Berger Paints Update — Demand And Margins Normalizing; Upgrade To Buy: Yes Securities

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Berger Paints growth during the quarter looks much lower than peers given the presence of a large one‐off project in the base quarter; excluding that, both growth and margin trends are not very different from peers. But growth continues to remain lower than the sector leader for past couple of quarters given the company's relatively weaker presence in the faster growing Tier 1 markets.

The worse on the margins front also seems to behind with sequential improvement in gross margins which can move up further given further price hikes taken in the ongoing quarter post sharp price hikes in December. The subsidiaries and JVs are also delivering a strong recovery in performance excluding currency impact.

The management is not worried much about the emerging competition excluding the economy/mass segment where price disruption can impact market shares. It is confident of steadily gaining market share given its product innovation, strengthening distribution and branding/backward integration initiatives.

The demand outlook looks positive on both decorative and industrial businesses with demand stabilizing despite the recent sharp price hikes as seen in April and May trends.

We believe the recent sharp correction on competition concerns looks overdone and despite no dent to the structural story,the stock is now trading at a reasonable discountto the sectorleader, and looks to have some upside potential even giving a multiple lower than its recent history. We, therefore, upgrade our rating to Buy from Add.

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