Berger Paints' Q2FY20 results (Outperformer) - Volume performance remains strong, outlook stable

Q2FY20 result highlights

• Cons. revenue up 7.3% yoy to ~Rs15.99bn (est. Rs16.55bn), EBITDA grew 14% yoy to ~Rs2.51bn (est. Rs2.81bn), while PAT grew 67.4% yoy to ~Rs1.95bn (est. Rs2.05bn).
• Std. Revenue grew 7.5% yoy to ~Rs14.29bn, EBITDA grew 13% yoy to ~Rs2.19bn while PAT came in at ~Rs1.74bn, up 51.1% yoy.
• Decorative volumes increased by ~13% yoy (2yr/3yr CAGR at 14%/12%) while Automotive sales declined by 30% yoy.
• Cons. gross margins expanded 230 bps yoy (+20 bps qoq) to 41.0% (standalone gross margins increased 240 bps yoy/-10 bps qoq to 40.1%). Margins were aided by benign input prices.
• Cons. staff cost increased 7% yoy while other expense were up 16% yoy. As a result, cons. EBITDA margins increased by just ~90 bps yoy to 15.7% despite healthy gross margin expansion (standalone EBITDA margins were up ~80 bps yoy to 15.4%).
• Subsidiary revenues increased by 5.7% yoy while EBITDA increased by 21.3% yoy with margin expansion 240bps yoy. Bolix, Nepal business and Saboo coatings saw healthy performance in the quarter.

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

Key negative: Decline in automotive paint segment.

Impact on financials: Cut sales/EBITDA by 4%/6% for FY20/21E, however, EPS increased by 5.5% due to lower tax rate.

Valuations & view

Berger paints reported yet another healthy performance especially with better than estimated volume growth, however, higher promotional intensity & weakness in industrial segment led to lower value growth & miss on EBITDA. Management commentary remains positive with decorative volume growth likely to sustain going ahead. Further, likely recovery in Industrial segment as automotive segment revives coupled with a benign input cost environment, the overall revenue & earnings trajectory is likely to remain healthy. Post our upgrade in 1QFY20, the stock has seen sharp run up on account of strong volume performance as well as expectation of inclusion in MSCI index. We expect premium valuations (49x FY22E) to sustain and are unlikely to materially contract given the favorable outlook and strong execution capabilities. Any correction in the stock should be taken as opportunity to add. We maintain Outperformer rating on the stock.