The Hindu Business Line : Berger Paints: Buy

The company has decided to acquire the entire exterior paints business of Snowcem India — a strong player in cement and textured finish paints — and is in the process of conducting due diligence. Considered to be a market of about Rs 500 crore, the exterior paints segment is growing at 20-22 per cent, making it one of the more lucrative categories within the decoratives space. Should the acquisition go through, it would considerably strengthen Berger's product portfolio and provide an impetus to its topline.

Berger is the third largest player in the paints sector in terms of overall market share and is the second largest player in the decorative segment, after market leader, Asian Paints. The decorative segment constitutes 70 per cent of the overall domestic market in the country and industrial paints take up the rest. Close to 70 per cent of Berger's revenue accrues from decoratives with industrial paints contributing the rest.

The net sales for the quarter ended September 2002 at Rs 161.27 crore posted an increase of 14.4 per cent compared to the corresponding quarter in the previous year (Rs 140.99 crore). However, the raw material cost, as a percentage of net sales, increased. For the current quarter, raw material costs stands at 68.4 per cent of net sales, up from about 65 per cent for the same quarter last year. Considering that most of the raw materials are imported, the increase in material costs reflects both the depreciation of the rupee as also the hardening of crude prices.

At the operating level, profit margins for the current quarter at 10.86 per cent have risen marginally compared to the operating margin of 10.1 per cent for the same quarter last year. The operating margins for this quarter could have been lower, if not for the increase in stock in trade, which was valued at Rs 10.1 crore compared to Rs 2.41 crore on a year-on-year basis. The net profit at Rs 9.17 crore rose 23.1 per cent compared to the corresponding previous quarter (Rs 7.45 crore). The company has also acquired the stake of its joint venture partner, ICI, in Berger Auto and Industrial Coatings. Berger derives a major portion of its revenues in industrial paints from the automotive sector, which has not had a very good year till now, barring September. However, with a strong focus on decoratives, the company would be in a position to offset the risk associated with an exposure to the auto sector during a downturn.

On the flip side, the stock is characterised by low volumes of trade (average of about 1,200 shares per day) and has been moving in a price band between Rs 68 and Rs 85 over the past one year. The stock could be in for a re-rating should the acquisition of Snowcem be completed.

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