Berger Paints

07 September 2020 Initiating Coverage

Berger Paints

Catalysts missing for a performance encore SELL Berger Paints (BRGR) has gone toe-to-toe with dominant leader APNT over CMP (as on 04 Sep 2020) Rs 552 FY10-20 despite the former's higher industrial salience, implying that its Target Price Rs 460 decorative biz has outpaced APNT’s. Growth has been smartly navigated alongside improving profitability via aggressive product innovation/ NIFTY 11,334 premiumisation, efficient marketing and distribution expansion KEY (GM/EBITDAM differential has reduced from 856/924bp to 320/560bp over OLD NEW FY10-20). While this narrative will continue, outperformance is unlikely to be CHANGES as steep over FY20-23, given that (1) BRGR will have to contend with APNT's Rating - SELL stepped-up aggression at the bottom of the pyramid and (2) margin levers Price Target - Rs 460 seem to be missing. We build in revenue/EBITDA/PAT CAGR of 8/9/10% over FY21E FY22E FY20-23E (closely tracking APNT) and initiate coverage on the stock with a EPS % - - Sell recommendation and a DCF-based target price of Rs. 460/sh (implying 55x Sep-22 P/E) as there is nothing on the investor table at 66x Sept-22 P/E. RoICs are likely to mean revert to 22% by FY22/23. KEY STOCK DATA . Outperformed market leader: BRGR’s 5/10 year growth rates of 8/13% Bloomberg code BRGR IN mirrors that of APNT’s despite the former's higher industrial salience (20% No. of Shares (mn) 971 of domestic sales), implying that BRGR's decorative biz has outpaced that of MCap (Rs bn) / ($ mn) 534/7,329 APNT's. It has also narrowed its profitability gap vs APNT over FY10-20 (GM/EBITDAM differential has reduced from 856/924bp to 320/560bp over 6m avg traded value (Rs mn) 862 FY10-20). Key underpinnings for this outperformance are (1) improvement 52 Week high / low Rs 597/357 in product price ladder, (2) smart brand-building, (3) improving distribution quality, and (4) strategic tie-ups with strong category partners. STOCK PERFORMANCE (%) . Albeit, do not expect a performance encore: Growth narrative will 3M 6M 12M continue, albeit BRGR's decorative outperformance vs APNT is not likely to be material, given the latter's stepped-up aggression in driving sales from Absolute (%) 9.5 2.0 53.3 the bottom of the pyramid, thereby restricting BRGR's sales outperformance. Relative (%) (3.3) 2.2 48.9 We model 11/12% and 8/9% volume CAGR for APNT/BRGR over FY20-23. . Margin levers absent over FY21-23: Benign RM costs are likely to keep GMs SHAREHOLDING PATTERN (%) elevated in FY21 at ~43% (up 170bp YoY) but are likely to mean revert over Mar-20 June-20 FY21-23 as (1) RM costs firm up with demand recovery, (2) the momentum Promoters 74.99 74.99 in low-GM (lower-end) paints outweighs that of premiumisation, and (3) down-trading gains steam amidst pressure on incomes. Cost of operations is FIs & Local MFs 1.05 1.12 expected to remain elevated in FY21/22, due to (1) pandemic-led FPIs 11.8 4.02 unfavourable leverage and (2) unabsorbed costs hitting the P&L once the Public & Others 12.16 19.87 Sandila Plant is commissioned in FY22. Hence, we build in a modest 60bp EBITDAM expansion, mostly mimicking GM gains over FY21-23. Pledged Shares 0 0 . Valuation and outlook: While BRGR remains a credible No. 2 in paints; at Source : BSE 66x Sept-22 P/E (18% premium to APNT), risk-reward seems unfavorable. We assign a DCF-based TP of Rs. 460/sh (implying 55x Sep-21 P/E). Implied assumptions: (1) 10-year revenue CAGR: 12.6%, (2) FY20-30E/FY30-41E FCFF CAGR: 20/13.5% resp. (3) WACC: 10.5%, and (4) terminal growth: 6%, FCF/PAT conversion of ~70% over FY20-30E. Initiate with a Sell Reco. Jay Gandhi Financial Summary [email protected] (Rs mn) FY19 FY20 FY21E FY22E FY23E +91-22-6171-7320 Net Revenue 60,619 63,658 58,853 71,948 80,458 EBITDA 8,816 10,610 9,698 12,396 13,902 APAT 4,975 6,561 5,867 7,706 8,684 Varun Lohchab EPS (Rs) 5.1 6.8 6.0 7.9 8.9 [email protected] P/E (x) 109.7 83.2 93.0 70.8 62.9 +91-22-6171-7334 EV/EBITDA (x) 62.2 51.7 56.2 43.9 38.7 Core RoCE (%) 17.9 21.0 17.6 21.5 22.1 Source: Company, HSIE Research

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Berger Paints: Initiating Coverage

Focus Charts Industry/organised paints revenue forecasts BRGR has held its own in the oligopolistic paint industry (Top 4 relative market share, %)

Total paints revenue Asian Paints Berger Paints Rs bn Organized paints revenue Kansai Nerolac Azko Nobel Org. Paints revenue growth (%) - RHS 1,500 25 100%

20 20

80%

1,000

18.7

12 12 18.4

12 18.0

18.0

17.8

18.0

17.7

17.5

17.7

17.5

11 60%

9 10

5 40% 500 0 0 20% -5 -7

0 -10 0%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

FY19E FY21E FY22E FY23E FY24E FY25E FY30E FY20E

Source: HSIE Research Source: HSIE Research

...and gone toe-to-toe with dominant market leader …with improving share in the sector's profitability APNT… (Top 4 relative PAT share, %)

5-yr CAGR 10-yr CAGR Asian Paints Berger Paints Kansai Nerolac Azko Nobel 100%

14.0 12.9 12.9

11.2

10.9 80%

12.0

16.5

13.4

14.3

13.1

9.7

14.4

12.7

14.2

13.2

10.0

11.4 11.7

8.4

8.1 60% 8.0 6.9

6.0 40% 4.0 2.0 1.0 20% -

0 0 0 0

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 APNT (Std) BRGR (Std) KNPL (Std) Azko Nobel FY10

Source: Companies, HSIE Research Source: Companies, HSIE Research

…as product innovation/premiumisation helped BRGR reduce its profitability gap with the best in business (gross margin and EBITDAM differential (bp) vs APNT reduced from 856/924bp to 320/560bp over FY10-20

APNT (std) BRGR (std) APNT (std) BRGR (std) KNPL (std) Azko Nobel KNPL (std) Azko Nobel 25 50.0 560bp

924bp 45.0 20

320bp 15 40.0 856bp

35.0 10

30.0 5

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Has outpaced market leader…

. Toe-to-toe with the market leader over the past decade: BRGR has gone toe-to- toe with dominant market leader APNT in the oligopolistic paints sector (in terms of performance) over the past decade despite its higher industrial salience (20%+); indicating that its decorative paints vertical may have outpaced APNT's. This has cemented its place as a strong #2 in the paints industry, especially in decorative paints. Key underpinnings for this outperformance were (1) improvement in the product price ladder, (2) smart brand-building exercises, (3) strengthening of the quality of distribution (i.e., increase tinting machine penetration) and (4) successful strategic tie-ups with JVs/acquisitions/MoUs across growth categories.

BRGR has gone toe-to-toe with APNT over FY10-20 Company-wise estimated decorative volume growth (%)

5-yr CAGR 10-yr CAGR APNT BRGR KNPL 18 14.0 12.9 12.9 16 12.0 11.2 10.9 14 10.0 8.1 8.4 8.0 6.9 12 6.0 10 4.0 8 2.0 1.0 6 - 0 0 0 0 4

APNT (Std) BRGR (Std) KNPL (Std) Azko Nobel

FY16 FY17 FY19 FY20 FY18

Source: Company, HSIE Research, std - standalone Source: Companies, HSIE Research

1. Improvement in product price ladder: From a strong value for money brand nearly a decade back, BRGR has certainly pivoted well to a more well-rounded product portfolio with better price laddering. This has helped it widen its consumer base. It has focused on introducing innovative products with distinctive features and high brand recall. Some successful brands include (a) Weathercoat: An Exterior paint range with products such as LongLife (paints that can last up to 10 years in Indian climatic conditions), (b) AntiDustt (dust repellent coating), and (c) Easy Clean Range: Interior paint with products such as Easy Clean (with stain resistance and washability features) and Easy Clean Fresh (has odour eliminating technology with a soothing fragrance). On the services front, BRGR's express painting service (FY15 launch) solves for the need to have a dust-free paint job. The service also claims to shave off 40% of the paint job time using mechanised tools. This service is offered at no extra cost to end consumer and has been a significant market share lever over the years.

Key Products which have helped BRGR's innovation/premiumisation journey Product Pricing Application Features/ Benefits Breathe Easy Premium Interior Anti-pollution, anti-bacterial, anti-fungal Easy Clean Fresh Economy Interior Odour reduction, imparts fresh fragrance Illusion Design Metallica Premium Interior Different designs can be created Glamor Premium Interior Crack bridging, stain resistance, cleanability WeatherCoat Anti-Dust Exterior Dust guard technology, anti-algal, anti-fungal WeatherCoat Long Life Premium Exterior Water repellant, dirt-resistant, anti-fungal WeatherCoat Champ Exterior Micro fibre-reinforced for superior strength, anti-fungal, anti-algal

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Berger Paints: Initiating Coverage

2. Smart brand-building exercises: While BRGR has typically remained under- indexed vs APNT/KNPL on A&P spends, its marketing strategy has remained effective. As per channel checks with media planners, BRGR typically restricts its ad budget/campaigns towards its premium portfolio (brand ambassador - Katrina Kaif for Silk range since 2014). This partly explains the reason behind the increasing salience of premium products for BRGR over FY15-19. Over the aforementioned period, BRGR is estimated to have gained market share from Dulux in luxury emulsions (APNT continues to lead the segment). BRGR's higher ad spend skew towards key regional markets ensures higher return on per dollar spent vs peers. That said, it has since (FY19 onwards) cut back on its A&P spends to protect margins from GM pressure (courtesy rising raw material costs).

A&P spends as % of estimated decorative revenue Company-wise ad spends (Rs. mn)

Asian Paints Berger Paints FY11 FY12 FY13 FY14 FY15 Kansai Nerolac Akzo Nobel FY16 FY17 FY18 FY19 FY20 12.0 12.5 11.1 9,000 11.5 10.3 8,000 10.5 7,000 9.5 8.5 6,000 8.5 7.8 7.7 5,000 7.5 4,000 6.5 3,000 5.5 5.4 2,000 4.1 4.3 4.1 4.5 4.5 4.8 1,000 3.5 -

Asian Paints Berger Paints Kansai Akzo Nobel

FY16 FY17 FY18 FY19 FY20 FY15 Nerolac

Source: Company, HSIE Research, std - standalone Source: Companies, HSIE Research, for standalone operations

Share of voice (SoV, %) in West Bengal SoV in Telangana and Andhra Pradesh (%)

, - , - Others, 13 Others, 17 APNT, 30 KNPL, 6 APNT, 39

KNPL, 28

BRGR, 29 BRGR, 38

Source: Company, HSIE Research, std - standalone Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

SoV in Maharashtra (%) SoV in Hindi speaking markets (%)

, - , - Others, 18 Others, 28 APNT, 30

APNT, 52 KNPL, 20

KNPL, 15 BRGR, 27 BRGR, 10

Source: Company, HSIE Research, std - standalone Source: Companies, HSIE Research

3. Strengthening of quality of distribution (i.e., increase tinting machine penetration): BRGR has been consistently bettering the quality of its distribution by expanding its dealer network in Tier 2/3 cities (semi-urban/rural) where penetrating through dealers and installing tinting machines is easier vs doing the same in Metros/Select Tier 1s. The company has been growing its dealer network at 10-12% per annum (2,500-3,000 dealers) and has nearly reached a tinting machine penetration of 80%+ (steadily increasing). This and a lower base has helped BRGR outpace the leader in decorative paints as (1) throughput/dealer improves with increasing tinting machine penetration (typically goes up 2.5-3x), (2) the higher skew towards the faster- growing Tier 2/3 cities and North East market vs peers ensured faster growth.

BRGR: Dealer expansion and tinting machine The faster-growing North and East markets remain penetration (%) BRGR's mainstays, well-represented in South too though (the largest market)

Dealers (#) Tinting machine penetration (%) BRGR Depot mix (%) 35,000 90

30,000 80 70 25,000 South, 27.0 East, 18.9 60 20,000 50 15,000 40 West, 14.4 30 10,000 20 5,000 10 Central, 0 0 23.4

North, 16.2

FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, HSIE Research, std - standalone Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Company-wise revenue per active dealer (Rs. mn) APNT's dealer multiple vs peers

Asian Paints Berger Paints Kansai Nerolac Berger Paints Kansai Nerolac Akzo Nobel

3.5 6.5 3.0 2.9 2.9 2.9 2.9 6.5 3.0 5.8 5.2 2.5 5.5 4.6 2.0 4.4 1.8 1.8 1.9 1.8 4.3 4.2 2.0 4.5 4.0 1.5 1.5 1.5 1.5 1.5 1.3 3.5 1.0 2.5 2.5 2.5 2.5 2.4 2.4 2.3 2.4 2.5 0.5 1.9 2.0 2.0 2.1 - 1.5 2.0 2.0 1.9 1.9 FY16 FY17 FY18 FY19 FY20 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research, NOTE: Revenue adjusted to Source: Companies, HSIE Research, How to Read the chart: Eg: account for only decorative revenue. 90% of deco rev assigned to APNT's dealer base has grown from 4.3x of Akzo Nobel in FY13 to active dealers 6.5x in FY20

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Berger Paints: Initiating Coverage

...albeit, do not expect an encore

. BRGR will have to contend with APNT's aggressive volume/low-end strategy While BRGR has managed to outpace APNT in decorative paints, courtesy its strengthening product portfolio, distribution quality and smart brand building over 14 out of the past 25 quarters, we do not expect the company's top-line outperformance (divergence with APNT) to continue. APNT is likely to remain aggressive on its volume strategy over FY20-23 by pushing low-end paint solutions (low-end emulsions, distempers, primers, putty) as its predisposition would be to increase its capacity utilisation and absorb as much production/other fixed costs as it can. Note: APNT recently increased its capacity (over FY18-19) by >50%.

BRGR has outpaced APNT in 14 out of the past 25 quarters…we do not expect an encore BRGR (std) APNT (std) 40 30 20 10 - (10) (20) (30) (40)

(50)

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21 1QFY15 2QFY15 3QFY15 4QFY15 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20

Source: Companies, HSIE Research, NOTE: Revenue adjusted to account for only decorative revenue. 90% of deco rev assigned to active dealers . GM's expansion likely to remain in check: BRGR significantly narrowed the GM (from 856bp to 320bp) and EBITDAM gap (from 924bp to 560bp) with APNT over the past decade, underpinned by (1) premiumisation/product innovation, (2) smart brand-building exercises, (3) strengthening of the quality of distribution (i.e., increase tinting machine penetration). However, at the margin, GM expansion/mix improvement levers mostly seem missing as top players (incl. BRGR) vie for demand (1) at the bottom-of-the-pyramid and sell low margin products amidst the pandemic and beyond; (2) emanating from any down- trading trends which play out due to stress on income levels during/in the aftermath of the pandemic. While premiumisation may continue within the portfolio, the momentum in lower-end paint solutions and down-trading is likely to overshadow the positive impact of premiumisation, if any. . We build in a marginal 60bp GM improvement (42.1%) over FY20-23, primarily stemming from benign RM prices. GM differential with APNT will continue to gradually narrow though. Note GMs in FY20 improved by 250bp to 41.5%, primarily led by (1) benign RM prices and (2) the increased skew of high-margin decorative paints in revenue mix, (3) steady performance of subsidiaries which typically enjoy higher GMs. Standalone GMs improved 270bp to 40.8% in FY20. . EBITDAM levers over FY20-23, too, remain modest: In FY20, higher cost of operations negated most of the GM savings. LTL cost of operations increased 140bp to 25.8% (Pre-INDAS 116) as employee costs and SG&A expenses remained elevated. We presume this might be due to unabsorbed costs of recent capacities installed (Rishra, Jejuri – FY19). BRGR is likely to witness another Capex round by FY22 (Sandila Plant – for decorative paints) as it spurs its capacity to service the bottom of the pyramid. Related costs are likely to be better absorbed over FY22-24. Hence, we build in a modest 60bp expansion largely trickling down from GM savings. Page | 7

Berger Paints: Initiating Coverage

Consistent improvement in pricing ladder, product …and it is ditto with EBITDAM differential (%) innovation, and premiumisation have helped BRGR narrow down its GM differential with APNT…

APNT (std) BRGR (std) APNT (std) BRGR (std) KNPL (std) Azko Nobel KNPL (std) Azko Nobel 25 50.0 560bp

45.0 20 320bp

40.0 15

35.0 10

30.0 5

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research Source: Companies, HSIE Research

BRGR's manufacturing footprint HOWRAH JEJURI JAMMU ASSAM (NALBARI)* SURAJPUR* PUDUCHERRY HINDUPUR RISHRA TALOJA HINDUPUR SIKANDRABAD* ASSAM (NALTOLI) GOA

Source: Companies, HSIE Research, * - manufacturing for British Paints Division

Company-wise estimated capacity (KL/pa) Estimated capacity utilisation (%)

APNT BRGR KNPL APNT BRGR KNPL

2,000,000 90 1,800,000 80 1,600,000 70 1,400,000 60 1,200,000 50 1,000,000 40 800,000 30 600,000 400,000 20 200,000 10 0 - FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20

Source: Companies, HSIE Research Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Making inroads into promising niche segments

. Berger has also been focusing on niche product segments in industrial paints such as the fast-growing glass, wood and metal coatings play and in construction chemicals too. While the contribution of India industrial paints' segment to sales is ~20%, these niche segments serve a few purposes: (1) reduce the dependence on the more cyclical Auto OEM segment, (2) offer better growth prospects, superior margins vs Auto Industrials, (3) low competitive intensity to contend with (at least in the near-to-medium term).

Niche product portfolio Product segment Brand End-use Glass Coatings Imperia Gold Clear - Matt/ Gloss Interior & Exterior Imperia Gold Opaque - Matt/ Gloss/ Metallic Interior & Exterior Wood Coatings Imperia Water-based PU Interior & Exterior Wood Keeper Easy Clean 2K PU Interior Wood Keeper Melamine Interior Wood Keeper 1K PU Interior & Exterior Metal/ Wood Coatings Luxol Satin Interior & Exterior Luxol High Gloss Interior & Exterior Luxol Xtra Super Gloss Interior & Exterior Luxol 7 in 1 Colours Interior & Exterior Luxol Lustre Interior Butterfly GP Interior Source: Companies, HSIE Research

. Strategic partnerships with global players have helped BRGR further its presence in niche segments: Along with in-house production, BRGR has piggy- backed on strategic partnerships (via acquisitions, JVs, MoUs) with strong global/domestic category participants to make inroads in certain promising niche segments. Some key partnerships include: 1. Industrial Coatings: BRGR acquired SBL Speciality Coatings in 2017, which makes speciality liquid coatings used in construction equipment, industrial machinery, consumer durables and auto products 2. Acquired a 51% stake in Saboo Hesse wood coatings in 2019 to strengthen its presence in the fast-growing wood and glass coatings market. Partner - German firm Hesse Lignal coatings 3. MoU with Promat, Belgium, in 2017 for fireproof coatings 4. MOU with Chugoku in 2017 for Marine Coatings 5. JV with Nippon Paints (Berger Nippon Paint Automotive Coatings) formed in 2007 to improve its presence in 3W/4W auto segment and to capitalise on the metal-to-plastic substrate shift in the Auto segment. 6. 51:49 JV with Rock Paints, US, to further strengthen capabilities in Auto refinish market in India and Nepal 7. Berger Becker Coatings (JV) – a JV with Becker Acroma, Italy would gain share in the fast-growing wood coating segment. 8. Bolix S.A. acquisition was carried out to capitalise on the external insulations market in Europe.

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Berger Paints: Initiating Coverage

BRGR's inorganic journey Partner Partnership Type Year Category serviced STP Ltd Acquisition 2,020 Construction Chemicals Rock Paints JV 2,018 Auto Refinish Rock Paints MOUs 2,017 Auto Refinish Promat MOUs 2,017 Fireproof Chugoku MOUs 2,017 Marine Coatings Saboo Coatings Acquisition 2,017 Industrial Coatings Sherwin Williams (now Bepee Coatings) Acquisition 2,013 Decorative Coatings Sherwin Williams MOUs 2,013 Wood Coatings Bolix Acquisition 2,008 External insulation Nippon JV 2,007 Automotive Paints ICI Acquisition 2,006 Motor and Industry Tigerwerke MOUs 2,004 Powder Coatings Becker JV 1,997 Coil Coatings

Subsidiaries have inched up from 10% to 11.6% of sales, accounting for 8% of bottom-line of BRGR in FY20; the profitability of key subsidiaries has improved as well FY 20 Margin Rs. mn FY20 FY19 Growth (YoY, %) FY 19 Margin (%) % stake (%) Subsidiaries Revenue PBT PAT Revenue PBT PAT Revenue PBT PAT PBT PAT PBT PAT BJN (Nepal) 100.0 2,145 577 485 1,972 535 403 8.8 8.0 20.2 26.9 22.6 27.1 20.5 Beepee Coatings 100.0 241 22 16 249 38 27 (3.0) (41.3) (41.8) 9.2 6.6 15.2 11.0 SBL Specialty 100.0 1,053 213 157 1,063 132 93 (0.9) 61.0 68.8 20.2 14.9 12.4 8.8 Coatings Berger Paints 100.0 - (2) (2) - (2) (2) (37.5) (37.5) (Cyprus) Lusako Trading 100.0 - (52) (52) - (38) (38) 37.2 37.2

Berger Paints Overseas 100.0 136 (52) (52) (98) (176) (176) (239.1) (70.7) (70.7) (37.9) (37.9) 180.0 180.0 Bolix S.A 100.0 2,573 207 174 2,479 105 88 3.8 98.3 98.6 8.1 6.8 4.2 3.5 Build Trade BIS 100.0 - (0) (0) - (0) (0) - -

Bolix UKRAINA 100.0 31 6 6 27 4 4 15.9 64.9 64.9 19.4 19.4 13.7 13.7 OOO Soltherm External Insulations 100.0 254 4 3 224 4 2 13.6 19.4 64.7 1.7 1.1 1.6 0.8

Soltherm Insolations Thermique 100.0 24 1 1 16 0 0 53.5 100.0 100.0 3.3 2.5 2.5 1.9 Exterieure SAS Berger Hessee 51.0 97 (1) (1) 14 1 1 619.3 (230.0) (181.8) (1.3) (0.9) 7.4 8.1 Wood Coatings Berger Rock 51.0 83 (35) (35) 15 (9) (9) 449.0 269.1 269.1 (41.9) (41.9) (62.3) (62.3) Paints STP 95.5 778 34 15 - - - 4.3 1.9 Ltd Total 7,416 923 716 5,959 592 393 24.4 55.9 82.3 12.5 9.7 9.9 6.6

Joint Ventures % stake Revenue (Rs. mn) PAT (Rs. mn) Attributable PAT (Rs. mn) Berger Becker Coatings 49.0 3,651 117 58 Berger Nippon Paint Automotive Coatings 49.0 1,566 (141) (69) Surefire Management Services 75.0 2 2

Total 5,217 (21) (10)

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Berger Paints: Initiating Coverage

1QFY21: Relatively weak, GMs disappoint

. Delivered a relatively weaker sales print: BRGR's 1QFY21 top-line declined 47.9% YoY (vs APNT's 44.1%) - a bit of a surprise, given (1) BRGR's lower exposure to severely impacted metros/select Tier 1s) vs APNT, (2) lower base (APNT does 3x the business). We reckon the sequential recovery trend would have largely mimicked that of APNT (May/June APNT's volume growth trends (80% of base/~14% YoY respectively), implying that the Paints category, counter- intuitively, is showing spurts of recovery faster than other consumer discretionary categories. Standalone volume decline is estimated at 44-45%. While the recovery is encouraging, we remain circumspect of the real progression in volume recovery as the May/June recovery is mostly a function of (1) pent-up demand and (2) incentivised channel up-stocking.

. GMs were the bigger disappointment: BRGR's (standalone) GMs for 1Q remained flat YoY/declined 276bp QoQ to 40.2% despite a benign RM environment (crude is down 18-20%). Relatively too, BRGR lagged both APNT (GMs expanded 154bp YoY/contracted 65bp QoQ) and KNPL GMs expanded 340/317bp YoY/QoQ respectively). One would have hoped BRGR would do better in 1Q at least to the extent of the Decorative skew increasing in the mix (as the decline in Industrial revenue is likely to have been steeper). Reasons attributed to the GM disappointment was high-cost inventory consumption in the ecosystem. However, we suspect such a divergence in BRGR's performance with the #1/#3 players hints at some significant deterioration in the mix.

. Subsidiaries stitched a better show: Subsidiaries clocked a relatively better quarter. We suspect the STP acquisition (Oct-19) might have aided top-line performance. The laggards in the portfolio were BJN Nepal as Nepal only had 10 working days in 1Q. BRGR's Polish subsidiary Bolix showed improvement both in top-line as well as profitability as external insulation's (key product) application on building sites entails less involvement with the end consumer, and perceived to be safer than an interior paint job, hence was allowed during the pandemic. EBITDA losses for subsidiaries stood at Rs. 214mn.

. Cost Overheads shaved off by 37%: BRGR did an impressive job of cutting down its op costs by 37% in 1Q to salvage profitability to the extent it could for its standalone operations. SG&A expenses (standalone) halved in 1Q. On a consolidated basis, opex costs declined 27% YoY vs a 47% decline in revenue; hence, sub-par scale-led deleverage hit profitability. EBITDAM contracted 434/788bp YoY to 13.7%/7.8% for standalone/consolidated operations respectively.

. Other key takeaways: 1. Benign RM cost benefits are likely to be seen 2Q onwards, as (1) high-cost inventory in the channel has normalised and (2) formulation-led RM savings kick in. Management indicated that it has managed to re-negotiate better deals with vendors for key RM. 2. Lower end paint products such as putty, primers, distempers and low-end emulsions outpaced higher-end paint solutions this quarter. Justifiably so, as the impact of the pandemic has been relatively less severe in Tier 2-4 markets where low-end products sell more. Management did not discount the possibility of down-trading in FY21, courtesy pandemic-led impact on income levels.

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Berger Paints: Initiating Coverage

3. Discounting and rebates to channel remained elevated as more solvent-based products pushed in 1Q. Price decreases in the last 10 months preceding COVID19 is ~2% 4. Like in 1Q, management indicated that they do not expect pricing interventions by the industry anytime soon. 5. Protective coatings typically account for 9-9.5% of revenue and Powder Coatings is a little less than 2% 6. Within the industrial segment, Auto continues to remain under severe pressure; however, Protective coatings (9-9.5% of sales) and powder coatings (~2% of sales) witnessed good recovery. 7. Dealer growth in FY20 was ~12.5%. However, in 1Q, BRGR, justifiably so could only add dealers for 1.5/3 months. Run-rate is likely to progressively normalize by end FY21. Quarterly snapshot – consolidated Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) 1QFY21 FY20 FY21 Net Revenue 17,165 13,548 9,308 (45.8) (31.3) 10,205 63,658 58,853 Total COGS 10,154 7,639 5,495 (45.9) (28.1) 5,619 37,258 33,441 Gross Profit 7,011 5,910 3,812 (45.6) (35.5) 4,586 26,400 25,412 Gross Profit Margin (%) 40.8 43.6 41.0 11 bps (266 bps) 44.9 41.5 43.2 Total Operating expenses 3,960 3,825 2,892 (27.0) (24.4) 3,258 15,790 15,714 Reported EBITDA 3,052 2,084 921 (69.8) (55.8) 1,328 10,610 9,698 EBITDA Margin (%) 17.8 15.4 9.9 (788 bps) (549 bps) 13.0 16.7 16.5 Depreciation 462 493 504 9.0 2.1 492 1,910 2,132 EBIT 2,590 1,591 417 (83.9) (73.8) 836 8,700 7,567 EBIT Margin (%) 15.1 11.7 4.5 (1060 bps) (726 bps) 8.2 13.7 12.9 Finance cost 99 141 124 24.6 (11.9) 141 470 566 Other income 219 167 78 (64.2) (53.0) 225 685 731 PBT 2,709 1,617 372 (86.3) (77.0) 920 8,915 7,732 Exceptional Item

Tax Expenses 944 560 176 (81.3) (68.6) 252 2,271 1,946 Effective Tax Rate (%) 34.8 34.7 47.4 1253 bps 1272 bps 27.4 25.5 25.2 Share of associate earnings (1) (25) (45) 3,625.0 81.0 (25) (83) (50) Minority Interest ------

EO items ------

PAT 1,764 1,032 151 (91.4) (85.4) 643 6,561 5,736 APAT margin (%) 10.3 7.6 1.6 (866 bps) (599 bps) 6.3 10.3 9.7 Operating Expenses (Rs mn) 3960 3825 2892 (27.0) (24.4) 3258 15790 15714 Employee expenses 1117 1237 1162 4.1 (6.0) 1080 4525 4826 Other expenses 2843 2589 1729 (39.2) (33.2) 2178 11265 10888 Source: Company, HSIE Research

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Berger Paints: Initiating Coverage

Quarterly snapshot – standalone Rs. Mn 1QFY20 4QFY20 1QFY21 YoY (%) QoQ (%) 1QFY21E FY20 Net Revenue 15,852 11,748 8,261 (47.9) (29.7) 8,826 56,917 Total COGS 9,484 6,705 4,943 (47.9) (26.3) 4,861 33,673 Gross Profit 6,368 5,043 3,318 (47.9) (34.2) 3,966 23,244 Gross Profit Margin (%) 40.2 42.9 40.2 (1 bps) (276 bps) 44.9 40.8 Total Operating expenses 3,503 3,134 2,183 (37.7) (30.3) 2,648 13,666 Reported EBITDA 2,865 1,909 1,135 (60.4) (40.5) 1,318 9,578 EBITDA Margin (%) 18.1 16.2 13.7 (434 bps) (251 bps) 14.9 16.8 Depreciation 418 432 444 6.2 2.8 432 1,705 EBIT 2,447 1,477 691 (71.8) (53.2) 885 7,873 EBIT Margin (%) 15.4 12.6 8.4 (708 bps) (421 bps) 10.0 13.8 Finance cost 70 96 88 24.3 (9.0) 96 327 Other income 164 1,085 71 (56.9) (93.5) 200 1,508 PBT 2,541 2,466 674 (73.5) (72.7) 989 9,054 Exceptional Item

Tax Expenses 896 519 176 (80.4) (66.1) 249 2,064 Effective Tax Rate (%) 35.3 21.1 26.1 (917 bps) 506 bps 25.2 22.8 Share of associate earnings ------Minority Interest - - - - -

EO items - - - - -

PAT 1,645 1,947 498 (69.7) (74.4) 740 6,991 APAT margin (%) 10.4 16.6 6.0 (435 bps) (1054 bps) 8.4 12.3 Operating Expenses (Rs mn) 3503 3134 2183 (37.7) (30.3) 2648 13,666 Employee expenses 875 832 878 0.3 5.4 750 3,425 Other expenses 2628 2302 1306 (50.3) (43.3) 1898 10241 Opex (As % of sales)

Employee expenses 5.5 7.1 10.6 510 bps 354 bps 8.5 6.0 Other expenses 16.6 19.6 15.8 (77 bps) (379 bps) 21.5 18.0 Total 22.1 26.7 26.4 433 bps (25 bps) 30.0 24.0 Source: Company, HSIE Research

1QFY21: Volume decline estimated at 44% YoY

Volume growth (%)

20 11 13 12 9 8 10 - (10) (20) (30) (44) (40)

(50)

1QFY16 2QFY16 3QFY17 4QFY17 1QFY19 2QFY19 3QFY19 4QFY20 1QFY21 3QFY16 4QFY16 1QFY17 2QFY17 1QFY18 2QFY18 3QFY18 4QFY18 4QFY19 1QFY20 2QFY20 3QFY20

Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

1QFY21: Gross margins dip sequentially due to (1) high-cost inventory and (2) possible deteriorating mix

Gross margin (%)

46 44 43 43 43 44 43 42 41 41 41 42 40 40 41 40 40 40 40 39 40 39 39 38 38 37 36 34

1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21

Source: Companies, HSIE Research

Key assumptions Key Assumptions FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Decorative volume growth (%) 6.0 (2.0) 30.0 13.5

Decorative realisation growth (%) (3.0) (4.0) (2.0)

Decorative revenue growth (%) 3.5 (4.9) 24.8 11.2

Industrial growth (%) 1.7 (15.9) 13.5 8.9

Standalone Revenue growth (%) 5.5 9.5 11.8 16.8 3.2 (7.3) 22.5 10.9 Gross margin (%) 41.5 43.1 41.7 39.0 41.5 43.2 42.2 42.1 EBITDA margin (%) 15.3 15.8 15.6 14.5 16.7 16.5 17.2 17.3 Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Financial analysis

. We build in moderate 8% revenue CAGR for BRGR over FY20-23, lower than its growth over FY15-20 as the company spends most of FY21 recouping lost 1QFY21 volumes. We expect BRGR to lose 4.6% of its FY20 base volumes in FY21 (-8% revenue decline), courtesy the pandemic-led demand destruction. Value is likely to continue lagging volumes as focus shifts on revving up volumes in lower-end products and throughput from Tier 2/3/4 cities/towns geographies which are relatively less impacted. Baking in 8.1% revenue CAGR over FY20-23 BRGR: Standalone revenue trend

LTL Consol Revenue YoY (%) - RHS Standalone Revenue (Rs. mn) YoY (%) - RHS

90,000 22 25 80,000 23 25

80,000 17 20 70,000 20 16 17 70,000 60,000 13 15 13 11 15 60,000 12 12 12 50,000 10 10 10 50,000 8 6 5 12 40,000 3 40,000 5 5 30,000 30,000 (8) - (7) - 20,000 1 20,000 10,000 (5) 10,000 (5)

- (10) - (10)

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

. RM prices have significantly corrected (TiO2 and crude-linked derivatives account for 80% of RM costs for paint companies). We believe the flow-through in material costs may remain relatively low in FY21 (modest 170bp savings factored in GMs for BRGR) as better part of 1H will witness clearing of high-cost inventory. As demand gradually recovers 2H onwards, RM costs are likely to firm up too. Also, part of GM savings is likely to find its way to incentivise the channel for up-stocking. In FY20, higher cost of operations negated most of GM savings. LTL cost of operations increased 140bp to 25.8% as employee & SG&A expenses remained elevated due to unabsorbed costs of recently installed capacities (Rishra, Jejuri – FY19). This trend is likely to continue as BRGR commissions its Sandila Plant by FY22. We build in a modest 60bp expansion, largely trickling down from GM savings. Expect volume decline of ~5% YoY in FY21 No material margin gains built in

Volume growth (%) Gross Margin (%) EBITDA Margin (%) 40.0 27.6 50 30.0 43 43 43 42 45 42 42 41 42 20.0 15.0 12.9 39 8.0 40 10.0 5.5 35 - 30 (10.0) 25 (20.0) (30.0) 20 (40.0) 15 16 17 16 17 17 (50.0) (44.0) 10 15 16 15 12

FY16 FY17 FY18 FY19 FY20 FY22 FY23

1QFY21 2QFY21 3QFY21 4QFY21

FY15 FY16 FY17 FY18 FY19 FY20 FY22 FY23 FY21

Source: Companies, HSIE Research Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Key RM (Tio2 and Brent Crude) costs have declined meaningfully

TIO2 China Brent Crude oil (USD)

200 160 190 140 180 120 170 100 160 80 150 60 140 130 40 120 20

110 0

14 19 14 19

12 16 17 17 12 16 17 17

15 16 20 15 16 20

13 13 15 18 18 13 13 15 18 18

12 17 12 17

14 15 19 20 14 15 19 20

- - - -

------

- - - -

------

Jul Jul Jul Jul

Jan Jan Jan Jan

Jun Jun Jun Jun

Oct Oct Oct Oct

Feb Feb

Sep Sep

Dec Dec Dec Dec

Apr Apr

Mar Mar Mar Mar

Aug Aug Aug Aug

Nov Nov

May May May May

Source: Companies, HSIE Research Source: Companies, HSIE Research

BRGR's A&P spends likely to remain linked to sales and under-indexed to peers till the time clarity on secular demand recovery emerges

A&P spends (Rs. mn) As % of revenue - RHS FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 8 3,000 5.3 6.0 7 7 4.9 4.8 7 6 2,500 5.0 6 6 6 6 5 5 5 5 5 5 5 5 2,000 3.3 4.0 5 5 5 5 5 3.3 3.3 3.3 3.3 5 4 4 4 4 4 4 4 4 4 4 1,500 3.0 3 3 3 3 3 1,000 2.0 2 500 1.0 1 - - - Asian Paints Berger Paints Kansai Akzo Nobel

Nerolac

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Companies, HSIE Research Source: Companies, HSIE Research

BRGR: Freight costs expected to remain steady over …in line with market leader FY21-23…

Freight, Octroi and Delivery (Rs. mn) As % of revenue - RHS FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 6,000 7.0 7.2 8 7 6.9 7.0 7 5,000 7 7 6 6 6 7 6 6 6.8 6 6 6 6 6 6 6.8 6 5 5 5 5 5 5 4,000 5 5 5 6.5 5 5 5 6.6 5 4 4 4 4 4 3,000 6.3 6.3 6.4 6.4 4 6.4 3 2,000 6.2 2 1,000 6.0 1

- 5.8 - Asian Paints Berger Paints Kansai Akzo Nobel

Nerolac

FY16 FY17 FY18 FY20 FY21 FY22 FY23 FY19

Source: Companies, HSIE Research, Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

. BRGR's cash conversion (CC) cycle has improved from 70 days to 53 days over FY13-20, primarily led by higher support from creditors. We expect the CC cycle to momentarily elongate in FY21, given (1) pandemic-led demand destruction, (2) imperative to support vendors, hence reducing creditor days. This could partially mean revert, but directionally payable days may have to move towards that of APNT without material changes to its receivables profile (greater than APNT) as that's one of the key hooks to penetrate thought dealers for BRGR. Hence, cash conversion cycle could marginally deteriorate from here on (not factored in).

BRGR's Cash Conversion (CC) cycle has improved, albeit via higher creditor's support…this could partially mean revert FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Asian Paints

Inventory days 60 58 56 50 63 56 58 60 Receivables 26 25 23 23 29 29 28 24 Trade payables 49 53 41 41 48 48 46 37 Core CC Cycle 37 31 38 32 44 38 39 46

Berger Paints

Inventory days 69 66 61 63 75 71 74 73 Receivables 45 46 45 47 46 49 40 41 Trade payables 44 51 47 58 61 67 60 61 Core CC Cycle 70 60 59 53 60 53 55 53

Kansai Nerolac

Inventory (days) 68 74 56 56 63 64 74 69 Debtors (days) 54 52 51 51 52 54 48 50 Payables (days) 50 51 33 53 50 54 45 38 Core CC Cycle 72 76 74 54 65 63 77 80

APNT leads in CFO/EBITDA conversion, but BRGR not far behind

% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

90 83 77 75 80 74 72 73 72 69 69 68 69 63 66 64 64 65 63 70 63 62 60 62 62 58 57 59 60 60 55 52 47 50 50 46 45 40 35 30 20 10 - Asian Paints Berger Paints Kansai Nerolac

Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Capex intensity likely to be high given the capacity Return profile to decline in the pandemic-stricken addition imperative FY21…expect a V-shaped recovery over FY20-23E

Capex (Rs. mn) Asset turnover (x) - Gross Rev/GFA - RHS RoE (%) RoCE (%) RoIC (%) 30.0

7,000 5.5 6.0 22.1 6,000 4.5 25.0 21.5

5.0 18.6 18.9 4.1 17.9

4.1 19.7 21.0 5,000 20.0 17.6 3.4 4.0 4,000 2.9 2.8 2.8 15.0 3.0 3,000 2.0 10.0 2,000 5.0 1,000 1.0

- - -

FY16 FY17 FY18 FY19 FY20

FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

FY21E FY22E FY23E

Source: Companies, HSIE Research Source: Companies, HSIE Research

BRGR's capital allocation over the years Sources of funds (Rs bn) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E Cash from Operations (excl WC change) 4,023 4,807 5,220 5,499 6,542 8,245 7,658 9,737 10,915 Other Income ------Total 4,023 4,807 5,220 5,499 6,542 8,245 7,658 9,737 10,915

Application of funds (Rs bn)

Working Capital (115) (1,138) 1,275 1,280 925 999 602 630 921 Capex 1,602 1,233 2,757 2,878 3,166 4,310 1,317 5,844 3,189 Investments 381 1,477 374 (1,622) 434 (886) - - - Dividend 1,383 1,085 1,169 2,045 2,105 3,816 2,225 2,225 2,225 Borrowings 149 2,319 (507) (290) (619) (1,014) - - - Others 303 155 116 824 795 801 (215) (334) (585) Net change in cash 320 (323) 36 384 (265) 219 3,730 1,373 5,165 Total 4,023 4,807 5,220 5,499 6,542 8,245 7,658 9,737 10,915 3-yr rolling WC + Capex as % of 78 35 40 53 71 67 50 53 44 sources of funds Source: Companies, HSIE Research

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Berger Paints: Initiating Coverage

Valuation We initiate coverage on Berger Paints with a SELL recommendation and a DCF- based target price of Rs460/sh (downside: 18%), implying 55x Sept-22 P/E (8% premium to our target multiple for APNT). Key underpinnings of the target price are: . Revenue CAGR of 12.6% over FY20-30E (~60-70bp higher than APNT), given the lower base primarily, implying a 35-40bp improvement in market share. . 18.5bp/p.a improvement in EBITDA margin, primarily driven by scale-led operational efficiencies. . Berger is likely to commission its Sandila plant in FY22. Hence, the year is likely to be Capex heavy. Post that, if BRGR has to deliver the volume growth of ~12% over FY20-30, then it will have to take on a 0.2-0.3mn KL Capex exercise every three years to underpin its growth ambitions. . Our DCF-based target price assumes: (1) FY20-41 FCFF CAGR: 16.8% (FY20-30E FCFF CAGR: 20%, FY30-41E CAGR: 13.5%), (2) WACC: 10.5%, (3) Terminal growth: 6%, FCFF/PAT conversion of ~70% over FY20-30E. DCF Valuation FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30E FY31E FY35E FY41E EBIT*(1-t) 7,544 8,333 9,658 11,275 13,139 15,418 17,980 20,837 23,712

Less: Capex (5,844) (3,189) (3,096) (4,929) (4,801) (6,446) (7,246) (7,957) (7,871)

Add: Depreciation 2,315 2,766 3,081 3,482 3,968 4,531 5,215 5,975 6,767

Change in NWC (630) (921) (1,352) (1,686) (1,922) (2,196) (2,431) (2,624) (2,777)

FCF 3,385 6,989 8,291 8,142 10,384 11,306 13,518 16,232 19,831 23,936 44,877 77,984 FCF growth yoy (%) (41.9) 106.5 18.6 (1.8) 27.5 8.9 19.6 20.1 22.2 20.7 14.8 6.0

Year-ending 31-Mar-22 31-Mar-23 31-Mar-24 31-Mar-25 31-Mar-26 31-Mar-27 31-Mar-28 31-Mar-29 31-Mar-30 31-Mar-31 31-Mar-35 31-Mar-41 Discounting period 0.50 1.50 2.50 3.50 4.50 5.50 6.50 7.50 8.50 9.50 13.51 19.51 Discounting factor 0.95 0.86 0.78 0.70 0.64 0.58 0.52 0.47 0.43 0.39 0.26 0.14 Discounted FCF 3,221 6,018 6,459 5,740 6,625 6,528 7,061 7,673 8,484 9,267 11,650 11,115 FCF/EBITDA (%) 27 50 52 44 48 45 46 48 52

DCF as on (date) 30-Sep-21

WACC (%) 10.5

Terminal growth (%) 6.0

Terminal FCF multiple (X) 23.6

Implied terminal EV/EBITDA (X) 20.2

PV-Explicit Period 181,337

PV-Terminal Value 261,817

EV 443,154

Net debt/(cash) (3,736)

Equity value 446,890

# of shares (mn) 971

Equity value (Rs/share) 460

CMP (Rs/share) 552

Upside/(Downside) (16.6)

Implied Sep-22 P/E 54.5

Source: Companies, HSIE Research Sensitivity Analysis WACC (%) 9.5 10.0 10.5 11.0 11.5 5.0 510 446 395 352 317 5.5 561 485 424 375 335 Terminal growth rate (%) 6.0 625 532 460 403 357 6.5 712 593 505 437 384 7.0 832 674 563 480 416

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Berger Paints: Initiating Coverage

Company profile With modest beginnings in India in 1923, today, Berger Paints India Limited is the second-largest paint company in the country with a consistent track record of being one of the fastest-growing, quarter on quarter, for the past few years. It has a presence in decorative paints, industrial coatings, and construction chemicals (primarily waterproofing). Berger Paints India is headquartered in Kolkata, with 16 strategically located manufacturing units across India (including subsidiaries), two in Nepal, one each in Poland and Russia and about 162 stock points. The company also has an international presence in four countries: Nepal, Bangladesh, Poland, and Russia. It has 610,000 MT capacity. Berger has the second-largest distribution network with ~27,000 dealers and a tinting machine penetration of ~80%.

The decorative segment makes up nearly 75%+ of Berger's revenue. Traditionally having a strong foothold in the economy segment, over the past few years, Berger has gained market share in the premium segment. Through strategic tie-ups/JVs with global firms, the company has tried to strengthen capabilities in niche areas such as auto refinishes and glass, wood, marine and fireproof coatings. In the Auto segment (2W, 3W, CVs), its key customers include Hero, Royal Enfield, Yamaha, TVS, Honda, Bajaj, Tata Motors, and Ashok Leyland.

The Dhingra family, promoters of Berger Paints, has been in the paints business for four generations. The family acquired the controlling stake of the company from Mr Vijay Mallya in 1991. The promoter family continues to have executive powers but is not involved in day-to-day operations. The company is run by professionals.

Key Personnel Name Designation Description Mr Dhingra is the Chairman of the Board of Directors. He has been a Director of the company since 1991. He is a Science Graduate from Hindu College, Delhi University. Mr. Kuldip Singh Dhingra Chairman He is the promoter of the company and an industrialist with a long-standing experience in paints and related industries. He is the fourth generation of his family that has been continuously in the paints business since 1898. Mr Dhingra is the Vice-Chairman of the Board of Directors. He has been a Director of the company since 1993. He is a graduate, an industrialist, the promoter and has Mr. Gurbachan Singh Vice-Chairman considerable experience in the paint industry, especially in its technical aspects. He is Dhingra the fourth generation of his family, which has been continuously in the paints business since 1898. Mr Roy graduated in Mechanical Engineering from Jadavpur University, Kolkata and completed his post-graduation in Business Administration from the Indian Institute of Mr. Abhijit Roy MD & CEO Management, Bangalore. He started his career with Asian Paints Limited and before joining Berger was associated with L'Oreal. He was appointed as the Managing Director & CEO with effect from 1st July 2012. Mr Dasgupta is a B.Sc (Hons) from Calcutta University, AICWA from Institute of Cost & Works Accountants of India & Company Secretary from Institute of Company Mr. Srijit Dasgupta CFO Secretaries of India having over 29 years of work experience. He started his career with Machinery Manufacturers Corporation Limited and before joining Berger was associated with the same organisation. Mr Ganguly is a B.Com (Hons.) from St. Xaviers College Kolkata. He is a fellow Vice President & Member of the Institute of Company Secretaries of India and has passed LL.B. from the Company Mr. Arunito Ganguly University of Burdwan. He has 16 years' experience in handling secretarial and legal Secretary matters, including 14 years' experience as Company Secretary/Deputy Company

Secretary in large listed companies. Source: Company, HSIE Research

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Berger Paints: Initiating Coverage

Key Risks Name Description While the three top paint companies have shown resilience in terms Correlation of sales with the of volume growth over the past few quarters even during the extant economy economic slowdown, the sustenance of the slowdown could pose a downside risk to our estimates. There are several raw materials which are directly driven by crude oil. Approximately 70% of the input costs can be accounted for by The sharp rise in input costs crude derivations. The remaining ~30% of the input costs arise from non-crude (TiO2) forms. Therefore, any sharp increase in input costs could adversely impact the business The USD-INR exchange is an important component of the input Finance risks originating out of costs. Hence, a depreciation of INR vis-à-vis the USD could affect currency fluctuations the company's bottom line directly by way of gross margins. In a year of high uncertainty in the macro-environment and geopolitical scenarios, disruptions in the supply chain are an Disruption in the supply chain important risk to monitor. The unavailability of raw materials could impact the estimates negatively. Source: Company, HSIE Research

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Berger Paints: Initiating Coverage

Financials Income Statement Year End (March) FY16 FY17 FY18 FY19 FY20P FY21E FY22E FY23E Net Revenues 42,231 45,523 51,657 60,619 63,658 58,853 71,948 80,458 Growth (%) (2.3) 7.8 13.5 17.3 5.0 (7.5) 22.3 11.8 COGS 24,702 25,923 30,100 36,996 37,258 33,441 41,601 46,602 Employee Expense 2,735 3,067 3,566 4,085 4,525 4,826 5,180 5,753 A&P Expense 2,078 2,413 2,487 2,018 2,119 1,942 2,374 2,615 Freight and handling charges 2,898 3,209 3,360 3,834 4,026 4,002 4,569 5,109 Rent Expense 404 473 530 584 - - - - Other Expenses 2,967 3,252 3,544 4,286 5,120 4,944 5,828 6,477 EBITDA 6,447 7,186 8,070 8,816 10,610 9,698 12,396 13,902 EBITDA Growth (%) 26.2 11.4 12.3 9.2 20.4 (8.6) 27.8 12.2 EBITDA Margin (%) 15.3 15.8 15.6 14.5 16.7 16.5 17.2 17.3 Depreciation 987 1,081 1,242 1,378 1,910 1,957 2,315 2,766 EBIT 5,461 6,105 6,828 7,438 8,700 7,742 10,081 11,136 Other Income (Including EO Items) 347 545 459 600 685 731 850 1,101 Interest 273 162 246 323 470 566 566 566 PBT 5,535 6,488 7,041 7,715 8,915 7,907 10,365 11,671 Total Tax 1,886 2,294 2,439 2,732 2,271 1,990 2,609 2,938 RPAT before associate earnings 3,649 4,194 4,602 4,984 6,644 5,917 7,756 8,734 Share of Associate earnings 57 101 6 (9) (83) (50) (50) (50) Minority Interest ------RPAT 3,706 4,295 4,608 4,975 6,561 5,867 7,706 8,684 Exceptional Gain/(loss) - 442 ------Adjusted PAT 3,706 3,853 4,608 4,975 6,561 5,867 7,706 8,684 APAT Growth (%) 40.0 4.0 19.6 7.9 31.9 (10.6) 31.4 12.7 Adjusted EPS (Rs) 3.8 4.0 4.7 5.1 6.8 6.0 7.9 8.9 EPS Growth (%) (0.0) 4.0 19.6 7.9 31.9 (10.6) 31.4 12.7 Source: Company, HSIE Research Balance Sheet Year End (March) FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E SOURCES OF FUNDS Share Capital - Equity 694 971 971 971 971 971 971 971 Reserves 14,927 18,045 20,974 23,756 25,630 29,272 34,754 41,213 Total Shareholders Funds 15,621 19,016 21,945 24,727 26,601 30,243 35,725 42,184 Minority Interest - - - 35 71 121 171 221 Long Term Debt 2,108 2,621 2,495 2,389 2,073 2,073 2,073 2,073 Short Term Debt 1,437 1,441 1,727 2,811 3,286 3,286 3,286 3,286 Total Debt 3,544 4,062 4,222 5,201 5,359 5,359 5,359 5,359 Net Deferred Taxes 678 807 825 871 483 483 483 483 Other Non-current Liabilities & Provns 60 68 90 198 2,662 2,662 2,662 2,662 TOTAL SOURCES OF FUNDS 19,903 23,953 27,081 31,031 35,175 38,868 44,399 50,908 APPLICATION OF FUNDS Net Block 7,765 9,571 10,026 11,029 13,288 12,649 16,178 16,601 CWIP 511 622 972 1,699 1,785 1,785 1,785 1,785 Goodwill 1,865 1,789 2,646 2,693 2,790 2,790 2,790 2,790 Other Non-current Assets 577 611 905 493 3,355 3,355 3,355 3,355 Total Non-current Assets 10,717 12,593 14,548 15,913 21,217 20,578 24,107 24,530 Investments 3,475 4,721 3,331 3,949 3,152 3,152 3,152 3,152 Inventories 7,332 9,355 10,073 12,335 12,785 12,416 14,390 15,981 Debtors 5,454 5,781 6,924 6,715 7,141 7,095 8,082 8,972 Other Current Assets 736 921 2,500 2,323 2,501 2,312 2,728 2,941 Cash & Equivalents 1,053 1,025 2,050 2,385 2,199 5,929 7,302 12,467 Total Current Assets 18,051 21,803 24,878 27,707 27,778 30,903 35,653 43,512 Creditors 6,699 7,612 9,553 9,990 10,658 9,674 11,768 13,094 Other Current Liabilities & Provns 2,166 2,831 2,793 2,599 3,162 2,939 3,593 4,040 Total Current Liabilities 8,865 10,443 12,345 12,589 13,820 12,613 15,361 17,134 Net Current Assets 9,186 11,360 12,533 15,118 13,958 18,289 20,292 26,378 TOTAL APPLICATION OF FUNDS 19,903 23,953 27,081 31,031 35,175 38,868 44,399 50,908 Source: Company, HSIE Research

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Cash Flow Statement Year ending March FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E Reported PBT 5,592 7,031 7,047 7,706 8,832 7,857 10,315 11,621 Non-operating & EO Items (262) (858) (267) (434) (341) (731) (850) (1,101) Interest Expenses 273 162 246 323 470 566 566 566 Depreciation 987 1,081 1,242 1,378 1,910 1,957 2,315 2,766 Working Capital Change 1,138 (1,275) (1,280) (925) (999) (602) (630) (921) Tax Paid (1,782) (2,195) (2,769) (2,431) (2,626) (1,990) (2,609) (2,938) OPERATING CASH FLOW ( a ) 5,946 3,945 4,219 5,617 7,246 7,056 9,107 9,994 Capex (1,233) (2,757) (2,878) (3,166) (4,310) (1,317) (5,844) (3,189) Free Cash Flow (FCF) 4,713 1,188 1,341 2,451 2,937 5,739 3,263 6,804 Investments (1,477) (374) 1,622 (434) 886 - - - Non-operating Income 117 47 (578) (491) 1,190 731 850 1,101 INVESTING CASH FLOW ( b ) (2,592) (3,084) (1,834) (4,091) (2,234) (586) (4,994) (2,088) Debt Issuance/(Repaid) (2,319) 507 290 619 1,014 - - - Interest Expenses (272) (163) (246) (305) (314) (566) (566) (566) FCFE 2,122 1,532 1,385 2,765 3,636 5,173 2,697 6,238 Share Capital Issuance 0 0 - 0 0 50 50 50 Dividend (1,085) (1,169) (2,045) (2,105) (3,816) (2,225) (2,225) (2,225) Others - - - - (1,678) - - - FINANCING CASH FLOW ( c ) (3,676) (825) (2,001) (1,791) (4,794) (2,741) (2,741) (2,741) NET CASH FLOW (a+b+c) (323) 36 383 (265) 219 3,730 1,373 5,165 EO Items, Others 638 573 1,214 1,814 1,410 - - - Closing Cash & Equivalents 1,053 1,025 2,050 2,385 2,199 5,929 7,302 12,467

Key Ratios FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E PROFITABILITY (%) GPM 41.5 43.1 41.7 39.0 41.5 43.2 42.2 42.1 EBITDA Margin 15.3 15.8 15.6 14.5 16.7 16.5 17.2 17.3 EBIT Margin 12.9 13.4 13.2 12.3 13.7 13.2 14.0 13.8 APAT Margin 8.8 8.5 8.9 8.2 10.3 10.0 10.7 10.8 RoE 26.3 22.2 22.5 21.3 25.6 20.6 23.4 22.3 RoIC (or Core RoCE) 19.7 18.9 18.6 17.9 21.0 17.6 21.5 22.1 RoCE 19.8 18.0 18.7 17.8 20.9 17.0 19.5 19.1 EFFICIENCY Tax Rate (%) 34.1 35.4 34.6 35.4 25.5 25.2 25.2 25.2 Fixed Asset Turnover (x) 5.0 4.1 4.0 4.1 3.4 2.9 2.8 2.8 Inventory (days) 63.4 75.0 71.2 74.3 73.3 77.0 73.0 72.5 Debtors (days) 47.1 46.4 48.9 40.4 40.9 44.0 41.0 40.7 Other Current Assets (days) 6.4 7.4 17.7 14.0 14.3 14.3 13.8 13.3 Payables (days) 57.9 61.0 67.5 60.2 61.1 60.0 59.7 59.4 Other Current Liab & Provns (days) 18.7 22.7 19.7 15.6 18.1 18.2 18.2 18.3 Cash Conversion Cycle (days) 40.3 45.0 50.5 52.9 49.4 57.1 49.9 48.8 Net Debt/Equity (x) 0.2 0.2 0.1 0.1 0.1 (0.0) (0.1) (0.2) Interest Coverage (x) 20.0 37.6 27.8 23.0 18.5 13.7 17.8 19.7 PER SHARE DATA (Rs) EPS 3.8 4.0 4.7 5.1 6.8 6.0 7.9 8.9 CEPS 4.8 5.1 6.0 6.5 8.7 8.1 10.3 11.8 Dividend 1.5 1.8 1.8 1.9 1.9 1.9 1.9 1.9 Book Value 16.1 19.6 22.6 25.5 27.4 31.1 36.8 43.4 VALUATION P/E (x) 144.6 139.1 116.3 107.7 81.7 91.4 69.6 61.7 P/BV (x) 34.3 28.2 24.4 21.7 20.1 17.7 15.0 12.7 EV/EBITDA (x) 83.5 75.0 66.7 61.1 50.8 55.2 43.1 38.0 EV/Revenues (x) 12.7 11.8 10.4 8.9 8.5 9.1 7.4 6.6 OCF/EV (%) 1.1 0.7 0.8 1.0 1.3 1.3 1.7 1.9 FCF/EV (%) 0.9 0.2 0.2 0.5 0.5 1.1 0.6 1.3 FCFE/Mkt Cap (%) 0.4 0.3 0.3 0.5 0.7 1.0 0.5 1.2 Dividend Yield (%) 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Source: Company, HSIE Research

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RECOMMENDATION HISTORY

Date CMP Reco Target Berger Paints TP 07-Sep-20 552 SELL 460 600

550 500 450 400 350 300 250

200

19 20

19 20 20

- - - -

Jul

Jan

Jun

Oct

Feb

Sep Sep

Dec

Apr

Mar

Aug Nov May

Rating Criteria BUY: >+15% return potential ADD: +5% to +15% return potential REDUCE: -10% to +5% return potential SELL: >10% Downside return potential

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Berger Paints: Initiating Coverage

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