Sell Berger Paints; target of Rs 393: Cholamandalam securities

Cholamandalam securities' research report on Berger Paints

Berger’s 4QFY20 consolidated sales, EBITDA and net profit declined by 8.0%, 1.6% and 7.7% to ₹13.5bn, ₹2.1bn and ₹1.0bn respectively. Revenue and profit performance both were below our estimates. We have further revised our estimates downwards considering the muted volume growth in the last 3 months and overall pressures on the topline due to macro-economic challenges. As per the management, protective paints, segment where berger is the market leader has taken a sizeable hit as government projects have come to a standstill. Although they had significant orders from public sector utilities, it remains to be seen when these orders will be finalized by the government, looking at the current situation with Covid-19 cases increasing day by day, and there is a large probability that most of these orders will be either modified and reduced or simply cancelled with budget constraints.

Outlook

Valuation premium that Berger Paints has been commanding over Asian Paints (29%) in recent times remain unjustified. Asian Paints is the market leader in the Indian decorative paints market with >50% share amongst organized players. Berger is one-third Asian Paints’ size. In our view this marginal out performance do not justify such high premium. At CMP of ₹587, the stock is trading at 70.7xFY21E and 61.4xFY22E earnings. We are valuing the company at 46xFY21E EPS to arrive at a target price of ₹393 and retain our SELL rating on the stock.

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