BERGEPAINT - Berger Paints India Ltd Share Price

Outlook by Management:

• Decorative Business: Optimistic about sequential growth improvement driven by better consumer sentiment, favorable budget measures, and adequate monsoon. Volume-value gap expected to narrow as prior price cuts phase out.
• Protective & Industrial Segments: Strong prospects due to government infrastructure spending; automotive and industrial coatings likely to recover.
• Risks: Geopolitical tensions and currency depreciation remain key concerns.

Major Points:

• Market Share & Growth: Current market share exceeds 20%; decorative volume grew 7.4% YoY (Q3 FY25) and 7.7% YTD. Value growth lagged due to price cuts and mix shift toward lower-value products (textures, adhesives).
• Margins: Gross margin stable at ~39-40%; EBITDA margin at 16.2% (within 15-17% guidance). Sequential margin improvement from operational leverage.
• Segments:
  • Decorative: Premium exterior products, waterproofing, and construction chemicals saw double-digit growth. Added 2,000+ retail touchpoints and 1,800 color banks.
  • Industrial: Protective coatings strong; automotive/powder coatings muted.
• Subsidiaries/JVs: BOL (Poland) steady; Nepal subsidiary rebounded. Berger Becker (JV) and automotive coatings JV delivered robust growth.
• Competition: New entrants impacted industry growth by ~3.5%, but Berger expects to counter via aggressive distribution expansion and urban-focused initiatives.
• Financials: Net cash position improved to Rs.377 Cr (standalone). Price cuts (4-5% earlier) and mix distortion impacted value growth, but normalization anticipated.
• Cost Management: Reduced overheads and tech adoption supported margins; ad spends maintained despite market challenges.

Question 1:
Sir, we have seen the new entrant in the market has reached more than almost 1,200 crore sales, probably in 9 months itself. And now the new plant will also start in Eastern India. So now, Berger, in a way, has got some extra time compared to other peers to understand the strategies and aggression. What will be our strategy to counter them as they enter Eastern India? Also, are green shoots visible in January?
Answer: Berger expects the new competitor's impact to remain limited (3.5% market share YTD) and emphasizes accelerated distribution expansion and urban initiatives to offset challenges. Temporary volume-value gaps (price cuts, low-value product mix) will ease as price reductions end. Sequential demand improvement is noted, with Q4 volume growth likely near double digits.

Question 2:
Why is there a divergence in Berger's volume growth versus peers? Is it regional or due to competitive intensity? Also, why did gross margins dip despite higher premium/exterior sales?
Answer: The divergence stems from aggressive distribution expansion and urban initiatives. Gross margins were stable (~39.8%) despite mix shifts toward high-volume, low-value products (e.g., tile adhesives, textures) and price cuts. Margins were resilient due to cost controls, though currency depreciation and monomer prices had minor impacts.

Question 3:
What is Berger's stance on the potential Akzo Nobel deal? Could a new entrant post-acquisition intensify competition?
Answer: Berger ruled out bidding for Akzo Nobel's India unit, citing a lack of strategic fit. The deal is unlikely to disrupt competition significantly, as Akzo's existing operations are well-established. New entrants pose risks, but growth focus remains on distribution and premiumization.

Question 4:
Will Q4 industry value growth reach mid-to-high single digits? How sustainable are mix-related margin pressures? Explain urban initiatives and dealer profiles.
Answer: Industry value growth may lag volume due to lingering price cuts. Mix impacts (low-value products) will persist but normalize as bases stabilize. Urban strategies focus on improving metro presence via new dealers (existing/non-paint entrants), driving availability and secondary sales. Inventory levels are lean, aiding rebound potential.

Question 5:
Why were Q3 other expenses lower YoY despite festive demand? How sustainable are these savings?
Answer: Cost-saving measures (non-essential overhead cuts, tech adoption) drove expense reductions. Ad spends were maintained, but discretionary costs were trimmed. These savings are sustainable through operational efficiency and tech integration.

Question 6:
What are Berger's urban dealer addition targets? How healthy is inventory at newer counters?
Answer: Over 2,000 retail touchpoints and 1,800 color banks were added recently. Dealer inventory is lean due to demand tracking and secondary sales focus. Urban growth is prioritized in weaker metros, with exterior products gaining traction.

Question 7:
Are rural markets outperforming urban for Berger, as peers suggest?
Answer: No. Berger's urban growth is stronger due to low prior penetration and targeted expansion. Rural-urban trends vary by player; Berger's urban focus offsets broader slowdowns.

Question 8:
How will INR depreciation affect Q4 margins?
Answer: Limited impact expected: 25"“30% imported RM cost exposure is partly offset by stable crude prices. Margin guidance (15"“17%) remains intact, aided by operating leverage and cost controls.

Question 9 (Follow-up):
Why is Akzo Nobel not a strategic fit despite premium segment synergies?
Answer: Overlap in urban/exterior segments (e.g., Berger's WeatherCoat) reduces synergies. Valuation and integration risks outweighed benefits, given Berger's existing brand strength and growth plans.

Question 10 (Follow-up):
Why is paint demand underperforming GDP?
Answer: Temporary factors: price cuts (-5% value), new entrant share (~3.5%), and weak sentiment. Normalization is expected post-Q4 as price cuts reverse and demand recovers. Structural drivers (GDP multiplier) remain intact.