Management Speak: Berger Paints (Outperformer) - Focus on core expertise to drive sustainable growth

We met Mr. Kuldip Singh Dhingra, the non-executive Chairman of Berger Paints India. Following are the key takeaways:

Decorative paints industry will continue to outperform – Volume growth for the decorative paint industry has strong correlation with GDP growth. Despite the near term challenges (moderation in GDP growth, impact of erratic monsoons on exterior paints), management expects paint industry will continue to outperform consumer/building material industry on account of a) entry in newer territories given the headroom to penetrate Tier2/3 as well as rural areas, b) increase in on ground sales force c) new dealer additions as well as established building material dealers now also selling paints and d) buoyant re-painting demand (upwards of 85% contribution).

New competition not a worry – Management indicated that paint industry has always been competitive but players with stable/consistent strategy only have survived & grown in the domestic market. MNC players haven’t been able to succeed due to lack of consistency in execution and decision making being governed by global parent entity. Further, the newer entrants (eg: JSW paints) are unlikely to disrupt the market given their limitations in terms of product portfolio, dealer network and manufacturing footprint.

Focus on sustainable growth - Berger will continue to focus on driving market share gains and achieve industry-leading growth. Chairman believes that Berger’s strength lies in its consistency in the strategy, strong R&D expertise, and robust product portfolio with strong equity. Further, the direction to management from the board is clear that sustainable consistent growth should be the priority and company will not adopt any over aggressive strategies to drive short term gains.

Valuation and View

We like management’s clear focus on creating a sustainable business model and focusing on core strength to drive growth. Further, we do not see entry of new players as a threat to Berger, given the moats that the company has developed over the years in terms of wide portfolio, brand equity, manufacturing & distribution strength. We also like company’s strategy to stick to paint business where it has core understanding and create future avenue’s for growth by entering in related business (construction chemicals, wood coatings, industrial coatings) where it can leverage its current infrastructure & expertise. Maintain outperformer rating on the stock.