Chola Wealth Bets On This Mid-Cap Stock For 30% Potential Upside, Topline Increased 8% YoY

Chola Wealth Direct, the brokerage firm, has published a report today on Berger Paints (India) Ltd, a mid-cap company, has suggested investors buy the stock for a target price of Rs 740/share.

Target price, CMP, 52 Week Low & High, Returns, Potential Gains

The shares of Berger Paints tanked 1.33% today and ended at the current market price (CMP) of Rs 572.10/share. The stock is trading nearly 5.24% above the 52-week low levels. It recorded Rs 543.60/share at the 52-week low and Rs 872.95/share at the 52-week high.

Looking at the returns, it has not given good positive returns in the last 1 year. In the last 1 year, the stock has given 29.03% negative returns. However, on long-term investment, the stock performed well and gave positive returns of 73.52% in 3 years and 129.57% in 5 years, respectively.

According to the brokerage's estimated target price of Rs 740/share and the CMP, the stock's CMP, the stock has the potential to gain close to 30% in 12 months period.

Benign quarter; cost inflation continues to ruin margins

Berger's topline increased 8% YoY to Rs 21.9bn in Q4FY22 even on a higher base of 50% growth in Q4FY21 largely driven by higher realizations (+14% YoY). The price hike undertaken to offset the input cost inflation aided the stopline. The volumes remained flat YoY due to higher inventories at dealers in previous quarter. The raw material cost dragged gross margin down 478 bps YoY. However, saving in other costs arrested EBITDA margin fall at 73 bps YoY to 15.8%. PAT increased ~6% YoY to Rs 2.2bn, tracking sales growth & higher other income during the quarter. Berger Paints' decorative segment volume has declined ~5% in Q4FY22 against 8% volume growth of Industry leader (both the players had higher base in Q4FY21). Similarly, Berger's volume growth of 20% lagged the market leader in FY22 by 16%. We believe Berger Paints had focused more on maintaining EBITDA margin over market share. The one-off project income effect which happened in 4QFY21 is also responsible for the margin pressures and decrease in volume. Excluding the high RMS costs & adjusting volume from the one-off deal the increase in volume would be little below 20%.

Concall highlights

1. The company has already taken price hike of ~2.2% in April, the impact of which will be felt partially at least in Q1FY23 because of the staggered timing of the price increases.
2. Berger sees strong demand traction despite aggressive price hike. The company plans further price hikes in the coming quarters if raw material prices remain at elevated levels.
3. The company is increasing rural penetration and launching new products as it is focused on maintaining its market share in the decorative paint segment.
4. Demand for industrial paints (15- 20% of revenues) was largely driven by protective and infrastructure businesses. The company has been witnessing a revival in the automotive business segment.
5. Increased focus on the 'water proofing & building chemical' category will continue drive revenue growth for Berger Paints. Water proofing & building chemical industry is pegged at Rs 60bn vs. Rs 1,500bn in China.

Investment Rationale

The two JVs have also shown improvement, these are the JVs with Nippon Paints i.e, Berger Nippon (BNPAC) paints automotive coating and Berger Becker in the field of coil coatings. Both had improved top-line growth for the quarter and consequently higher profitability numbers. Berger has continued initiatives on formulation developments and RM substitution in 4QFY22 which aided in mitigating inflation to some extent. Management expects probability of price war in commodity and mass-market products due to new entrants. Berger has to increase expenditure (in terms of discounts/marketing) in order to combat with intensifying new competition such Grasim, JK Cement, and Astral Ltd.

Buy for a target price of Rs 740/share

Berger has built a strong franchise for itself under the shadows of a strong market leader. Although it lags the market leader on volume as well as revenue CAGR for the past 3 years it continues to grow its market share. Following the covid disruptions, the company has managed to grab the additional market share from unorganised segments. The rising cost inflation remains a primary concern for margin profile though partially offset by price hikes. "We anticipate further price hikes in due course. At the Current Market Price of Rs 581, the stock is trading at 55.4xFY23E and 45.5xFY24E earnings. The sharp fall in stock price during the recent phase offers revision of rating to BUY from MARKET PERFORMER with a target price of Rs 740. Risks: Volatility in crude oil prices and adverse exchange rate movements," the brokerage has said.

About - Berger Paints (India) Ltd.

Berger Paints is a mid-cap company and the second-largest decorative paint company in India. The Company operates seven manufacturing facilities spread across India and four overseas manufacturing facilities. The company has the second-largest distribution network of ~11,500 active dealers and ~12,000 tinting machines. Berger has a strong presence in East and North India, which accounts for 60% of its distribution network while South & West India accounts for 40% of the distribution network. The company derives ~80% of revenue from decorative paints and the rest from industrial paints of which Automotives account for 8%, powder coating accounts for 2% and other industries accounts for 10%. It has strong brands like Berger Silk, Berger Rangoli, Berger Illusions, Berger Weather Coat and Jadoo Enamel.

Disclaimer

The stock has been picked from the brokerage report of Chola Wealth Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.