Berger Paints Initiating Coverage - Myiris.com

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We expect revenue momentum to continue with 19% revenue CAGR over FY11-13E Berger Paints Initiating Coverage 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 Source: Company, Emkay Research 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 Source: Company, Emkay Research 60% growing at 20-25% 40% growing at 6-10% Emkay Research 27 June 2011 4
Setting up a 160,000 MT capacity plant in AP – scalable to 320,000 MT Berger Paints Initiating Coverage 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 Source: Company, Emkay Research Berger Paints Asian Paints 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 Source: Company, Emkay Research 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) Emkay Research 27 June 2011 5 Rs bn 11.0 10.0 9.0 8.0 7.0 6.0 5.0 FY09 FY10 FY11 FY12E FY13E
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