Berger Paints Initiating Coverage - Myiris.com

TiO2, 23% of raw material
costs, is on a structural
uptrend
Berger Paints Initiating Coverage
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
Emkay Research 27 June 2011 7
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
FY06 FY07 FY08 FY09 FY10 FY11
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
Source: Company, Emkay Research
%
20
15
10
5
0
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
FY06 FY07 FY08 FY09 FY10 FY11
GDP growth Berger Paints volume gowth
1QFY12