Berger Paints stock set to gain from lower input costs, crude oil prices

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The Berger Paints stock, which had a good run on the bourses prior to its December quarter (Q3) results, has been on a downtrend in the last couple of weeks, shedding about 11 per cent. The Street was disappointed due to a weak net profit performance even though the top line was up a robust 21 per cent year-on-year for the decorative and industrial paints maker. 

On the volume front, the company reported lower volume growth than Asain Paints, a first in the last nine quarters. However, analysts believe that the correction offers a good entry point to investors given the expected improvement in earnings. Further, a sharp fall in Berger's share price has also made valuations a bit attractive. The stock now trades at 43 times FY20 earnings, a 9 per cent discount to Asian Paints. 

Though elevated input cost due to higher crude oil prices and use of high cost inventory impacted Berger’s profitability in Q3, the cost pressure is now receding on the back of lower crude oil prices. This coupled with expected price hikes are expected to aid the company’s margin profile. However, a likely rise in share of low priced products – distemper/putty – due to higher demand may confine margin expansion.

In Q3, amid a 203 basis point contraction in Ebitda (earnings before interest, tax, depreciation and amortisation) margin to 14.6 per cent led to a meagre 2.7 per cent year-on-year rise in net profit to Rs 133.9 crore. This was lower than 12 per cent growth expectation of analysts and over 14 per cent rise reported by Asian Paints. 

Not only profits, but the price hike expectations along with a likely strong rise in decorative segment volumes would also support the company’s top line growth. Analysts foresee a 12-16 per cent annual revenue growth and 16-18 per cent net profit growth over FY18-FY21. 

Volume traction would be led by demand shifting away from unorganised players amid a sharp cut in goods and services tax (GST) in July last year. In Q3 too, the company clocked a strong 18-19 per cent volume growth in decorative segment, which accounted for over 80 per cent of its revenue in FY18. The caveat however, could be dismal performance of automotive segment and higher inventory pressure of the real estate, caution analysts.

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