Buy Berger Paints, target price Rs 595: ICICI Direct

ICICI Direct has initiated a coverage of Berger Paints with a buy rating and a target price of Rs 595 over a period of 15 months.

The brokerage gave the buy rating in view of: a) long term growth drivers remaining intact; 2) expansion in gross margin and 3) market share gain from smaller, unorganised companies.

The brokerage believes the current Covid-19 lockdown would restrict FY21 volume growth. A strong demand recovery is expected to be witnessed from FY22E onwards supported by a surge in repainting demand. The brokerage also believes that with a strong supply chain and distribution network in place, the paints company is set to benefit from a spike in demand once the situation normalises post lockdown.

The share price moved up by 1.21 per cent from its previous close of Rs 519.70. The last traded price is Rs 526. Incorporated in 1923, Berger Paints (India) has a market cap of Rs 50474.29 crore.

Investment Rationale

Berger Paint is the second largest decorative paint player in India with an organised market share of ~17 per cent. The company has kept its market share intact despite aggressive expansion by the leader and other MNC paint players in the domestic market. In the last five years, it has invested heavily in capex, brand building (average 5 per cent of sales in the last five years) and product innovation with a strong balance sheet position. All these resulted in a sharp expansion in EBITDA margin by ~300 bps in the past five years and generated average RoE, RoCE of ~22 per cent, 32 per cent, respectively.

Berger Paints is likely to report revenue, earnings CAGR of 11 per cent, 32 per cent, respectively, in FY19-22E supported by elevated margins (backed by benign raw material prices) and lower corporate tax. Further, with the dominance of limited players and intact long term growth drivers, the premium valuation of the company is justified due to its robust fundamentals (strong distribution, debt free status and consistent positive CFO).

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1695.87 crore, up 6.09 per cent from last quarter sales of Rs 1598.58 crore and up 4.90 per cent from last year's same quarter sales of Rs 1616.70 crore. The company reported net profit after tax of Rs 185.88 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 74.99 per cent stake in the company as of the third quarter ending December 31, 2019, while FIIs held 12.78 per cent, DIIs 11.78 per cent and public & others 10.24 per cent.