Berger Paints Initiating Coverage - Myiris.com

June 27, 2011 

Reco 

Accumulate 

CMP 

Rs 100 

Nifty 

Sensex 

Target Price 

Rs109 

5,470 

18,234 

Price Performance 

(%) 

1M 3M 6M 12M 

Absolute (3) 19 (5) 32 

Rel. to Nifty 1 21 8 34 

Source: Bloomberg 

Relative Price Chart 

125 

114 

103 

92 

81 

Rs 

70 

Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 

Source: Bloomberg 

Berger Paints (LHS) Rel to Nifty (RHS) 

Stock Details 

Sector Consumers 

Bloomberg BRGR@IN 

Equity Capital (Rs mn) 692 

Face Value(Rs) 2 

No of shares o/s (mn) 346 

52 Week H/L 123/73 

Market Cap (Rs bn/USD mn) 

% 

50 

38 

26 

14 

2 

-10 

34/756 

Daily Avg Volume (No of sh) 165353 

Daily Avg Turnover (US$mn) 0.4 

Share Holding Pattern (%) 

Mar -11 Dec-10 Sep-10 

Promoters 75.6 75.6 75.6 

FII/NRI 7.6 7.3 7.3 

Institutions 4.0 4.5 4.5 

Private Corp 2.0 2.0 1.9 

Public 10.8 10.7 10.8 

Source: Capitaline 

Pritesh Chheda, CFA 

pritesh.chheda@emkayglobal.com 

+91 22 6612 1273 

Sweta Jain 

sweta.jain@emkayglobal.com 

+91 22 6624 2479 

� Berger Paints, the second largest player in the decorative 

paints market with a 17% market share, is expected to 

benefit from the long-term steady demand in paints industry 

� Expect revenue and earnings CAGR of 19% and 20% over 

FY11-13E, leading to a comfortable cash flow position; Rule 

out additional fund raising despite planned capex of Rs140bn 

� Increasing shift towards water-based paints to augur well for 

operating margins, not factored in margin expansion due to 

higher raw material cost; Expect margins at 10.4% in FY13E 

� Initiate coverage with an ACCUMULATE rating and a target 

price of Rs 109/share, valuing it at 17.5x FY13E (30% 

discount to Asian Paints) EPS of Rs 6.2/share 

Second largest player with 17% market share… 

Berger Paints is the second largest player in the decorative paints market with a 17% 

market share. Decorative paints constitute 80% of its sales and enjoy strong brand 

equity in the eastern regions. It has a pan India distribution network of 14,000 dealers 

and 7,700 tinting machines. Further, the company also has a strong foothold in the 

protective coatings market, which contributes nearly 10% to its total sales. 

Decorative paints market to grow at a healthy rate in the future… 

Decorative paints constitute 70% of the Rs 170bn paints market. The per capita 

consumption of paints in India is very low at 1.5 kgs/year compared to 15-20 kgs in 

developed countries. While the short term macro environment could result in lower 

velocity of paint consumption growth to GDP growth, we believe, in the long term, with 

increasing per capita income and healthy economic growth, paints sector demand is 

poised for robust growth. 

Berger Paints to benefit from increasing size and scale… 

Berger is poised for a strong growth ahead, given the inherent growth in the decorative 

as well industrial paint segment and the company’s increasing aggression to enhance 

its capacity and distribution reach, especially in the southern region. We expect revenue 

and earnings to grow at 19% and 20% CAGR respectively, over FY11-13E, driven by a 

healthy 15% increase in volumes. Moreover, the cash flow position remains strong with 

a healthy growth of 26% in operating cash flows over the same period. 

Initiate coverage with an ACCUMULATE rating and a TP of Rs 109/share 

We expect the historical discount in valuations of Berger Paints to Asian Paints to 

narrow in the future due to 1) It gaining considerable size and scale with healthy 

revenue CAGR and 2) increasing shift towards premium products enhancing operating 

margins. We have valued the company at 17.5x FY13E EPS of Rs 6.2/share, a discount 

of 30% to Asian Paints target PER of 25x FY13E EPS. Our target price of Rs 109/share, 

provides 9.5% upside from current levels. Hence, we initiate coverage with an 

ACCUMULATE recommendation. 

Valuation Table (Consolidated) 

Berger Paints 

Gearing up for higher scale… 

YE- Net EBITDA EPS EPS RoE P/E EV/ P/BV 

Mar Sales (Core) (%) APAT (Rs) % chg (%) (x) EBITDA (x) (x) 

FY10 18,913 1,991 10.5 1,204 3.5 33.9 24.7 28.6 16.6 7.4 

FY11 23,281 2,373 10.2 1,501 4.3 24.7 23.3 22.9 13.4 5.6 

FY12E 28,967 2,802 9.7 1,733 5.0 15.5 23.1 19.9 11.6 4.7 

FY13E 33,174 3,456 10.4 2,153 6.2 24.3 24.3 16.0 9.6 3.9 

Emkay Global Financial Services Ltd 1 

Initiating Coverage

Second largest paints 

company in India 

Management profile 

Name Designation Remarks 

Berger Paints Initiating Coverage 

Company Background 

Berger Paints started operations in 1923 in a small unit in Kolkata as Hadfields India Ltd. 

The current promoters, the Dhingra’s , entered the company in 1991 after acquiring UB 

Group’s stake in the company. Berger Paints is the second largest decorative paints 

company in the country. It derives almost ~80% of revenue from decorative paints and the 

balance from industrial paints -largely automotive and protective coatings. It has a wide 

variety of product portfolio including interior and exterior wall coatings as well as metal and 

wood paints. It has strong and well established brands like Berger Silk, Berger Rangoli, 

Berger Illusions, Berger Weather Coat, Jadoo Enamel, etc that span across mass to 

premium category of the market. It has eight manufacturing facilities with a total capacity of 

306,000 MT across India and four facilities overseas. It has 82+ depots with a widespread 

distribution network of 14,000 dealers across the country. Berger Paints has six subsidiaries 

and two JVs located across geographies including Cyprus, Russia, Poland and Nepal. 

The company has undergone many change of hands - In 1947, it was acquired by British 

Paints (Holdings), UK, which renamed the company as British Paints (India). The UK 

company was then acquired by Celanese Corporation, which later sold the Indian company 

to Berger, Jenson Nicholson Ltd in 1969. In 1983, the company was rechristened as Berger 

Paints India and it started using the trade name of Berger. 

Kuldeep Singh Dhingra Chairman Mr. Dhingra, the Chairman, has been a director of the company since July, 1991. Mr. Dhingra is 

a graduate and promoter of the company and has a long standing experience in paints and 

related industries. 

Gurbachan Singh Dhingra Vice Chairman Mr. Dhingra has been the director of the company since 1993. He is a graduate and has 

considerable experience in the paint industry, especially in its technical aspects. 

Subir Bose Managing Director Mr. Bose is a B.Tech (Chemical) from IIT, Kanpur & PGDM from IIM, Ahmedabad having over 36 

years of work experience. He started his career with Asian Paints and prior to joining Berger in 

1984, he was associated with Abukon Nigeria Ltd. 

Abhijit Roy Director and Chief 

Operating Officer 

Srijit Dasgupta Director and Chief 

Financial Officer 

Source: Company, Emkay Research 

Snapshot on subsidiaries and joint ventures 

Name Holding Remarks 

Mr. Roy is a B.E (Mech) from Jadavpur University, Kolkata & PGDM from IIM, Bangalore having 

over 19 years of work experience. He started his career with Asian Paints Limited and prior to 

joining Berger, he was associated with ICI (India) Limited. 

Mr. Dasgupta is a B.Sc (Hons) from Calcutta University, AICWA & Company Secretary having 

over 27 years of work experience. 

Beepee Coatings Private Limited, India 100% Entire facility dedicated to processing of company unit's. Recorded sales of Rs 102 mn 

and PAT of Rs 6 mn in FY10. 

Berger Jenson & Nicholson, Nepal 100% Commenced its second decorative plant with a capacity of 18,000 MT in FY10. Recorded 

sales of Rs 305 mn with PAT of Rs 34 mn. 

Berger Paints (Cyprus) Limited, Cyprus 100% It is a SPV for overseas investments for Berger Paints 

Berger Paints Overseas Limited, Russia 100% It was affected by the global slowdown in FY10 and hence, recorded a net loss of Rs 15 

mn in FY10. 

Lusako Trading Limited, Cyprus 100% It is a SPV for overseas investments for Berger Paints 

Bolix S.A., Poland 100% Acquired in FY09 for USD 38 mn; Technology leaders in External Insulation Finishing 

Systems (EIFS) in the B2B segment in Poland and neighbouring countries such as 

Ukraine, Russia and the Baltic states. 

Berger Becker Coatings Private Limited, India 49% A joint venture with Becker Industrial Coatings, it offers a range of wood coating products 

BNB Coatings India Limited, India 49% The Company’s joint venture with Nippon Bee Chemicals Co. Ltd. of Japan (NBC) for 

manufacture of coatings for plastic substrates of automobiles. 


Emkay Research 27 June 2011 2

Holds 17% market share 

with 14,000 dealers and 

7,700 tinting machines 

Increasing its capacity by 

52% over the next two 

years 


Investment Rationale 

Second largest player in the decorative paints market… 

Berger Paints , with a 17% market share, is the second largest company in the Rs120bn 

worth decorative paints market. This market is characterized as an oligopoly with 4-5 

players constituting majority of the market. Berger Paints has a strong foothold in the 

eastern markets with strategically located plants there. Moreover, it has a strong distribution 

network including 80+ exclusive stock points and 14,000 dealers to service the decorative 

paint market across India. Rising consumerism in the country is expected to drive higher 

demand for decorative paints in future, and we believe Berger Paints is well placed to 

benefit from this. 

Competitive landscape 

Company 

Decorative 

market share 

Competitive position 

Berger Paints 17% Second largest player in the decorative market. In industrial 

coatings, it is the leader in the protective coatings market 

Asian Paints 53% It is the market leader in the decorative segment but lags 

second in the industrial segment 

Kansai Nerolac 10% Kansai is the largest player in the industrial segment and 

is the third largest player in the decorative segment 

Akzo Nobel 9% Strong player in the premium decorative paint segment 


Strong place in protective coatings; expect industrial paints growth at 14% 

Industrial paints constitute 20% of total sales for Berger Paints. Industrial paint market is 

worth Rs 50 bn and growing at 10-12% every year. The company has strong technical 

collaborations with DuPont Performance Coatings for automotive coatings. It also 

commands a strong leadership position in the protective coatings segment, which 

contributes 50% of its industrial sales . Taking cue from our capital goods and auto team 

estimates of 17% and 12% growth, we have modeled a 14% growth rate for industrial paints 

segment in our FY13E estimates. 

Industrial paints constitute 20% of FY11 sales 

Source: Company 

Emkay Research 27 June 2011 3 

20% 

Decorative paints Industrial paints 

Growing stronger…with considerable size and scale 

Berger Paints has developed a strong dealer network of 14,000 dealers with 7,700 tinting 

machines compared to 27,000 dealers and 17,000 tinting machines with Asian Paints. With 

a strong market foothold in the eastern and northern regions, Berger Paints is gaining 

momentum in the southern markets with its franchisee stores (40+ in nos.). It plans to scale 

these stores by 40-50 nos. in the coming years. Further, the company has embarked on an 

aggressive expansion plan to increase its production capacity by 52%, through the addition 

of 160,000 MT (Phase I and II at a cost of Rs 1.4 bn) capacity plant (scalable to 320,000 

MT) in Andhra Pradesh over the next 2 years. 

80%

We expect revenue momentum to 

continue with 19% revenue 

CAGR over FY11-13E 


Gaining strength… in comparison to Asian Paints 

Particulars Berger Paints Asian Paints 

Stronger regions East and North with 

increasing presence in South 

Dealer network 14,000 27,000 

Tinting machines 7,700 17,000 

South and West with 

a pan India presence 

Total current capacity 306,000 MT 595,000 MT 

Expansion plans 160,000 MT* 300,000 MT 

* Scalable to 320,000 MT 

Moreover, we believe Berger Paints, with a strong second position in the decorative paints 

market, is well placed to benefit from the rising paint consumption in the country. The paints 

market is poised for a robust growth momentum in the long term, driven by increasing per 

capita consumption- currently at 1.5 kg/year compared to 20 kg/year in developed 

countries . 

Berger Paints has recorded strong 18% revenue CAGR over FY06-11 and we expect it to 

sustain its growth momentum going ahead. We expect the company to post a 19% revenue 

CAGR over FY11-13E, gaining a considerable revenue base of Rs 33 bn. (When Asian 

Paints was at this run-rate in FY06/07, it had recorded a 21% CAGR over FY06-11, gaining 

a critical size of Rs 77 bn.) While we are not factoring market share gains for Berger Paints, 

we believe the inherent growth in paints industry and the company’s aggressive focus on 

increasing its distribution reach will aid Berger Paints in attaining considerable size and 

scale in the future. 

Gaining considerable revenue size… 

Rs bn 

120 

100 

- 

80 

60 

40 

20 

Berger Paints Asian Paints 

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 


Shift in product mix to augur well… 

Berger Paints is focus ing on raising the share of water-based paints in its total product 

portfolio and has also filled the product gap that existed with Asian Paints, through the 

introduction of premium products in the water-based paints. This shift of focus towards 

emulsions augurs well for the company as water-based paint is not only a high growth 

category, but also a higher margin product segment compared to solvent-based paints. 

Increasing contribution from this segment will drive higher revenue growth and also expand 

operating margins in the future. 

Water-based paints to record higher growth… 

Category Industry Mix Remarks 

Water-based paints 

- Emulsions, Distempers 

Solvent-based paints 

- Enamels, Primers, Thinners 


60% growing at 20-25% 

40% growing at 6-10% 


Setting up a 160,000 MT 

capacity plant in AP – scalable 

to 320,000 MT 


Scope for expansion in operating margins… 

Increasing focus on water-based emulsion paints , backward integration of its emulsion 

requirements and higher operating efficiencies as the company gains size and scale could 

possibly result in higher operating margins in the future. However, we have modeled in a 

flat operating margin scenario over FY11-13E, owing to higher raw material costs 

environment. Given its increasing focus on enhancing its margins, we do not rule out a 

possibility that Berger Paints could narrow the margin gap to Asian Paints in its growth 

phas e. (In FY04, Asian Paints with revenue of Rs 25 bn had EBITDA margin of 13.5%, 

whereas Berger Paints, in FY11, with revenue of Rs 23 bn has EBITDA margin of 10.2%). 

EBITDA margin gap with the leader…could narrow in future 

% 

25 

20 

15 

10 

5 



FY06 FY07 FY08 FY09 FY10 FY11 

Strong capex plans provide visibility to sustainable volume growth 

Healthy demand has led Berger Paints to embark on a strong expansion plan to enhance its 

manufacturing capacities. The company plans to increase its capacity from 306,129 MT by 

52% over a period of 2 years. While it has already expended Rs 1.3 bn towards expansion 

in its Rishra and Goa plants, it plans to spend an additional Rs 1.4 bn in a greenfield plant 

in Andhra Pradesh over the next 2 years. This plant, with an initial capacity of 160,000 MT 

and scalability to 320,000 MT, is expected to commercially start production (Phase I and II 

with a capacity of 160,000 MT) from FY14. We believe this will help Berger Paints, not only 

sustain volume growth but also give it a stronger presence in the southern markets and 

increase its capacity in water-based paints, which is a faster growing segment with a higher 

margin profile. 

Network of its production facilities Substantial increase in gross block 


Proposed unit in Hindupur (A.P.) 

(160,000 MT in Phase I & II) 

(Scalable to 320,000 MT) 

Howrah (28,560 MT) 

V V N (48,840 MT) 

Pondicherry (18,150 MT) 

Sikandrabad (21,639 MT) 

Goa (44,654 MT) 

Rishra (33,450 MT) 

Jammu (95,920 MT) 

Surajpur (14,916 MT) 


Rs bn 

11.0 

10.0 

9.0 

8.0 

7.0 

6.0 

5.0 

FY09 

FY10 

FY11 

FY12E 

FY13E

Strong cash flow position to 

fund the planned capex over 

the next two years 


Strong cash flow position… 

With healthy profit growth over FY11-13E, we expect operating cash flow to register strong 

CAGR of 26% over this period. We believe its cash position for the next two years is 

comfortably placed to meet its capex requirement for Phase I and II of Andhra Pradesh 

plant with an initial capacity of 160,000 MT. Hence, we do not expect the company to raise 

additional funds from outside over the next two years. In FY10, it had issued 20mn shares 

on warrant conversion to a promoter group company, Jenson and Nicholson and issued 

additional 7.2 mn shares to Nalanda Fund at Rs 50.5/share to fund its growth prospects, 

leading to a total dilution of 8% on the expanded equity capital. We do not expect Berger 

Paints to dilute further equity, as it has sufficient internal accruals to fund its growth plans 

over the next two years. 

Cash flow position to remain healthy… 

Rs mn 

2,100 

1,400 

700 

0 

-700 

-1,400 

-2,100 


FY08 FY09 FY10 FY11 FY12E FY13E 

Cashflow from operations Free cashflow 


TiO2, 23% of raw material 

costs, is on a structural 

uptrend 


Key Risks 

Raw material cost volatility 

Titanium dioxide (TiO2) is one of the main raw material inputs , constituting 23% of the total 

input cost and 10% of sales in FY10. The prices of titanium dioxide have been on an 

uptrend since FY10 and have increased by 32% YoY for 1QFY12. While continuing 

demand-supply mismatch is likely to keep the prices of titanium dioxide firm in the near 

future, prices of other raw materials like vegetable oils, crude oil, etc. continue to witness an 

inflationary scenario. Thus , firm prices will keep margins under pressure, owing to lag in 

product price increases . 

Trend in TiO2 price movement – Structural uptrend Uptrend in vegetable oil (index) price movement 

Rs/kg 

220 

200 

180 

160 

140 

120 

100 

1QFY09 

2QFY09 

3QFY09 

Source: Bloomberg, Capital line 

4QFY09 

1QFY10 

2QFY10 

3QFY10 

4QFY10 

1QFY11 

2QFY11 

3QFY11 

4QFY11 

1QFY12 


Indexed Rs/ 10kg 

700 

650 

600 

550 

500 

450 

400 

Berger Paints, being second, is the price-taker… 

1QFY09 

2QFY09 

3QFY09 

Berger Paints is the second largest player and hence, is subject to the perils of not being 

the leader with a pricing power in the market place. While in the past, there have not been 

any significant instances of the leader, Asian Paints, taking an unwarranted move to disrupt 

the market structure, Berger Paints, being a price-taker, will always stand a risk to the 

pricing decisions of Asian Paints. 

Change in velocity could influence earnings estimates 

While the Indian economy has registered a healthy growth over the last decade, current 

high inflationary environment could lead to interest rate hike, which can hamper the demand 

for housing and new infrastructural development, in turn, affecting the velocity for paints 

demand. This could result in lower volumes and consequently, profit growth for the paint 

companies. Nevertheless, the low per capita consumption of paints in India, at 1.5 kgs 

against 15-20 kgs in the developed countries, provides ample growth opportunities driven 

by increasing per capita income over a longer time period and rules out catastrophic impact 

in short-term. 

Trend in velocity of volumes: GDP growth Paint volumes highly correlated with GDP growth 


GDP growth (%) 9.5 9.6 9.3 6.8 8.0 8.6 

Volume growth (%)* 13.1 16.4 16.5 10.8 16.0 17.3 

Velocity (x) 1.4 1.7 1.8 1.6 2.0 2.0 

* Volume growth is a combination of Asian Paints and Berger Paints 


% 

20 

15 

10 

5 

0 

4QFY09 

1QFY10 

2QFY10 

3QFY10 

4QFY10 

1QFY11 

2QFY11 

3QFY11 

4QFY11 


GDP growth Berger Paints volume gowth 

1QFY12

We expect volume growth 

of 15% over FY11-13E 


Financials 

Revenues to register 19% CAGR over FY11-13E 

Berger Paints witnessed 18% CAGR over FY06-11, driven by a strong up-tick in the paints 

demand leading to a healthy volume CAGR of 13%. While concerns on the short-term 

demand scenario persist, we believe over a longer term, the company is poised for a 

healthy growth. We have estimated 19% revenue CAGR over FY11-13E aided by healthy 

volume growth of 15% (at 1.9x GDP growth assumption of 8%). The company has already 

undertaken a 7% price hike in 1QFY12, which will further aid overall sales growth in coming 

quarters. We expect the subsidiaries to contribute 7% to the consolidated sales by FY13E. 

Consolidated revenue growth trajectory Our assumptions for paints growth… 

Rs bn 

35 

30 

25 

20 

15 

10 

5 

0 



Sales (LHS) Growth (RHS) 

30 

25 

20 

15 

10 

5 

0 

% 

Operating margins to remain stable… 

(%) FY08 FY09 FY10 FY11 FY12E FY13E 

Volume growth 14.0 3.2 14.7 19.0 14.6 15.0 

Price growth 0.9 7.4 -5.9 4.8 10.0 0.0 

Value growth 15.0 10.9 7.9 24.7 26.0 15.0 

We expect Berger Paints’ consolidated operating margin to remain stable at 10.4% for 

FY13. While the company has undertaken 7% price hike in 1QFY12 and is adequately 

covered for its raw material requirement for this season, continuing high prices , especially 

of titanium dioxide, could keep margins under pressure. Nevertheless, as the product mix 

shifts towards water-based emulsion paints, there is scope for margin expansion in the 

future. With no incremental debt, we expect interest costs to remain at similar levels and 

hence, PAT to grow at 20% CAGR over FY11-13E. 

EBITDA margins to remain stable… PAT to grow at 20% CAGR over FY11-13E 

Rs bn 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 



EBITDA EBITDA margin 

11.0 

10.5 

10.0 

9.5 

9.0 

8.5 

8.0 

7.5 

7.0 

% 


Rs bn 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 


PAT PAT margin 

8.0 

7.5 

7.0 

6.5 

6.0 

5.5 

5.0 

4.5 

4.0 

%


Return ratios to remain at healthy levels… 

Berger Paints has lower RoE at 23% compared to Asian Paints’ RoE of 45% for FY11 due 

to the lower profitability that Berger Paints operates at, as against Asian Paints. Given our 

expectations of stable operating margins over the coming quarters, RoE and RoCE of the 

company is also likely to remain more or less flat at 24% and 28% respectively, for FY13E. 

Return ratios to remain healthy… RoE compared to peers 

% 

31 

29 

27 

25 

23 

21 

19 

17 

15 


RoE RoCE 

Source: Company, Emkay Research. * Bloomberg data 


Berger Paints 28.6 22.3 24.7 23.3 23.1 24.3 

Asian Paints 49.2 38.1 55.8 44.6 38.2 35.0 

Kansai Nerolac* 20.2 15.1 21.4 22.5 21.9 22.4 

Akzo Noble* 7.3 11.0 16.2 16.9 14.4 12.7 


Trading at 38% discount to 

Asian Paints… expect the gap 

to narrow 

Comparative valuations 


Valuation and Recommendation 

Second obvious option… cannot be ignored 

Berger Paints is the second largest player (17% market share) in the decorative paints 

market and has recorded healthy revenue run-rate of 18% CAGR over FY05-11. Berger 

Paints, with a strong presence in the eastern markets with strategically located plants there, 

is increasing its reach in the southern markets through the franchisee stores. Moreover, it 

has a strong distribution network of 14,000 dealers with 7,700 tinting machines across 

India. With a strong second position in the decorative paints market, we believe Berger 

Paints cannot be ignored. 

Gaining scale and size… 

Berger Paints is increasing its capacity by 52% over the next two years, which provides 

healthy volume growth visibility in the future. Moreover, the inherent growth in the paints 

industry coupled with the company’s aggression to expand its geographical reach will help 

Berger Paints attain reasonable revenue size of Rs 33 bn by FY13E. 

…with healthy growth momentum 

We forecast 19% revenue CAGR over FY11-13E driven by 15% volume growth and 5% 

price-led growth. While high raw material costs continue to keep pressure on profitability 

and will lead to a flat operating margin over this period, we expect the company to post 

earnings CAGR of 20% over FY11-13E. 

Valuation gap to Asian Paints to narrow… 

At the current market price, the stock is trading at 19.9x FY12E EPS of Rs 5.0/share and 

16.0x FY13E EPS of Rs 6.2/share. At 16.0 x FY13E EPS, it is trading at 38% discount to the 

market leader, Asian Paints. Historically, the company has traded at an average discount of 

40% to Asian Paints’ one-year forward mean PER. We believe that going forward; this 

discount should narrow due to the following reasons: 

� Gaining considerable size with a revenue CAGR of 19% over FY11-13E 

� Product mix shifting towards higher growth and better margin business of water-based 

emulsion paints 

� Increasing presence across India with rising penetration in the south 

…Initiate with ACCUMULATE and target price of Rs 109/share 

We have valued Berger Paints at 17.5x FY13E earnings, a 30% discount to Asian Paints 

target PER multiple of 25x. This gives us a fair price of Rs 109/share, which provides 9.5% 

upside from the current levels . Hence, we initiate coverage on the stock with an 

ACCUMULATE rating and a target price of Rs 109/share. 

CMP Mcap Sales (Rs bn) PAT (Rs bn) EPS CAGR (%) PER (x) EV/EBITDA (x) RoE (%) 

Rs Rs bn FY13E FY13E FY11-13E FY12E FY13E FY12E FY13E FY12E FY13E 

Berger Paints 100 34.4 33.2 2.2 19.8 19.9 16.0 11.6 9.6 23.1 24.3 

Asian Paints 2976 285.3 108.2 11.5 14.5 30.1 25.8 18.1 15.6 38.2 35.0 

Kansai Nerolac* 858 46.2 29.3 2.5 8.3 21.2 18.5 12.9 11.1 21.9 22.4 

Akzo Nobel* 902 33.2 15.2 1.8 11.5 18.9 17.9 16.1 17.3 14.4 12.7 

* Source: Bloomberg 



PER band 1 Year forward PER band 

150 

120 

90 

60 

30 

0 

Apr-03 

Apr-04 

Apr-05 

Apr-06 

Apr-07 

Apr-08 

Apr-09 

Apr-10 

1 year forward PER band Discount to Asian Paints 

35 

30 

25 

20 

15 

10 

5 

0 

Jun-02 

Jun-03 

Jun-04 

Jun-05 

Jun-06 

Jun-07 

Jun-08 


Jun-09 

Apr-11 

Jun-10 

20x 

15x 

10x 

5x 


25 

20 

15 

10 

5 

0 

Apr-03 

100% 

80% 

60% 

40% 

20% 

0% 

-20% 

Jun-02 

Apr-04 

Jun-03 

Apr-05 

Jun-04 

Apr-06 

Jun-05 

Apr-07 

Jun-06 

Apr-08 

Jun-07 

PER discount 

Apr-09 

Jun-08 

Apr-10 

Jun-09 

Apr-11 

Jun-10

Per capita consumption of 

paints is low at 1.5 kgs/year 


Annexure - I 

Industry overview 

The Indian Paints Industry, estimated at USD 3.8 bn, is growing at 1.8-2x GDP growth since 

the last few years. This industry is characterized with many players in the unorganized 

sector. However, the organized segment that cons titutes 80% of total paint industry is 

concentrated with top 4 players commanding more than 90% share of the organized 

market. The per capita consumption of paints in India remains very low at 1.5 kgs, against 

15-20 kgs in developed countries. This industry is categorized in two segments – 

decorative, which contributes 70% and industrial that contributes 30% to the total industry 

size. 

Decorative paints (70% of total paint industry) 

Decorative paints constitute 70% of total paints market of Rs 170 bn and has witnessed a 

17% CAGR over FY06-11. The demand for decorative paints is highly co-related to the 

GDP growth of the country. While 70% of the decorative demand is from re-painting needs 

and is driven by rising purchasing power of the consumer and the economic growth in the 

country; emergence of a sizeable middle class and growing urbanization drives the demand 

for new painting requirements , which forms 30% of the decorative segment. 

Decorative paint demand led by re-painting requirements… 

Driven by increasing 

middle class, growing 

urbanisation and 

higher availability of 

affordable housing 

Source: Industry, Emkay Research 


30% 

Industrial paints (30% of total paint industry) 

70% 

Re-painting Fresh painting 

Driven by rising 

purchasing power, 

increasing re-painting 

cycle and higher 

economic growth 

The industrial paints category, estimated at Rs 50 bn constitutes 30% of the overall paints 

industry. This category is further sub-divided into different segments based on the user 

industry and constitutes automotive paints, protective paints, powder coatings and coil 

paints. Hence, the key demand driver for this category of paints depends on the industrial 

activity in its user-industries like automobiles, power, marine, consumer durables, etc. 

Demand drivers – Short term pain…. Long term remains strong… 

For decorative paints 

Demand for decorative paints emanates from new house construction (30%) and repainting 

needs (70%). While the demand for re-painting could be linked to the economic 

activity, demand for new house construction would depend on the construction activity in 

the commercial and residential space. Encouraging economic growth and an improvement 

in business environment are likely to drive the demand for commercial space over a long 

run. According to a report by Cushman & Wakefield in October 2010, 240mn sq ft of 

commercial property and 4.25mn units of residential property will be required to meet 

demand over 2010-2014. Similarly, demand for office space will be 55mn sq ft and hotels 

will witness a demand for 78mn room nights over the same period. This signifies the robust 

growth potential that the paints industry is poised for, over the ensuing years.


Distribution of demand Estimated demand for 2010-14 

Residential property 4.25 mn units 

Commercial property 240 mn sq ft 

Office space 55 mn sq ft 

Hotels 78mn room nights 

Source: Cushman & Wakefield 

For Industrial paints 

Demand for industrial paints is derived from its application in the user-industries like 

automotive, consumer durables and the capital goods industries. As automotive segment 

constitutes 40% of total industrial paints, operating environment in this segment is a major 

demand driver for the industrial paints category. Further, infrastructural development in 

sectors like power, ports, roads, oil and gas etc, will be another key driver of volume growth 

in industrial paints. 

Automotive segment 

While rising macro headwinds like increase in interest rates, fuel prices and inflation will 

lead to subdued demand in 1HFY11, it is likely to recover from 2HFY11 once the consumer 

makes the psychological adjustment for higher fuel prices and interest rates. We expect 

growth rates to revert to healthy levels from FY13E. Our auto team estimates a 10% YoY 

growth agains t ~30% growth in passenger cars and 9% YoY growth against 36% growth In 

M&HCV segment for FY12. In FY13E, the growth rates are expected to recover to 17% and 

12% for passenger cars and M&HCV segment, respectively. 

Trend in passenger car segment Trend in commercial vehicles segment 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

FY07 FY08 FY09 FY10 FY11 FY12e FY13e 


Cars (mn units) % YoY 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 


0.4 

0.4 

0.3 

0.3 

0.2 

0.2 

0.1 

0.1 

0.0 

Consumer durables segment 

FY07 FY08 FY09 FY10 FY11 FY12e FY13e 

M&HCV Trucks (mn units) % YoY 

60% 

40% 

20% 

0% 

-20% 

-40% 

-60% 

According to CEAMA, the consumer durable market is currently pegged at around Rs 350 

bn and has witnessed a growth of approximately 13% in the last few months. However, with 

tightening credit situation, it is likely to witness some short term pressure. Nevertheless, 

over a longer period, consumer durables market is poised to grow at healthy double-digit 

growth driven by increasing per capita income and higher discretionary spend in the 

country.

Annexure - II 

Growth comparison 



Growth (%) Volume Revenue EBITDA PAT Volume Revenue EBITDA PAT 

FY05 15.3 23.0 16.1 31.1 13.2 15.2 8.1 13.3 

FY06 11.4 18.8 27.9 22.1 13.8 18.7 20.3 26.4 

FY07 13.0 18.9 13.9 17.7 17.8 21.7 19.5 21.1 

FY08 14.0 15.0 16.6 11.1 17.5 21.2 31.7 40.4 

FY09 3.2 12.6 (5.4) (3.9) 13.4 24.9 3.4 (3.3) 

FY10 14.7 11.7 38.8 35.4 16.4 20.0 75.6 86.5 

FY11 19.0 24.5 19.6 23.4 16.8 23.4 13.0 14.1 

FY12E 14.6 26.0 20.4 15.6 15.1 25.9 16.7 13.7 

FY13E 15.0 15.0 24.0 23.7 15.1 14.8 17.3 17.0 

Margins and return ratio comparison 

Ratios (%) 

EBITDA 

margin 

PAT 

margin 


RoE RoCE 

EBITDA 

margin 

PAT 

margin 

RoE RoCE 

FY05 9.7 7.0 29.4 29.6 15.1 9.0 31.8 41.0 

FY06 10.4 7.2 32.5 35.0 15.3 9.6 37.1 47.8 

FY07 10.0 7.1 32.9 32.7 15.0 9.5 39.3 50.8 

FY08 10.1 6.9 29.6 29.8 16.3 11.0 45.0 58.9 

FY09 8.5 5.9 23.2 26.3 13.5 8.5 36.0 49.1 

FY10 10.6 7.1 23.1 29.5 19.8 13.3 51.2 70.8 

FY11 10.2 7.1 22.7 31.3 18.1 12.3 43.3 59.7 

FY12E 9.7 6.5 23.2 31.8 16.8 11.1 38.0 53.9 

FY13E 10.5 7.0 24.3 33.4 17.1 11.3 34.9 49.9 

Raw material mix comparison 

Raw material cost 

as a % to sales 

Pigments Solvents 


Resins and 

Oils 

Others Pigments Solvents 

Resins and 

Oils 

FY05 11.3 12.9 14.9 13.4 15.8 7.1 7.6 17.8 

FY06 10.5 13.6 12.8 13.6 14.7 7.4 7.3 16.6 

FY07 11.1 14.9 11.9 15.3 15.8 8.1 8.6 16.2 

FY08 9.5 13.4 12.2 16.3 14.7 7.1 8.4 16.5 

FY09 10.3 15.2 12.1 14.7 16.2 7.7 8.8 17.0 

FY10 11.2 12.1 12.1 13.9 17.0 5.8 7.2 16.1 

Note: Standalone financials 

Highlights 


Others 

� Volumes for Berger Paints and Asian Paints have grown at an average velocity of 1.6x 

and 1.9x to GDP, respectively. Only remarkable difference between the growth rates has 

been in FY09, when Berger Paints witnessed a weak volume growth of 3.2% against 

13.4% for Asian Paints. 

� Historically, Berger Paints has witnessed lower margins than Asian Paints. However, 

with increasing scale, higher backward integration and shifting product mix towards 

premium -end of water based paints; there is a possibility that the margin gap could 

narrow in future. 

� Similarly, due to Berger Paints’ lower margin profile, the company has relatively lower 

RoE compared to Asian Paints. Nevertheless, we expect it to remain at healthy levels of 

24%.

Consolidated Financials 

Income Statement Balance Sheet 


Y/E, Mar (Rs. m) FY10 FY11 FY12E FY13E Y/E, Mar (Rs. m) FY10 FY11 FY12E FY13E 

Net Sales 18,913 23,281 28,967 33,174 Equity Share Capital 692 692 692 692 

Growth (%) 16.5 23.1 24.4 14.5 Reserves 5,273 6,203 7,415 8,925 

Expenses 16,922 20,909 26,165 29,718 Networth 5,965 6,895 8,107 9,617 

Growth (%) 13.5 23.6 25.1 13.6 Secured Loans 2,673 3,022 3,022 3,022 

Raw Materials 11,931 14,686 18,936 21,531 Unsecured Loans 0 0 0 0 

% Of Sales 63.1 63.1 65.4 64.9 Loan Funds 2,674 3,022 3,022 3,022 

Employee Cost 1,246 1,448 1,641 1,867 Net Deferred Tax 264 263 263 263 

% Of Sales 6.6 6.2 5.7 5.6 Minority interest 0 0 0 0 

Other Expenditure 3,745 4,775 5,587 6,320 Capital Employed 8,903 10,180 11,393 12,902 

% Of Sales 19.8 20.5 19.3 19.1 Gross Block 6,757 7,196 8,046 8,446 

Ebidta 1,991 2,373 2,802 3,456 Less: Depreciation 2,462 2,863 3,314 3,812 

Growth (%) 49.8 19.1 18.1 23.3 Net Block 4,295 4,333 4,733 4,635 

Ebidta% 10.5 10.2 9.7 10.4 Capital Work In Progress 326 826 1,026 1,676 

Other Income 238 428 437 448 Goodwill 0 0 0 0 

Interest 152 238 297 297 Investments 1,282 526 526 526 

Depreciation 358 401 450 498 Current Assets 6,567 9,015 9,994 11,551 

PBT 1,720 2,161 2,491 3,109 Inventories 3,299 4,437 4,818 5,519 

Tax 516 660 759 956 Debtors 2,423 2,753 3,204 3,664 

PAT (Before EO Item) 1,204 1,501 1,733 2,153 Cash & Bank 413 1,265 1,305 1,605 

Growth (%) 45.3 24.7 15.5 24.3 Loans & Advances 432 560 668 764 

Net Margin% 6.4 6.4 6.0 6.5 Other Current Assets 0 0 0 0 

E/O Item 0 0 0 0 Current Liabilities & Prov 3,566 4,520 4,886 5,486 

Reported PAT 1,204 1,501 1,733 2,153 Net Current Assets 3,001 4,495 5,108 6,066 

Cash Flow Key Ratios 

Miscellaneous Expenditure - - - - 

Capital Deployed 8,903 10,180 11,393 12,902 

Y/E, Mar (Rs. m) FY10 FY11 FY12E FY13E Y/E, Mar FY10 FY11 FY12E FY13E 

Pre-Tax Profit 1,720 2,161 2,491 3,109 Profitability % 

Depreciation 358 401 450 498 Ebidta Mgn 10.5 10.2 9.7 10.4 

Non Cash 236 0 0 0 PAT Mgn 6.4 6.4 6.0 6.5 

Chg in Working Cap 35 -642 -573 -657 ROCE 22.6 25.1 25.9 28.0 

Tax Paid -502 -660 -759 -956 ROE 24.7 23.3 23.1 24.3 

Operating Cash Flow 1,846 1,260 1,610 1,994 Per Share Data 

Capex -622 -940 -1,050 -1,050 EPS 3.5 4.3 5.0 6.2 

Free Cash Flow 1,224 320 560 944 BVPS 13.4 17.8 21.3 25.6 

Investments -1,237 756 0 0 DPS 1.1 1.3 1.5 1.9 

Equity Capital 1,255 -579 0 0 Valuations (X) 

Loans -1,002 348 0 0 PER 28.6 22.9 19.9 16.0 

Dividend -191 -450 -520 -644 P/BV 7.4 5.6 4.7 3.9 

Others 0 458 0 0 Ev/Sales 2.0 1.6 1.3 1.1 

Net Change in Cash 49 852 40 300 Ev/Ebidta 16.6 13.4 11.6 9.6 

Opening Cash Position 364 413 1,265 1,305 Dividend Yield (%) 1.1 1.3 1.5 1.9 

Closing Cash Position 413 1,265 1,305 1,605 Turnover (X Days) 

Debtor TO Days 44.6 40.6 37.5 37.8 

Inventory TO Days 60.2 60.6 58.3 56.9 

Gearing Ratio 

Net Debt/Equity (X) 0.4 0.3 0.2 0.1 

Total Debt/Equity (X) 0.4 0.4 0.4 0.3 


Emkay Rating Distribution 


BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months. 

ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months. 

HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. 

REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months. 

SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months. 

Emkay Global Financial Services Ltd. 

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Emkay Research 27 June 2011 www.emkayglobal.com 16

Berger Paints Initiating Coverage - Myiris.com

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