Hold Berger Paints Ltd For Target Rs. 320 – Emkay international monetary Services
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Margin recovery priced in
- Berger Paints rumored twenty first revenue growth in Q3FY19, previous our expectations by five-hitter, supported by another quarter of robust volume growth in domestic ornamental paints. Management indicated a continuation in demand momentum in ornamental and Industrial segments.
- Margins were below expectations thanks to the consumption of high-cost inventory, adverse currency movements, and delayed value hikes in Industrial paints. These factors resulted in lower Earnings Before Interest Taxes Depreciation and Amortization and PAT growth of 3-6%, that came in 5-9% below our estimates.
- Management indicates that this quarter had peak input value inflation, however margins square measure expected to boost in Q4FY19 on a softening in crude costs and stable currency. However, additional value hikes square measure needed in industrial paints to totally mitigate input value inflation.
- Valuations, at 47x FY20E EPS, already consider robust growth momentum and margin recovery, and supply restricted upsides. we have a tendency to restate our Hold rating, with a revised target value of Rs320, currently valuing it at 42x Dec’20E EPS.
- Revenue previous our expectation on robust volume growth:
Berger Paints’ domestic revenue grew twenty first, driven by robust high adolescent volume growth in ornamental paints. Mass end-products (distemper and putty) recorded higher growth thanks to market share gains from unorganized players. Growth in Industrial, Automotive, and protecting segments was conjointly tight within the quarter. Management is optimistic on demand improvement once GST rate cuts and expects growth momentum to sustain in ornamental and Industrial segments.
- High-cost inventory impacts margin; expects successive improvement:
The consumption of high-cost inventory, adverse currency movements, and delayed value hikes within the industrial section diode to a 425bps contraction in ratio to thirty seven.8% – very cheap within the last twenty six quarters. However, lower overheads thanks to increase in operative leverage restricted Earnings Before Interest Taxes Depreciation and Amortization margin contraction to 200bps. Management indicated that additional value hikes square measure needed within the Industrial section to mitigate input value inflation. However, the softening in crude costs and therefore the appreciation of the authority together with the complete advantage of Q3 value hikes ought to improve margins consecutive.
- we have a tendency to expect a much better entry point; maintain Hold:
We expect Berger’s stronger volume growth momentum to continue in ornamental paints, profiting from GST rate cuts and market share gains from unorganized players. we have a tendency to expect 12-tone system volume CAGR and sales/earnings CAGR of 15%/22% over FY20-21E. At the present valuation of 47x FY20E EPS, the stock offers restricted near-term upper side, in our read. we have a tendency to maintain our Hold rating, with a revised target value of Rs320, valuing it at 42x Dec’20E EPS.