Berger Paints India Ltd.

BERGERPAINTSINDIALTD.

BUY

Retail Equity Research

02 April, 2012

nd

PriceTarget :Rs.123 PotentialUpside:14.4%

ABOUT BERGER PAINTS INDIA LTD. Berger Paints India Ltd. (Berger) is engaged in the business of manufacture of paints. By virtue of its consolidated turnover, Berger is the 2nd largest paint manufacturer in India. The Company manufactures and markets a wide range of decorative & industrial paint products under several brands. It has seven manufacturing facilities in India, four facilities overseas, more than 85 depots and a strong distribution network of 15000 plus dealers. It has several regional & area offices to support its operations spread across India. MAJOR BUSINESS AREAS OF BERGER A. Decorative Paints Decorative Paints segment contributes 80 % of Bergers total revenues. Under this segment, it sells interior wall coatings, exterior wall coatings, metal and wood paints, green paints. Recently the Company has forayed into Construction Chemicals space. B. Industrial Paints Industrial Paints segment accounts for the remaining 20% of the Companys total revenues. Berger sells paint products to General Industrial and Automotive segment. Berger offers consultancy services to various user industries and engineering consultants by providing them with painting specifications, helping them follow good painting practices and guiding them against protection from corrosion.

Berger Paints India Ltd.

Berger Paints India Ltd.

INDUSTRY ANALYSIS PAINTS Paint Industry can be divided into 2 segments - Decorative paints and Industrial paints. Decorative paints segment which includes Interior and Exterior Wall Finishes, Enamels, Wood Finishes and Ancillary products accounts for nearly 70% of the industry sales, while the Industrial paints segment, which comprises Automotive and Industrial, Protective, Powder, Coil and Marine Coatings accounts for the remaining 30% of the industry sales. Realty and Housing sector drive the demand for Decorative paints which constitute the majority demand in the paint industry. Hence they are the main drivers for the Paints industry. Industrial growth, especially in sectors like Infrastructure, Construction, Automobiles, Consumer durables and industries which require paint, etc. contribute to the demand for Industrial paints. The demand for Decorative paints in rural areas has grown remarkably over the years. Higher disposable incomes, desire for a better standard of living etc have changed their spending habits and contributed to this robust demand for Decorative paints. Many households are shifting from lime wash or unpainted walls to entry level paint products. Moreover, the time frame for repainting has gradually shrunk from 5 6 yrs to 3.5 4 yrs. Indias per capita consumption of paints per annum at 0.5 kg is among the lowest in the world as compared to the global average of 10-13 kgs. This gives plenty of room for the Paints industry to expand in future. Over the years, the Indian Paints industry has witnessed a gradual shift towards the organized players who command nearly 65 % of the market share. Berger Paints, Asian Paints, Kansai Nerolac, Akzo Nobel and Shalimar Paints are the major players in the organized segment. The remaining share is held by the unorganized sector which comprises of around 2000 small scale paint units. Customers are now moving towards the organized players as they have become more conscious towards brands and quality of products. The size of the Indian Paints industry is estimated at roughly Rs. 24,000 crores. Over the last few years Paint manufacturers have introduced various paint products with value-added features like weather protection, various types of textures, eco-friendly production, low Volatile Organic Content (VOC) etc. These products often fetch a better premium over regular paints and provide the manufacturers with higher margins. The number of eco-friendly paint products available in the market has risen steadily. Consumers are attracted towards eco-friendly paint products as they are not harmful to both human beings as well as the environment.

Berger Paints India Ltd.

PAINT INDUSTRY - FUTURE OUTLOOK, OPPORTUNITIES & GROWTH DRIVERS Higher disposable incomes to drive demand for Decorative Paints The average Indian consumer, backed by higher incomes & purchasing power has become more conscious about aesthetics and quality of living. This is also helped by the spread of audio-visual media, internet and communication facilities and will translate into a robust demand for decorative paints. Moreover, housing construction, urbanization and affordable housing have helped boost sales in the decorative segment. Faster growth in rural areas The demand for paints in rural towns has witnessed a faster growth as compared to urban areas. Rising disposables incomes and a preference for a higher standard of living have changed the spending habits in rural areas. Consumers have slowly shifted from lime wash or unpainted homes to entry level paint products. However rural towns still have a huge untapped potential. Robust growth in Real Estate Sector to drive demand for decorative paints The demand for real estate is expected to grow at a Compound Annual Growth Rate (CAGR) of 19% between 2010 and 2014. Out of this, Tier 1 metropolitan cities are projected to account for about 40%. Apart from housing, demand for space from sectors like education, healthcare etc is also slated to rise. This will translate into a robust demand for paints in future. Economic recovery in Industrial & Infrastructural sector Economic growth in sectors like construction, automobile, manufacturing which require industrial paints drive the demand for Industrial paints. These sectors are dependent on overall economic growth of the nation. Strong industrial activity backed by government spending can drive the demand for industrial paints. INVESTMENT RATIONALE Robust financial performance Bergers consolidated net sales have grown at a decent CAGR of 17.54 % in the last five years. Continuous focus on expanding geographical coverage through a large dealer network and on newer and more innovative products for its customers boosted its top line.

Source: Company/TSL Research

Berger Paints India Ltd.

Stable operating margins Operating profit margins maintained by occasional price hike in its paint products, has offset the rise in price of its key raw materials. Over the last five years, operating profit margins have ranged between 10 12 %. Going forward we expect continuous improvement in its product mix which will help them to maintain its growth momentum. 2nd largest player with a strong distribution network Berger is an established player in the Indian Paints industry. It owns strong and established paint brands. By virtue of its revenue, it is the 2nd largest player, after Asian Paints. This gives Berger a significant advantage in the Paints market.

Continuous focus on expanding its domestic geographic reach Berger is continuously focusing on roping in new dealers, innovating new products and improving the products bouquet for each dealer to enhance its geographical reach in India. The Company has expanded its total dealer network to more than 15000 (FY 2012), with approximately 700 dealer addition every year. Foray into Construction Chemicals segment Berger recently forayed into the Construction Chemicals space after launching a new range of construction chemicals and new roof paint under its banner - Home Shield. It plans to develop this new segment significantly and targets sales to the tune of Rs 25 crore during FY 2012-13 and Rs 100 crore in next three years. Product innovation to match changing consumer needs and dynamic business environment - Berger innovates in terms of new products and offerings with varied uses through constant technological advancement & upgradation to be able to tap every consumer segment. Some of its recent additions are Emulsion and Enamel in Breathe Easy category, niche products in roofing and ceiling compounds or paints, wood coatings area. In the industrial and protective coatings segment, it has made technological advances to offer better products with varied uses.

Berger Paints India Ltd.

Growth in Premium products in Decorative Paints segment Berger is focusing on developing its premium emulsion category which has witnessed significant growth in the last few years. Moreover through product innovation, it is trying to capture opportunities for technically superior premium products in the Decorative Paints segment. This demand is fuelled by higher purchasing power, increased urbanization and rising construction activity in the housing segment.

Fig: Demand drivers for Decorative paints segment

Risks and Concerns Sharp increase in prices of key raw materials - Raw Materials and packaging costs form a major component of the manufacturing cost. Rise in price of key raw materials like Rutile due to inflation and shortage of its availability push up the manufacturing cost and exerts pressure on Bergers profit margins. Moreover prices of some raw materials are also linked to crude oil and witness price fluctuation similar to crude oil. Moreover depreciation of Indian Rupee against the US Dollar also aggravates the problems. Berger passes this rise to its customers through occasional price hikes of its products.

Slackening of demand due to pace of economic growth and seasonality Demand for Industrial Paint depends upon economic growth. A weaker growth in industries like automobile, manufacturing, infrastructure directly impacts demand for industrial paint. Demand for Decorative paints which accounts for nearly 80% of Bergers total sales depends upon Housing and Real Estate sector. However demand for Decorative paint rises during festive months and is seasonal in nature. Moreover a lower than normal monsoon also affects the demand for paints.

Berger Paints India Ltd.

FINANCIAL PERFORMANCE

Berger Paints India Ltd.

Bergers consolidated net sales have grown from Rs 1396.93 Cr in FY 2008 to Rs 2328.12 Cr in FY 2011. Good product mix and technologically upgraded varieties of paints and a continuous expansion of dealer network boosted its top line. Berger is generating healthy Operating Cash Flows from its business, which will help in future as it expands its operations. These were to the tune of Rs 127.39 Cr in the FY 2011.Bergers Profit after Tax has also risen from Rs 93.03 Cr in FY 2008 to Rs 150.09 Cr in FY 2011 due to rich product mix. Over the last 4 years, Berger has generated a consistent Return on Net Worth to the tune of 20 to 26 %. Bergers Quarterly EPS in the 3rd Quarter ended 31st December 2011 remained flat on a Quarter on Quarter basis at Rs 1.42. Rising price of raw materials due to factors like inflation, high crude oil prices, lack to availability etc. resulted in lowering Bergers margins, but Berger has managed to pass on some hikes to its consumers. As the Company shifts to water based paints from solvent based paints, margins are expected to remain stable and improve in future.

Source: Company/TSL Research

Valuation: At the current price levels, Berger is trading at a TTM PE of 22 times. Berger is continuously expanding operations and improving margins with a better product mix. Considering its market position, its strong distribution network, Berger is expected to perform well in future. Going forward in FY 2012-13 we have taken a conservative 14.5% growth in PAT. At a conservative estimate Bergers EPS is expected to touch Rs 5.59 in FY13. Valued at current TTM PE multiple of 22, the estimated future price will be Rs. 123, giving a potential upside of 14.4% over a period of one year.

Berger Paints India Ltd.

Tata Securities Limited

One Forbes, Dr V.B. Gandhi Marg, Fort, Mumbai 400 001 Tel: 91 22 6745 9000 Fax: 91 22 6610 6722 Web: www.tatasecurities.com
SEBI Registration Number BSE INB010664150 INF011207954 NSE INB/F/E231288730 Portfolio Manager INP000003872 Depository Participant of CDSL: IN-DP-CDSL-450-2008 Depository Participant of NSDL: IN-DP-NSDL-298-2008 Merchant Banker INM 000011302 Compliance Officer: Mr. Umesh Maskeri : 022 - 61827805 email:umesh.maskeri@tatacapital.com

Head- Retail Research: Sanjit Sen, B.Com (Hons), A.C.A Email id: Sanjit.Sen@tatacapital.com DISCLAIMER
Analyst Certification: I, Vasu Goyal, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Tata Securities Limited, hereinafter referred to as TSL) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclaimer This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. TSL is not soliciting any action based upon it. Nothing in this research report shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research report, I did not take into account the investment objectives, financial situation and particular needs of the reader. This research report has been prepared for the general use of the clients of the TSL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research report in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. TSL will not treat recipients as customers by virtue of their receiving this report. Neither this document nor any copy of it may be taken or transmitted into the United States (to US Persons), Canada or Japan or distributed, directly or indirectly, in the United States or Canada or distributed, or redistributed in Japan to any residents thereof. The distribution of this document in other jurisdictions may be restricted by the law applicable in the relevant jurisdictions and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. It is confirmed that, the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months. Our research professionals are paid in part based on the profitability of TSL, which include earnings from other business. Neither TSL nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information contained in this report. The report is based upon information obtained from sources believed to be reliable, but I do not make any representation or warranty that it is accurate, complete or up to date and it should not be relied upon as such. I accept no obligation to correct or update the information or opinions in it. TSL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. TSL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. TSL and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities related to the information contained in this report. To enhance transparency, TSL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement in the above report as on 2nd April 2012: 1. Name of the analyst 2. Qualifications of the analyst 3. Analysts ownership of any stock including the long & short position related to the information contained 4. Dependants holdings of any stock including the long & short positions related to information contained 5. TSL ownership of any stock including the long & short positions related to the information contained 6. Broking relationship with company covered 7. Investment banking relationship with the company covered : NIL : NO : NO : NIL : NIL : Vasu Goyal : B.Com (Hons), A.C.A, C.S

This information is subject to change without any prior notice. TSL reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, TSL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the Company nor the director or the employee of TSL accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research report and/or further communication in relation to this research report.

CopyrightinthisdocumentvestsexclusivelywithTataSecuritiesLimited. 9