 "Berger: to gain from a favorable revenue mix")
While the deal is unlikely to have a material impact on Berger's financials, it is a strategically good move and will enable Berger increase its presence in the Western and Southern India markets. Notably, Berger has been losing out to its larger peer- Asian Paints in western India.
"Given the small size of the acquisition, we do not expect this to be a material event for Berger. Increased focus on efficient supply chain management in a large distribution network remains the formula for success in the decorative paints industry. We continue to view Asian Paints as the biggest market share gainer amongst incumbents in the sector going forward, with Berger leading the race for the second spot", says Rakshit Ranjan, analyst at Ambit Capital.
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The acquired business has two brands namely Nitco brands (acquired by Sherwin Williams in 2007 for Rs 200 crore) and Sherwin Williams' own brands in the decorative paints segment. It has 33 depots and 300 owned dealers across Mumbai, Pune and Bangalore. The acquired company marks the exit of US-based Sherwin Williams - world's third largest coating company having revenues of $8 billion.
Analysts estimate the acquired business' annual revenues to be about Rs100-200 crore - close to 3-7% of Berger's FY12 revenues and negligible profits. Going forward, Berger plans to continue with the Nitco brands and do away with the Sherwin brands gradually. The Berger management expects to fund the deal from its internal accruals and expects it to be earnings accretive from June 2013 quarter onwards.
Notably, paint stocks have had a decent run recently with both Asian Paints and Berger making new one-year highs this week. The industry is expected to witness slowing growth in the next 2-3 quarters in line with the weakening macro, believe analysts.
"We continue to believe that in the current environment of sluggish growth and shrinking pricing power in the industrial paints segment, revenue composition which are tilted in favor of decorative paints are relatively better placed to deliver growth and protect margins. Berger derives 80% of its revenue from the decorative paints segment and balance from the industrial paints segment (Protective, Powder and Automotive coatings) and hence appears to be better placed than its peers", says a recent note from Spark Capital. Most analysts remain bullish on Berger's growth prospects going forward.
At 25 times FY14 estimated earnings, the stock is trading at a 20% discount to its larger peer- Asian Paints. Notably, this valuation gap has reduced to half its historical average discount of 40% to Asian Paints. Going forward, analysts expect this discount to shrink further to about 15% levels. Berger's revenues and earnings are set to clock in compounded annual growth of 17% and 20% respectively over FY12-17. Berger's shift to high-growth and high-margin emulsion products, backward integration efforts for its emulsion requirements and expanding distribution 0network will enable it to hold on to its market share, believe analysts.