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Berger Paints' Q3FY20 results (Downgrade to Neutral) - Volume growth sustained, expensive valuation caps upside

Q3FY20 result highlights

• Cons. revenue up 4.9% yoy to ~Rs16.9bn (est. Rs17bn), EBITDA grew 18.4% yoy to ~Rs2.96bn (est. Rs2.8bn), while PAT grew 36.5% yoy to ~Rs1.8bn (est. Rs1.77bn).
• Std. Revenue grew 2.9% yoy (APNT: +2.7% yoy/KNPL: -7.7% yoy) to ~Rs15bn, EBITDA grew 16.5% yoy to ~Rs2.6bn while PAT came in at ~Rs1.65bn, up 39% yoy.
• Decorative volume growth of ~10% and value growth of ~5% yoy.
• Cons. gross margins expanded 300 bps yoy (+80 bps qoq) to 40.8% (standalone gross margins increased 380 bps yoy/50 bps qoq to 40.6%). Margins were aided by benign input prices.
• Cons. staff cost increased 4% yoy while other expense were up 11.8% yoy. Cons. EBITDA margins increased by 200 bps yoy to 17.5% (standalone EBITDA margins were up ~210 bps yoy to 17.4%).
• Subsidiary revenues increased by 24% yoy (includes STP acquisition) while EBITDA increased by 34% yoy with margin expansion of 140bps yoy.

Key positives: Double-digit volume growth in decorative segment.

Key negative: Decline in automotive paint segment.

Impact on financials: Cut FY21/22E EPS by 3%.

Valuations & view

Berger paints 3QFY20 earnings print was largely in line with our estimates, with double digit volume growth & gross margin expansion continuing for the company, partially offset by higher promotional intensity & weakness in industrial segment. Management commentary remains positive with decorative volume growth likely to sustain going ahead. This coupled with recovery in Industrial segment and benign input cost environment will continue to drive earnings growth. We like Berger’s execution and remain positive on the story, however, post our upgrade in 1QFY20, the stock has seen sharp run up on account of strong volume performance, fall in crude prices as well as inclusion in MSCI index. We are factoring strong 15%/18% sales/PAT CAGR over FY19-22E, however, current valuations at 68x/58x FY21/22E are expensive (~17-18% premium to APNT), and adequately capture the positives with further upsides being capped. As a result, we downgrade the stock to Neutral. We remain believers in the story and would look at better entry point to enter the stock.