Berger Paints' Q1FY20 results (Upgrade to Outperformer) - Robust performance, healthy visibility warrants an upgrade

Q1FY20 result highlights

• Consolidated net sales grew by 15.7% yoy to Rs17.2bn (est: Rs16.5bn), EBITDA grew by 27.5% yoy to Rs3.05bn (est: Rs2.62bn), PAT grew by 31.9% yoy to Rs1.8bn (est: Rs1.5bn). Adj. for IndAS 116, cons. EBITDA would have been Rs2.91bn much higher than the est. of Rs2.62bn but yoy growth no stated above is comparable as IndAS 116 has been given affect in base qtr as well.
• Standalone net sales grew by 15.5% yoy to Rs15.9bn, EBITDA grew by 25.6% yoy to Rs2.9bn, Adj PAT grew by 27.4% yoy to Rs1.6bn. The standalone revenue growth is indicative of double-digit volume growth in decorative segment.
• Consolidated gross margins increased by 130 bps yoy (up 80 bps qoq) to 40.8% (standalone gross margins increased by 130 bps yoy but were up 100 bps qoq to 40.2%) aided by benign input costs.
• Cons. staff cost increased by 14.2% yoy while other expenses were up by 14.4% yoy. Resultant cons. EBITDA margins increased by 170 bps yoy to 17.8% (standalone margins increased by 150 bps yoy to 18.1%).

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

Impact on financials: Increase FY20/21E EPS by ~11%/9%.

Valuations & view

After relatively weaker earnings growth compared to APNT in FY19, Berger has started FY20 on a strong note with double-digit volume growth in decorative segment as well as improved operating performance benefiting from benign input cost & operating leverage. With input cost scenario remaining favourable and favourable base over the next few quarters, we expect earnings outperformance to continue for Berger in coming quarters too. International/subsidiary business profitability too has improved while Industrial business weakness is lower compared to Kansai Nerolac given the healthy growth in protective coatings & lower exposure to Automotive segment (~6-7% of sales). We are factoring 12% volume growth which coupled with favourable input cost scenario & leverage benefit should result in earnings CAGR of 27% over FY19-21E. While we have always liked the name, we were on the side-lines given full valuations; however, consistent execution, positive management commentary and better than peers earnings trajectory makes us upgrade the stock to Outperformer with target price of Rs385 (now value it at 5% discount to Asian Paints target multiple). Any correction in the stock should be used to add positions.