Berger Paints' Q2FY19 results (Neutral) - Input cost pressures dampen earnings growth

Q2FY19 result highlights

• Consolidated net sales increased by 16% yoy to Rs14.9bn (est: Rs14.7bn), EBITDA increased by 4% yoy to Rs2.1bn (est: Rs2.1bn), Reported PAT increased by 5.3% yoy to Rs1.17bn (est: Rs1.2bn).
• Standalone net sales increased by 15.6% yoy to Rs13.3bn, EBITDA increased by 0.8% yoy to Rs1.8bn, Reported PAT decreased by 3.3% yoy to Rs1bn. The standalone revenue growth was driven by ~15% volume growth.
• Consolidated gross margins decreased by 420bps yoy (standalone gross margins decreased by 460bps yoy) impacted by higher input costs and a weaker mix. Staff cost increased by 10.5% yoy while other expenses grew by 3.7% yoy. Resultant EBITDA margins decreased by 160bps yoy (standalone margins declined by 200bps yoy) to 13.9%.
• Other income was up 19% yoy, depreciation & interest expenses increased by 10% and 4% yoy respectively.  JV business reported a loss indicative likely due to upfront investments and higher RM cost pressure. Tax rate decreased by 280bps yoy, resulting in PAT growth of 5% yoy.

Key positives: Healthy decorative volume growth

Key negatives:  Sharp contraction in gross margins

Impact on financials: We reduce our FY19/20/21E earnings by 8%/9%/7% to factor the effect of higher cost pressures.

Valuations & view

In the wake of the current environment of heightened costs, Berger has reported the best operating performance among peers led by strong volume growth and improved subsidiary performance. As the pass through of costs takes place in the form of price increases in both the decorative and industrial business, we expect margins to recover gradually from current Q2 levels in the following quarters. Further, the improved performance from the subsidiaries which was a drag last year will aid earnings growth.  We believe that given Berger’s scale and execution capabilities, the company can outpace industry growth over the foreseeable future. However, at 45xFY20E earnings, valuations are head of the market leader Asian Paints. We await a better entry point and maintain our Neutral rating on the stock. ​