Berger Paints' Q3FY19 results (Neutral) - Volume momentum strong, valuations remain prohibitive

Q3FY19 result highlights

• Consolidated net sales increased by 21% yoy to Rs16.2bn (est: Rs15.7bn), EBITDA increased by 6% yoy to Rs2.4bn (est: Rs2.5bn), Reported PAT increased by 2.7% yoy to Rs1.3bn (est: Rs1.4bn).
• Standalone net sales increased by 21% yoy to Rs14.6bn, EBITDA increased by 6% yoy to Rs2.1bn, Reported PAT increased by 7.5% yoy to Rs1.2bn.
• The standalone revenue growth is indicative of double digit volume growth in decorative segment.
• Consolidated gross margins decreased by 420bps yoy (standalone gross margins decreased by 450bps yoy) impacted by higher input costs. Staff cost increased by 15.5% yoy while other expenses grew by 8.4% yoy. Resultant EBITDA margins decreased by 200bps yoy (standalone margins declined by 200bps yoy) to 14.6%.
• Other income was up 50% yoy, depreciation & interest expenses increased by 14% and 41% yoy respectively.  JV business reported higher loss likely due to higher RM cost pressure.

Key positives: Healthy decorative volume growth.

Key negatives: Contraction in gross margins

Impact on financials: No material change in estimates

Valuations & view

Berger Paints 3QFY19 earnings print was largely inline with estimates with continued traction in decorative volume growth partially offset by contraction in gross margins. Management commentary on decorative volume growth remains positive and expects momentum to continue. With recent moderation in input costs, consumption of high cost inventory now behind and continued benefit of price hikes as well as likely hike in industrial segment, margin trajectory is likely to improve, thereby driving earnings growth in the following quarters.  We continue to like Berger’s execution capabilities, however, at 46x/38x FY20/21E, the stock trades at ~7-9% discount to the market leader, thereby, restricting upsides from current levels. We await a better entry point and maintain our Neutral rating on the stock.