Berger Paints Initiating Coverage - Myiris.com

Trading at 38% discount to
Asian Paints… expect the gap
to narrow
Comparative valuations
Berger Paints Initiating Coverage
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
Emkay Research 27 June 2011 10