Beating peers may not be easy for Berger as it lags in rural markets

Berger Paints
The March 2018 quarter (Q4) results of Berger Paints (Berger), announced on Wednesday after market hours, were almost in-line with expectations.  The consolidated net sales grew 16.7 per cent year-on-year (y-o-y) to Rs 12.98 billion in Q4. The raw material costs increased and impacted gross profit margin by 85 basis points (bps). Yet, Berger improved its operating profit margin by 94 bps y-o-y, owing to control on other expenses, which declined 192 bps y-o-y as a percentage of net sales. While the operational performance was good, a Rs 73-million loss in joint venture versus a Rs 24.7-million profit in year ago quarter, as well as a 35 per cent y-o-y surge in taxes weighed on its bottom line, which at Rs 1.06 billion was up half a per cent from a year ago.

Acceleration in demand from rural market, compared to urban, has benefitted Asian Paints more than Berger, which was delivering higher volume growth in the past six quarters compared to larger peer. In Q4, analysts estimate Berger's volume growth in the low double digits, almost at par with Asian Paints' 10-11 per cent. Moreover, Asian Paints outperformed Berger in terms of profitability. 

Berger generates 35-40 per cent of its business from rural markets, compared to Asian Paints’ 50 per cent. With improved rural sentiment, Asian Paints is expected to clock higher volumes. "Till the December quarter, Berger performed better than Asian Paints as rural economy was not doing well. However, given an upswing in rural market, Asian Paints will be in a better shape," said Sachin Bobade, analyst at Dolat Capital.

With better earnings outlook for Asian Paints, the valuation gap will narrow, making the former more attractive, Bobade added. Currently, Asian Paints is trading at 55 times its 2018-19 earnings, and Berger at 50 times. Thus, Berger's stock might lag in the near term, unless the company can surprise investors with a better than expected show.