Berger Paints share price Drops 10% in 5 days post Q2

Berger Paints share price has tanked about 10 per cent in the past five trading sessions following its earnings announcements for the quarter ended 30^th September 2016, last week. Consolidated net profit of the company rose 55 per cent year on year to Rs 138.78 crores and consolidated net sales increased 7.5 per cent year on year to Rs 1,142.14 crores.

But the surge in profit of the paints manufacturer was due to a one-time gain of Rs 44.20 crores, which was on account of the sale of a division to Berger Nippon Paint Automotive Coatings Private Limited, the company’s joint venture with the Nippon Bee Coatings Private Limited of Japan.

What did not brood well with the market was that profit was buoyed by a one-off item and had that not been the case, the number would have looked more subdued. It is a miss on the sales front, too. EBITDA (earnings before interest tax depreciation and amortization) margin expanded 130 basis points year on year to 15.59 per cent; the rise was restricted by increased staff cost and other expenses.

Segment-wise, the decorative business witnessed steady volume growth, but the cause of concern, its protective as well as infrastructure business remains sluggish. Demand for core protective coating products continued to be affected by low infrastructure spending, Berger Paints concluded. Apart from that, a spike in the cost of both the key raw materials- crude oil as well as titanium dioxide—could hurt margins going ahead. Akin to peers, Asian Paints Ltd and Kansai Nerolac Paints Ltd, Berger Paints too may hike prices to offset this impact.

All the hopes for improvement in volume from here on lie on the expected positive impact of a good monsoon and pay hikes awarded by the seventh pay commission. Some experts say given its higher rural exposure and presence across segments, Asian Paints would benefit more from the good monsoon and changing macros compared to Berger Paints.

Meanwhile, in the last one year, Berger Paints share price has risen more than 40 per cent, outperforming the broad market as well as the major rival, Asian Paints. On the valuation front, the share is trading at a one-year forward price to earnings multiple of 48.17 times. Given the sharp run-up and expensive valuations, it isn’t surprising the shares are correcting sharply because of the earnings miss.

Berger Paints share price closed at Rs 215.15, down by 6.19 per cent on Friday.