Sell Berger Paints; target of Rs 460: HDFC Securities

HDFC Securities' research report on Berger Paints

Berger Paints (BRGR) has gone toe-to-toe with dominant leader APNT over FY10-20 despite the former's higher industrial salience, implying that its decorative biz has outpaced APNT’s. Growth has been smartly navigated alongside improving profitability via aggressive product innovation/ premiumisation, efficient marketing and distribution expansion (GM/EBITDAM differential has reduced from 856/924bp to 320/560bp over FY10-20). While this narrative will continue, outperformance is unlikely to be as steep over FY20-23, given that (1) BRGR will have to contend with APNT's stepped-up aggression at the bottom of the pyramid and (2) margin levers seem to be missing. We build in revenue/EBITDA/PAT CAGR of 8/9/10% over FY20-23E (closely tracking APNT) and initiate coverage on the stock with a Sell recommendation and a DCF-based target price of Rs. 460/sh (implying 55x Sep-22 P/E) as there is nothing on the investor table at 66x Sept-22 P/E. RoICs are likely to mean revert to 22% by FY22/23.

Outlook

While BRGR remains a credible No. 2 in paints; at 66x Sept-22 P/E (18% premium to APNT), risk-reward seems unfavorable. We assign a DCF-based TP of Rs. 460/sh (implying 55x Sep-21 P/E). Implied assumptions: (1) 10-year revenue CAGR: 12.6%, (2) FY20-30E/FY30-41E FCFF CAGR: 20/13.5% resp. (3) WACC: 10.5%, and (4) terminal growth: 6%, FCF/PAT conversion of ~70% over FY20-30E. Initiate with a Sell Reco.