The Hindu Business Line : Berger Paints: Hold

Investors can retain their holdings in the Berger stock. At the current price of Rs 85, the stock trades at 20-21 times its expected per-share earnings for FY-07.

With the valuation factoring in growth prospects, we would not recommend buying the stock at the prevailing levels. The caution is considering the stock's sharp run up in the recent past.

Any price decline in the stock can be used as an entry point, as the dividend yield at lower levels would provide for an added margin of safety.

Narrowing gap

Over the past few years, the valuation gap between the market leader, Asian Paints, and other frontline players such as Kansai Nerolac and Berger, has been narrowing.

Driven by strong demand from the housing and automotive segments, stock returns have been good across-the-board. That this has happened in the case of Berger, in spite of lower operational metrics compared to its peers, reflects investor appetite for the stock.

For the quarter ended June 2006, Berger's performance in terms of topline growth and operating margins has been lower compared to its peers. Margins have declined marginally on a year-on-year basis. Input cost pressures and escalating competition appear to be the key reasons behind this trend.

With demand continuing to remain strong, we believe Berger should be able to pass on price hikes to mitigate cost pressures.

Holding ground

In the near term, there are three reasons why the Berger stock should hold its ground. The company had declared a bonus in the ratio of three shares for every five held, the record date for which is a couple of weeks away.

In the homestretch to the record date, shareholders tend to retain their holdings in the stock; buyers hoping to capitalise on the bonus typically consider exposure in the stock. This should lead to the stock ruling firm.

We are also approaching the festival season, when the demand for paint peaks. The third important factor is the price of crude, which determines the cost of key inputs, is softening and should ease some of the cost pressures faced by all industry players.

Though its effect would be captured only partially this quarter, margins can be expected to improve the next quarter, should crude prices remain benign.

Over the medium-long/term, shareholders can expect benefits to flow in from the new facility at Jammu for powder coatings and a proposed plant in Haryana for industrial paints.

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