NEW DELHI: January-March was a strong quarter for , with a 50 per cent surge in sales and more than doubling of profit. But analysts project a steep fall in the stock going ahead, as they felt earnings surprises were largely over for the paints maker and margin pressure is likely to emerge now.
Risk-reward has turned unfavourable, they said, and suggested up to 30 per cent downside over the next 12 months.
To be sure, Berger’s March quarter sales growth was higher than peers
and . But its two-year sales growth for the domestic business at 15 per cent could only match Asian Paint’s 16 per cent, despite being a smaller player.
The scrip today trades at 20 per cent premium valuations over Asian Paints, which analysts said is unjustified.
“We see no reason to up our target P/E to one that represents a premium to what we use to value Asian Paints,” said JM Financial, adding that Berger’s revenue growth trajectory remains slightly below Asian Paints despite the latter being more than 3 times in size.
This brokerage has a target of Rs 560 on Berger Paints.
At Friday’s intraday price of Rs 803 apiece, the target represents 30 per cent downside.
Emkay Global also has a sell rating on the stock with a target of Rs 585. “Berger has continued to grow strongly, largely in line with the leader, with the performance indicating market share gains. While growth and execution remain impressive, valuations at 68 times FY23 EPS (at 20 per cent premium to Asian Paints) are expensive and unjustified,” the brokerage said.
Similar concerns are echoed by Nomura India whose March 23 EPS estimates for the paints maker suggest 80 times PE multiple for the stock. Nomura said Berger’s valuations are quite higher than its three-year average of 63.5 times and is also above Asian Paint’s valuation of 66 times, despite the two having similar growth trajectories.
Nomura said it likes Berger’s ability to drive relatively strong sales and volume growth, but it is building in some impact on demand due to the second wave of Covid-19 on rural markets. This is because penetration in those markets had been a key growth driver for the company. Further, the brokerage said the price hikes by the paints maker will lag inflation and, therefore, some margin pressure is likely in FY22.
For the fourth quarter, Berger Paints reported more than doubling of consolidated net profit at Rs 208.60 crore compared with Rs 103.18 crore reported for the year-ago period. Consolidated sales rose 49.5 per cent to Rs 2,026.09 crore from Rs 1,354.84 crore.
Berger’s consolidated gross profit margin was flattish at 43.6 per cent over 43.7 per cent YoY but was down 55 basis points QoQ sequentially. This could be due to product mix as analysts believe paints raw material prices rose 11 per cent during the quarter on YoY basis.
JM Financial said volume growth has been strong across paint companies over the past two quarters, but such growth is not sustainable and moderation is likely in FY22.
ICICI Securities expects Berger to report revenue growth of 15.9 per cent and profit growth of 17.5 per cent compounded annually over FY21-23.
It sees a return on equity (RoE) to be stable at 24 per cent over this period, citing Berger’s strong positioning in value-for-money paints, distribution network, especially in East India, and aggressive growth strategy. It also sees a high probability of market share gains for Berger Paints in ancillary segments such as waterproofing and putty. Yet, this brokerage also sees the prevailing stock valuations as unjustified.