Berger Paints Q2 2010

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               BERGER PAINTS INDIA LTD                                                   BUY
                                                                                      June 3rd, 2010
 C.M.P:                              Target Price:
 Rs.70.00                            Rs.84.00
                                                        Berger Paints was incorporated in 1923;
                                                        is the third largest paint manufacturer and
  1 Year Comparative Graph
                                                        second largest manufacturer in decorative                    S
                                                        paints. It has distribution network of 75
                                                        stock points and 12,000 paint retailers.
                                                        The company’s manufacturing facilities is
                                                        located in West Bengal, Uttar Pradesh,
                                                        Pondicherry, Goa, and Jammu and                              C
                                BSE SENSEX
                                                        The Company has technical license                            A
                                                        agreement with DuPont Performance in the
Stock Data                                              area of automotive coating, Nippon paints
Sector                         Paints                   for new generation automotive coating,
                                                        Orica Australia Pty for protective coating
Face Value(Rs)                 Rs.2.00
                                                        and     TIGERWERK      Lacku.Farbenfabrik                    L
52 wk. High/Low (Rs.)          Rs.75.70/37.75           GmbH, Australia for specialised powder
Volume (2 wk. Avg.)            514000
BSE Code                       509480                   The Company has acquired 100% stake of
Market Cap(Rs in Mn)           24223.50                 Motor and Industrial paints business of ICI

Share Holding Pattern
                                                        India.                                                       R
                                                        The company has joint ventured with
                                                        Nippon Bee Chemical for manufacturing of                     E
                                                        coatings for plastic substrates used in
                                                        automobiles and mobile phones.
                                                        Net Sales and PAT of the company are
                                                        expected to grow at a CAGR of 14% and
                                                        25% over 2009 to 2012E respectively.                         E
                                                     (Rs in Mn)   FY09        FY10        FY11E        FY12E         A
                                                     Net Sales    15137.4    16884.6      19417.2      22524.0
V.S.R. Sastry
Equity Research Desk
                                                     EBIDTA       1501.2     1953.6       2347.2       2666.2

Dr. V.V.L.N. Sastry Ph.D.
                                                     PAT           887.6     1191.1       1523.7       1748.8        C
Chief Research Officer                               EPS           2.78       3.44         4.40         5.05                                                                                          H
                                                     P/E           16.74      20.34        15.90        13.85

Peer Group Comparison
    Name of the                         Market
     company              CMP(Rs.)    Cap.(Rs.Mn.)    EPS(Rs.)   P/E(x)      P/BV(x)   Dividend (%)

Berger Paints              70.00        24223.50        3.44     20.34        4.50        30.00

Asian Paints              2120.00       20311.49       71.94     29.43        18.56      175.00

Kansai Nerolac            1539.95       4149.55        61.42     25.07        5.06       120.00

AKZOINDIA                  598.10       2203.06        43.24     13.83        1.95       160.00

    Investment Highlights

       Q4 FY10 Results Update

       Berger Paints India Ltd disclosed results for the quarter ended March 2010. Net
       sales for the quarter moved up 24% to Rs.4356.90 million as compared to
       Rs.3520.40 million during the corresponding quarter last year. During the quarter,
       PAT is increased Rs.281.70 million as compared to Rs.214.90 million in previous
       year same quarter. The Basic EPS of the company stood at Rs.0.81 for the quarter
       ended March 2010.

                           Quarterly Results – Standalone (Rs in mn)

                  As At                Mar-10        Mar-09      %Change

                  Net sales           4356.90        3520.40           24%

                  PAT                  281.70        214.90            31%

                  Basic EPS             0.81          0.67             21%

Basic EPS of the company stood at Rs.0.81

Conversion of equity warrants and issue of equity shares

Berger Paints India Ltd has informed that subsequent to the in principle approvals
from the regulatory authorities, the Company has, converted 20,000,000 equity
warrants issued earlier to Jenson and Nicholson (Asia) Ltd, a promoter of the
Company, into 20,000,000 equity shares of a face value of Rs. 2 each at a price of
Rs. 49.50 per equity share and has issued and allotted the equity shares to
Jenson and Nicholson (Asia) Ltd, issued and allotted 7,200,000 equity shares of a
face value of Rs. 2/- each to Nalanda India Fund Limited at a price of Rs 50.50. As
a result of the aforesaid issues, the paid up capital of the Company stands
increased from Rs. 637,744,928 to Rs. 692,144,928.

Break Up of Expenditure

Company Profile

BERGER PAINTS is the culmination of over seven-decade process of evolution and
growth that began in 1923. Its growth has been closely linked with the business and
industrial development of modern India.

BERGER'S performance is anchored in a wide variety of Decorative and Industrial
paints which continue to gain an increasing share of the highly competitive Indian
paint market. Being an ISO 9001 company its quality products have attained instant
recognition, worldwide, and continues to meet quality requirements that are
demanded in the domestic market.

The Country's second largest decorative paint player, Berger is headquartered in
Calcutta and services the market through a distribution network comprising of 82
stock points and 12,000+ paint retailers.


      Metal & Wood Paint

      Interior Wall Coatings

      Exterior Wall Coatings

      Clear Coats for wood

Financials Results
12 Months Ended Profit & Loss Account (Standalone)
   Value( million)    FY09A       FY10A       FY11E       FY12E

                            12m         12m         12m         12m


        Net Sales         15137.40    16884.60    19417.29    22524.06

      Other Income         174.50      174.50      191.95      211.15

      Total Income        15311.90    17059.10    19609.24    22735.2

      Expenditure         -13810.70   -15105.50   -17261.97   -20068.93

    Operating Profit      1501.20     1953.60     2347.27     2666.27

        Interest           -123.90     -31.40      -33.28      -35.28

      Gross Profit        1377.30     1922.20     2313.99     2630.99

      Depreciation         -204.00     -266.30     -282.28     -299.21

    Profit before Tax     1173.30     1655.90     2031.71     2331.77

           Tax             -285.70     -464.80     -507.93     -582.94

     Profit after Tax      887.60     1191.10     1523.78     1748.83

     Equity Capital        637.70      692.10      692.10      692.10

        Reserves          3503.70     4694.80     6218.58     7967.41

       Face Value           2.00        2.00        2.00        2.00

           EPS              2.78        3.44        4.40        5.05

*A=Actual, *E=Estimated

Quarterly Ended Profit & Loss Account (Standalone)
  Value( million)    30-Sep-09   31-Dec-09   31-Mar-10   30-Jun-10

                             3m           3m         3m        3m(E)


       Net Sales          4539.60     4261.80     4356.90     4531.18

     Other Income           41.70       45.10       55.80       56.92

     Total Income          4581.30     4306.90     4412.70     4588.09

      Expenditure         -4021.50    -3831.60    -3959.00    -4010.09

    Operating Profit       559.80      475.30      453.70      578.00

        Interest           -10.70       -9.00       -5.90       -6.14

      Gross Profit         549.10      466.30      447.80      571.87

      Depreciation         -64.20      -67.50      -73.40      -76.34

    Profit before Tax      484.90      398.80      374.40      495.53

          Tax              -136.90     -121.20     -92.70      -128.84

    Profit after Tax       348.00      277.60      281.70      366.69

     Equity Capital        637.70      692.10      692.10      692.10

       Face Value           2.00        2.00        2.00        2.00

          EPS               1.09        0.80        0.81        1.06

*A=Actual, *E=Estimated

Key Ratios
     Particulars      FY09     FY10     FY11E    FY12E

      EPS (Rs.)        2.78     3.44     4.40     5.05

  EBITDA Margin (%)   9.92%    11.57%   12.09%   11.84%

   PAT Margin (%)     5.86%    7.05%    7.85%    7.76%

    P/E Ratio (x)     16.74    20.34    15.90    13.85

       ROE (%)        21.43%   22.11%   22.05%   20.20%

      ROCE (%)        26.36%   27.02%   26.29%   24.45%

    EV/EBITDA (x)      9.90    12.40    10.32     9.09

  Debt-Equity Ratio    0.19     0.16     0.14     0.12

   Book Value (Rs.)   12.99    15.57    19.97    25.02

          P/BV         3.59     4.50     3.51     2.80


Outlook and Conclusion

    At the current market price of Rs.70.00, the stock is trading at 15.90 x FY11E
    and 13.85 x FY12E respectively.

    Price to Book Value of the stock is expected to be at 3.51 x and 2.80 x
    respectively for FY11E and FY12E.

    Earning per share (EPS) of the company for the earnings for FY11E and FY12E
    is seen at Rs.4.40 and Rs.5.05 respectively.

    Net Sales and PAT of the company is expected to grow at a CAGR of 14% and
    25% over 2009 to 2012E respectively.

       The Company has acquired 100% stake of Motor and Industrial paints
       business of ICI India.

       The company has joint ventured with Nippon Bee Chemical for manufacturing
       of coatings for plastic substrates used in automobiles and mobile phones.

       On the basis of EV/EBITDA, the stock trades at 10.32 x for FY11E and 9.09 x
       for FY12E.

       We expect that the company will keep its growth story in the coming quarters
       also. We recommend ‘BUY’ in this particular scrip with a target price of
       Rs.84.00 for Medium to Long term investment.

Industry Overview

Paint is defined as the group of emulsions, consisting of pigments suspended in a
liquid medium, for use as decorative or protective coatings. “Paint” ranges from the
broad group of environmentally-sound latex paints used to decorate and protect
homes and the translucent coatings that line the interior of food containers, to the
chemically-complex, multi-component finishes that automobile manufacturers apply
on the assembly line.

Market Structure

The size of the Indian paint industry is valued at ~Rs.112 bn . Indian Paints Industry
can be classified into two sub-segments:

   •   Decorative Paints
   •   Industrial Paints

The paint industry is divided into organized and unorganized sector. The unorganized
segment plays a huge role in decorative paint segment due to low technical know-how
and highly scattered market. The organized segment constitutes around 54% of the

total volume and 65% of value of paints industry. Again the whole paints industry can
be classified into decorative (75% of total industry size) and industrial paints (25% of
total industry size). Further, in organized segment, the top 6 players account for
around 84% by volume and 63% by value. The remaining players in organized
business are largely present in non-auto industrial segment, and the unorganized
players are mainly operational in decorative paints segment as industrial paints
requires high technological know how and client tie-ups.

Demand Supply Dynamics

The Indian Paint Industry grew by 18% from Rs. 95 bn. in FY06 to Rs. 112 bn in
FY07. The industry has a positive correlation with GDP as both have same drivers for
growth. Demand for paints is both, derived as well as direct. The demand for
decorative paints is a direct demand whereas the demand for industrial paints is a
derived demand.

Demand drivers for Paints Industries

Increase in Per capita consumption of paints:

The per capita consumption of paints in developed countries is around 15-25 kgs and
world average is around 15 kgs. Comparing this with domestic consumption, India’s
contribution to world paint markets is 0.6% with per capita consumption of around
800-900 gms. Based on the expenditure in the construction activity and increase in
the repaint activity coupled with industrial growth, the industry is expected to
increase at an 11.85% CAGR over next three years

Increase in Real Estate Investments:

The demand for decorative paints is directly related to the increase in the investment
in the real estate thus increasing the cement area. Out of the total demand for
decorative paints, around 30-40% of the demand comes from the fresh construction.
The size of real estate industry is estimated to grow to Rs. 18,517 Bn, over next five

years period. Investment in real estate will be primarily led by housing, which is
expected to account for nearly 90% of total investment in the sector. India’s robust
economic growth and resultant increase in income are speeding up the pace of

In India, about three fourth (3/4) of real estate development is for residential use and
balance one fourth (1/4) is predominantly for commercial use. Housing investments
(permanent, non-slum houses) are expected to grow at a TAGR of 12% over the next 5
years period.

On other hand, repainting activity which accounts for 70% of the decorative paint
demand is also increasing, mainly due to increase in per capita income. The demand
from the repainting activity has increased by 6-7 percent in last two year.

Based on the expected investment in the housing, demand for paint is expected to
increase at a CAGR of 12 percent over the next 5 years (source: CRISINFAC).

Increase in Industrial Paints:

The industrial paint segment is divided into automotive industrial paints and non-
automotive industrial paints. Increase in income levels of the consumers contributes
towards the growth in the auto-segment and growth in the industrial segments like
power, road and infrastructure leads to growth in the non-automotive segment. Along
with these, growing needs for consumer durables and export opportunity for auto
ancillaries will also contribute towards the growth of industrial paints.

Increase in Per Capita Income:

The above mentioned increase in demand for paints is backed well by increase in per
capita income. Due to increase in disposable income, Indian consumer is expected to
shift from lime wash to paints and those already consuming paints would move up the
value chain. On other hand, the increasing capacity would also drive automotive and
consumer durable, thereby increasing the consumption of industrial paints.

Prices in line with substitute product:

Large scale of operations and technical know-how has helped prices of paints to come
down. They are now in line with those of substitute products like lime wash, distemper
etc., manufactured by local players. This gives consumers the incentive to shift from
lime to paints.

The major players that control the organized sector are shown in the above diagram.
The dynamics that control the supply side scenario are:


In case of industrial paints, distribution network doesn’t play an important role,
whereas the situation is totally different in case of the decorative paints. India being a
wide and scattered market having a large distribution network becomes prime
requirement for any company in decorative paints business.


The organized players in the decorative paint segment have to compete directly with
those in the unorganized sector manufacturing low cost paints like distemper and
enamels. In-order to face this competition organize players outsource small part of
their production (25-30%).

Import Scenario:

Indian climatic conditions are not conducive for foreign formulations and modification
cost in product formulation is quite high. As a result, imports are no threat to the
Indian players. In case of industrial paints, most of the major players in the industry
already have a tie-up with global players, for latest technology and markets accessible

to them. It negates the further supply from the international markets even after
reduction of import duty from 40% to 15.3% in last 8 years.

Cost Structure

The paint industry is raw material intensive industry. It takes around 300 different
raw materials to make paint, most of which are petroleum based. These raw materials
can be divided into three broad categories.

Titanium Dioxide (TiO2) is the largest consumed raw material for manufacture of
paints. It constitutes around 30% of the total manufacturing cost. TiO2 is available in
two grade i.e. retile (imported and mainly used by the Indian paint industry) and
anatine (manufactured domestically).

Besides TiO2, there are other petroleum based raw materials which constitute around
40-50% of total raw material consumed. Hence any movement in crude oil prices will
impact the profitability of the company.

_______________                   ____            _________________________
This document prepared by our research analysts does not constitute an offer or solicitation
for the purchase or sale of any financial instrument or as an official confirmation of any
transaction. The information contained herein is from publicly available data or other
sources believed to be reliable but do not represent that it is accurate or complete and it
should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s
affiliates shall not be in any way responsible for any loss or damage that may arise to any
person from any inadvertent error in the information contained in this report. This document
is provide for assistance only and is not intended to be and must not alone be taken as the
basis for an investment decision.

Firstcall India Equity Research: Email –
B. Harikrishna                                     Banking
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