Berger Paints 3Q on expected lines; UPGRADE to ADD on improving outlook | Berger Paints Q3FY18 |

Berger Paints’ (BRGR) 3QFY18 consolidated revenues grew by 14% yoy/4% qoq to Rs 13.4bn led by decent volume growth in decorative paints. In the domestic business, volume growth was steady as the base quarter (3QFY17) was hit by demonetisation. Subsidiary operations saw a 17% yoy revenue increase. Consolidated EBIDTA stood at Rs 2.23bn, 5% above EE, while consolidated gross margins expanded 26bps yoy to 42.1%. We have factored in an additional ~3% price hike in FY19 into our estimates. With bottoming earnings growth and a stable demand outlook, we UPGRADE the stock to ADD (from REDUCE). At our Mar’19 TP of Rs 263 (Rs 242 earlier), the stock would trade at 43x its TTM EPS of Rs 6.11.

Decent offtake in domestic decorative paints, better product mix pushes up gross margins: BRGR reported a ~8-9% growth in domestic decorative paint volumes led by strong offtake in advertised products, resulting in an improved product mix. Management indicated that demand outlook is improving, and with a pick-up in rural demand, outlook on the decorative paint business remains robust for the company. Despite increasing RM prices, gross margins in the standalone business improved 61bps yoy to 41.3%. We have factored in an additional 3% price hike for FY19 considering higher RM prices.

Standalone operating performance marginally better than expectations: Standalone EBIDTA margins came in at 16.9%, 68bps higher than EE and up 131bps yoy/87bps qoq. Standalone EBIDTA stood at Rs 2.01bn, 23% higher yoy and 4% above EE. Net profit at Rs 1.16bn grew 20% yoy. We estimate FY18/FY19 standalone EBIDTA margins at 15.7%/16.4%, with gross margins improving in FY19.

Earnings growth likely to have bottomed out, demand outlook remains steady: Despite higher RM prices, we believe earnings growth for BRGR is likely to bottom out and the company would take price hikes during FY19. We expect FY19/FY20 volume growth for the company at 10%/11%, and EBIDTA margins for both years at around 16%. With steady demand outlook and bottoming out of earnings growth, we UPGRADE the stock to ADD (from REDUCE) with a Mar’19 TP of Rs 263.

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