Berger Paints' Q2FY18 results (Outperformer) - Expect a strong recovery in H2FY18E…

Q2FY18 result highlights

• Consolidated net sales increased by 11.8% yoy to Rs12.8bn(est:13bn), EBITDA increased by 11.4% yoy to Rs2bn(est:Rs2bn), PBT(before exceptional item) was up by 4% yoy to Rs1.7bn(est: Rs1.8bn). Reported PAT declined by 19.8% yoy to Rs1.1bn as the base quarter included one-time exceptional gain of Rs442m.
• Standalone net sales increased by 11.3% yoy to Rs11.4bn, EBITDA increased by 16.8% yoy to Rs1.82bn. Domestic sales growth of 11% was led by 9% volume growth in the decorative segment.
• Consolidated gross margins declined by 100bps yoy. Staff cost increased by 25% yoy while other expenses grew by 3.1% yoy. Resultant EBITDA margins declined by 10bps yoy to 15.5%.
• Other income was up 45% yoy, depreciation & interest expenses increased by 12% and 50% yoy respectively. Share of profit from JV declined by 8% yoy, indicative of higher operating costs for new JVs.  Resultant consolidated PBT (before exceptional items) was up 4% yoy.

Key positives: Healthy volume growth in the decorative business

Key negatives: Higher staff cost. Weakness in industrial business

Impact on financials: We have reduced our FY18/19E estimates by 5%/4% respectively to factor the lower revenue growth in 1HFY18.

Valuations & view

While standalone performance continues to be strong, gestation costs of acquisitions, Joint Ventures and new ventures have impacted overall profitability. As growth in the decorative and industrial business improves, gross margin base gets favourable and the company’s new initiatives start to bear fruit, we expect Berger to return to the path of strong revenue and earnings growth from Q3FY18. We continue to maintain our positive outlook on the stock and maintain our Outperformer rating with a target price of Rs277.