Stock Review: Berger Paints

Berger Paints is India's second-largest decorative paints manufacturer with a market share of 17 per cent. It ranks second only to Asian Paints in the Rs 12,000 crore decorative paints segment. Berger has a presence across 14,000 dealers and 7,700 tinting machines. Some of Berger's key brands include Berger Silk, Berger Rangoli, Berger Illusions and Berger Weather Coat. When it comes to the protective coatings market, Berger pips Asian Paints to the top spot. Indian paint manufacturers have a tremendous opportunity ahead of them with the per capita consumption of paints here at only 1.5 kgs per year compared to 15-20 kgs per year in developed countries. In terms of growth rate, the Indian paint industry's fortunes are strongly tied to that of the economy: historically the industry has grown at a rate equal to 1.5x the GDP growth rate.

 

In a bid to cater to this opportunity, the company plans to increase its production capacity by 52 per cent over the next two years. On the cards is a 1,60,000 MT capacity plant in Andhra Pradesh which is expected to come online in the next two years at a cost of around Rs 140 crore. This project will be funded internally. The AP plant is expected to be scalable to 3,20,000 MT in future.

 

Berger has grown its revenues by a compounded average rate of 18 per cent over the last five years. Analysts tracking the company maintain that it should be able to grow its revenues by at least this rate in the near future. Margin concerns arise from the rising price of titanium dioxide (up 32 per cent y-o-y in Q1FY12), crude and other vegetable oils.

 

At the current price of Rs103, the stock trades at 24 times its FY11 earnings. On a five-year PEG basis, the stock trades at a slightly expensive 1.7 times. Compared to industry leader Asian Paints which trades at 33 times estimated FY11 earnings but at a lower five-year PEG ratio of 1.18, Berger looks expensive. Wait for its valuation to correct before taking a position in the stock.