Markets
Muted Q2 and increased competition take the gloss off Berger Paints
Summary
- Berger’s shares are down about 18% from their 52-week high of ₹629.50 on 17 September, but valuations remain pricey and are at a risk of further moderation.
Berger Paints India Ltd’s results for the September quarter (Q2FY25) lacked a spark. Volumes grew just 3.6% year-on-year due to heavy rains in the key markets of Andhra Pradesh, Kerala, West Bengal, Gujarat and Maharashtra. Premium and luxury products saw double-digit volume growth while mass products (putty, primers and enamels) remained flat, management said.
Gross margin was at a 10-quarter high at 41.7%, aided by better product mix. Nonetheless, higher staff costs led to a 147 basis points year-on-year drop in Ebitda margin to 15.6%, below Bloomberg consensus estimates of 16.5%.
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Berger anticipates 7%-10% volume growth in Q3FY25 and is confident of delivering double-digit volume growth in Q4FY25. Helped by pent-up demand and reducing channel inventory, H2FY25 volume growth may be better than H1FY25 growth of 7.8%. To bridge the volume-value gap, Berger raised prices by 2.3% in Q2FY25. Management expects this gap to narrow from around 5-6% to 2-3% in Q3FY25 and by Q4FY25, value growth should be 1% ahead of volume growth.
Importantly, the company believes the impact of new competition hasn’t been strong so far. Although it lost 1.5% growth to Birla Opus, the impact was lower than anticipated and the company should recover this loss. “Considering the industry slowdown and steep increase in competitive pressures, we believe Berger reported moderate (Q2FY25) results," said ICICI Securities Ltd in a report on 6 November. But it also cautioned that the increase in competitive pressures with Grasim’s entry is likely to affect the industry profit pool and thus valuation multiples.
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Berger’s shares are down about 17% from their 52-week high of ₹629.50 on 17 September, and trade at 46 times estimated FY26 earnings, showed Bloomberg data. Valuations are pricey and at a risk of further moderation.
Urban push
To boost its market share from 10% to 15% over the next three years, Berger is aggressively pursuing growth in urban markets (metros and other big cities). For that, it is looking at more investments in distribution and adding to its workforce in the urban areas. Overall, Berger aims to add 8,000 retail touchpoints to its distribution network in FY25. Still, it has maintained its operating margin guidance of 15-17% for FY25.
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All said, it is difficult to be upbeat, given the industry’s challenges. As a report by Nirmal Bang Institutional Equities pointed out, “While management commentary continues to remain positive, heightened competitive intensity from new and existing players and its possible impact on realisations and volume in FY25 and beyond remain key monitorables."
