Berger Paints' Q4FY19 results (Neutral) - Earnings outlook strong, valuation caps upsides

Q4FY19 result highlights

• Consolidated net sales grew by 13.4% yoy to Rs14.7bn (est: Rs14.7bn), EBITDA grew by 6% yoy to Rs2.1bn (est: Rs2.2bn), Reported PAT grew by 5% yoy to Rs1.1bn (est: Rs1.2bn).
• Standalone net sales grew by 13% yoy to Rs13.5bn, EBITDA grew by 7.4% yoy to Rs2.03bn, Adj PAT grew by 5% yoy to Rs1.15bn.
• The standalone revenue growth is indicative of double digit volume growth in decorative segment. Despite price hikes of ~6-7%, revenue growth is lower likely due to adverse mix and higher promotions as well as weaker growth in industrial segment.
• Consolidated gross margins decreased by 130bps yoy (up 220bps qoq) to 40% (standalone gross margins decreased by 130bps yoy but were up 240bps qoq to 39.2%) impacted by higher input costs. Sequential improvement in margins is likely due to softening of input costs & price hikes.
• Staff cost increased by 16% yoy while other expenses were up by 10% yoy. Resultant EBITDA margins decreased by 100bps yoy (standalone margins declined by 80bps yoy to 15%) to 14.4%.
• Other income was up 35% yoy, depreciation & interest expenses increased by 8% and 52% yoy respectively.

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

Key negatives: Contraction in margins.

Impact on financials: Cut FY20/21E EPS by ~8%/6%.

Valuations & view

Berger ended FY19 on a healthy note with revenue growth higher than peers (Asian Paints – 12%, Kansai Nerolac – 4%) driven by double-digit volume growth in decorative segment. Management commentary on the near term demand environment was relatively better compared to peers which coupled with recent moderation in input costs, if sustained will aid overall earnings growth. We are factoring higher volume growth and 100bps EBITDA margin expansion, resulting in earnings CAGR of 22% over FY19-21E, higher compared to peers. We continue to like Berger’s execution capabilities and its earnings growth trajectory is also better compared to peers, however, at 52x/43x FY20/21E, the stock trades at just ~3%/6% discount to the market leader, thereby, restricting upsides from current levels, maintain Neutral. Any further downside on the stock should be used to build positions.