns and the company’s lower presence in some of the more impacted metros, says the brokerage. It expanded the dealer network by 10-12 per cent in the year.



Investment Rationale

According to the brokerage, domestic gross margins expanded 377bps year on year, driving a 370bps gain in consolidated margins, led by lower input prices. Subsidiary margins fell 100bps. EBITDA margin expansion was lower at 10bps due to higher employee costs. Management expects that stable input prices will continue to support but higher growth in lower end products, rupee depreciation and likely price cuts may reduce gains, says the brokerage.

According to the brokerage, adjusted PAT decline was limited at 7 per cent due to a 22 per cent fall in tax expense. Recovery looks quicker than expected, led by small towns but demand visibility is still low. The near term performance may be boosted by pent-up demand, which may not sustain. The brokerage has factored in a 7 per cent fall in sales in FY21 and 22 per cent growth in FY22.

Despite optimistic margin assumptions, valuations at 54 times make it expensive against other consumer peers.

The brokerage maintains a sell rating with a target price of Rs 430, based on 42 times Jun-22 EPS.

Berger Paints-Emkay GlobalJune302020


Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1354.84 crore, down -20.11 per cent from last quarter sales of Rs 1695.87 crore and down -7.96 per cent from last year’s same quarter sales of Rs 1472.09 crore. The company reported net profit after tax of Rs 105.65 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 74.99 per cent as of March 31, 2020 in the company, FIIs held 11.8 per cent stake while DIIs held 2.81 per cent and public and others 10.4 per cent.





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