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Nath Balakrishnan

INVESTORS can considering buying into the stock of Berger Paints, the country's third largest paint manufacturer and the second largest player in the decorative segment.

Any dip in the stock price associated with weakness in the broad market could also be used as an opportunity to add the scrip to one's portfolio.

Berger is one of the better performing stocks from the small-cap space, having posted a substantial gain since Business Line's previous recommendation on the stock (Buy at Rs 44 (adjusted for the 1:2 bonus)) in March last year.

Notwithstanding Berger's good performance in the just-ended fiscal, the undemanding valuation level of the stock, coupled with reasonably good growth prospects for the industry as a whole, are key factors that underpin our recommendation.

Much like in the case of other players in the paints segment, prices of key raw material inputs such as titanium dioxide (a derivative of crude) will play a critical role in determining Berger's financial fortunes. And if crude prices continue to remain high, it would have a contractionary impact on operating margins.

However, in the case of Berger, both in the case of the last quarter of the recently-concluded fiscal as well as FY04 as a whole, margins have been better, albeit marginally, compared to what it was the corresponding previous fiscal.

This probably reflects the ability to contain other cost heads, as also to pass on the rising costs to consumers.

While Berger has traditionally been strong in the east and the north, it is now in the process of beefing up its presence in the southern and western regions of the country.

As this initiative plays out, it could impart a fillip to margins from their current levels. Berger is also setting up a plant in Jammu, which is in the process of being commissioned. Tax benefits associated with this facility could also provide a leg-up to earnings, going forward.

In the current year, with there being adequate time lag between the end of the monsoons and the commencement of the festival season (unlike last year, when this phase was compressed), a decorative-focussed player such as Berger could benefit from the lengthier painting season.

Valuation: When compared to its peers such as Asian Paints and Goodlass Nerolac (which trades at a multiple of 20 times and 13 times their FY04 per share earnings respectively), Berger trades at a more modest 7.1 times its FY04 per share earnings.

Further, the stock also offers an attractive dividend yield of close to 7 per cent, which should act as a cushion against downside risk. Buy with a medium-term perspective.

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