Brokerage firm Kotak Institutional Equities has downgraded the rating on Berger Paints to 'sell' with an unchanged target price of ₹500 apiece, which reflects a downside of 20% for the stock from its previous closing price.
The shares are currently trading at 54 times the FY2025E price-to-earnings (PE) ratio, representing only a 4% discount compared to its competitor, Asian Paints. Kotak believes that while Berger has outperformed Asian Paints in terms of decorative paint growth over the past four quarters, this level of outperformance doesn't justify the significant rise in its stock price.
"After the double-digit volume growth in 1Q, we note that decorative paint demand in the current quarter has been relatively muted, with volume and value growth for the industry likely to be 5-6%/3-4% in 2QFY24E," said Kotak Institutional.
"Berger’s CEO, in a recent media interaction, noted that ‘2Q might face some challenges’ while reiterating the company’s full-year guidance of double-digit volume and value growth. Industry Participants (including BRGR) are pinning their hopes on a robust 3Q, perhaps due to a longer gap between the monsoon and the festive season."
"However, given the marked slowdown visible across categories (staples, QSR, footwear/apparel), it remains to be seen if industry value growth recovers to double digit in 2HFY24E, the brokerage added.
The company had guided for FY2024E gross margins in the range of 38–40%. However, crude prices have jumped by about 10% QoQ in 2Q, at a time when the competitive landscape is prompting higher rebates and discounts. The brokerage believes that these developments present a potent risk to its 17% FY2024E EBITDA margin forecasts.
Furthermore, it points out that Grasim on track to launch its decorative paints business, branded as 'Birla Opus,' in 4QFY24, poses a significant threat to Berger Paints. Grasim aims to establish itself as a profitable second-largest player in the paint industry.
Kotak believes that Berger Paints, as the current number two player, is more exposed to this competition than Asian Paints. Grasim likely avoids a head-on battle with Asian paints and focus on displacing 2-4 brands in dealer outlets, the brokerage said.
Asian Paints' strong presence in related segments such as waterproofing and home decor gives it an advantage in defending its market share in large retail outlets.
Earlier, ICICI Securities said that the Indian paint sector is on the verge of witnessing intensified competition with the entry of new players into the market. Notably, Grasim, Astral, Pidilite, and JK Cement are among the companies that have entered the paint sector and strengthened their offerings in FY23.
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