Berger Paints falls 4% as Q1 net profit slips 91% YoY; what brokerages say

Berger Paints shares slipped as much as 4 per cent to Rs 527.75 apiece on the BSE on Monday after the company reported a 91.44 per cent decline in its consolidated net profit at Rs 15.09 crore for the quarter ended June (Q1FY1), hit by the Covid-19 crisis.

It had posted a net profit of Rs 176.41 crore in the corresponding quarter of the previous fiscal. 

Revenue from operations dropped 45.77 per cent to Rs 930.76 crore during the quarter under review, as against Rs 1,716.53 crore earlier. CLICK HERE TO READ FULL REPORT

What brokerages say?

"We believe Berger Paints would have had a larger stock of higher-priced crude inventory, due to which gross profit margin (GPM) was more impacted as compared to peers. Kansai Nerolac started consuming low-priced crude inventory from June. Nonetheless, we expect all players to witness benefits of low-priced crude inventory from 2QFY21, which should cushion margin contraction," said global brokerage firm Nomura in a result review note. 

Despite sharp other expenses cut (-39 per cent), Berger Paints' 1Q operating profit margin (OPM) declined 790 basis points (bps) to 9.9 per cent, which was steeper against Asian Paints, and Kansai Nerolac, largely on lower benefit from GPM, Nomura said. 

"While 1Q paint demand recovery has been better than expected, largely led by strong demand in tier-2,3,4 towns, we expect progressive unlocking in metros/ tier-1 cities and the upcoming festival season to continue to support demand recovery. We prefer Asian Paints (strong recovery in decorative) over Berger (given its rich valuation)," wrote Mihir P. Shah and Abhishek Mathur, research analysts at Nomura. 

The brokerage has a "Neutral" call on Berger Paints with the target price of Rs 540. High demand from new launches is a key upside risk while low volume growth is a key downside risk, it adds. 

ICICI Securities, on the other hand, notes that the likely higher trade margins, inferior revenue mix and lower profitability/losses of STP (construction chemical subsidiary of the company), would have impacted EBITDA margins. This, it believes, is transitory impact and should normalise by Q4FY21. 

Some cost savings are structural in nature and there will be savings in freight cost post commencement of Uttar Pradesh plant in H1FY21, it said. "We expect it to improve margins in FY22 (and beyond). "We remain structural bulls, yet retain HOLD rating as premium valuations against Asian Paints is unjustified," the brokerage said in a report dated August 16. The target price has been set at Rs 540.