Berger Paints: Hold/Risky Buy

Recommendation: Hold/Risky Buy

Anup Menon

TRADING at around Rs 97, the stock of the paints major, Berger Paints, may be a good buy for investors with a medium-to-high risk profile.

The price discounts its latest annualised earnings per share around nine times. The company's earnings performance in the recent past was reasonably good. The focus on the industrial paint segments augurs well for the long-term prospects of the company. On a cautious note, the market for paints is sensitive to the prevailing economic conditions. Hence, shareholders can stay invested and use any sizeable uptrend to trim exposures. Fresh exposures can be considered at around the Rs 80 mark.

Earnings performance: The company's performance for the quarter-ended September 2000 was fairly impressive. Sales revenues rose 20 per cent to Rs 133.51 crore compared to the previous corresponding period. In the same time-frame, operating margins increased 9.4 per cent to 10.3 per cent and post-tax earnings by around Rs 1.65 crore to Rs 7.52 crore. The company's performance is likely to be moderate/marginally better in the near future.

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Berger Paints is one of the leading domestic paint manufacturers. It has a presence in the industrial and decorative paint segment. Paints, varnishes and enamels contributed to nearly the entire turnover of the company in fiscal 2000. In the same time-frame, the company managed a capacity utilisation rate of around 63 per cent. Since mid-1998, it has taken over the manufacturing facilities of Rajdoot Paints.

Valuation drivers: The critical valuation drivers in the paint industry are access to technology, geographical reach, ability offer a range of products, value-added services and the general economic conditions.

BGL is not likely to face problems in terms of access to technology. The company has tied up with some of the leading international companies to tide over this problem. Partner companies include Valspar, Teodur NV, Consolidated Paints and Herbert GmBh.

The paints industry, which is dominated by the decorative paints segment, depends to a great extent on the manufacturer's ability to get visibility for his product. Since the merger of Rajdoot Paints with the company, the company has a manufacturing presence in all the four zones _ North, South, East and West.

The company's ability to offer variety and move into segments which provide higher margins will also determine the future profitability. BGL has been increasing its presence in the industrial paints segment. This augurs well for the company on two counts.

First, the segment is expected to grow at a much faster rate compared to the decorative paints segment. Second, competition from unorganised sector is low as technology requirements are high. Since BGL has already tied-up with some of the major world players, technology is not a problem. However, growth in this segment depends on the performance of the automobile and white goods segment, which are the major consumers.

Apart from this, the company also offers value-added services such as colour tinting and colour bank, among others. Another important valuation driver is the general economic conditions in the country. From the macro perspective, the economy appears shaky. Given this, the performance of the automobile and white goods sector may not be very impressive. This may have a direct impact on the company's performance in the short-term.

Overall, the company's performance in the near future needs a close watch. The key factor could be topline growth and the ability to manage costs. Shareholders can stay invested.