Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Berger Paints India Limited (Berger Paints)

 

The ratings continue to factor the well-established market position in the domestic paint industry and healthy financial risk profile. The company is the second largest domestic player in the decorative paint segment and the largest player in the non-auto industrial paint segment. These rating strengths are partially offset by moderate segmental diversity in revenue, vulnerability in raw material cost and limited pricing flexibility.

 

Revenues for fiscal 2022 grew by 28% to Rs 8,762 crores from Rs 6,818 crores driven by robust growth in the decorative and industrial segment. The decorative segment contributed to 80% of the total overall sales while balance was contributed by the industrial segment. Demand pick up was stronger in Tier -I cities (i.e. larger cities and towns). Revenue growth of 10% is expected over the medium term, supported by launch of new products and painting campaigns, up-trading towards higher value products and capturing market share from the unorganized players. Operating margin witnessed moderation in FY22 to 15.8% from 17.7% in FY21 on account of sharp increase in raw material prices which was not fully passed on despite various price hikes undertaken by the company. RM prices accounted for 58% of total revenues in FY22 and around 55-60% of RM prices is linked to crude derivatives. Going froward, operating margins to remain healthy at about 16-17% levels over medium term supported by improved capacity utilizations, price hikes and recent softening of raw material prices. Q1FY23 performance was strong with revenues growing by 53.4% over Q1FY22 albeit on a low base. There was a contraction in gross margins in Q1FY23 due to an uptick in certain raw material prices which led to the company securing a weighted average price increase of around 21%-22% versus Q1FY22. Overall, the operating margins remained broadly stable this quarter.

 

The company’s financial risk profile continues to remain strong marked by high networth of Rs. 3644 crores and sizeable liquid surplus of around Rs 400 crores as on March 31, 2022. Capital expenditure (Capex) is expected to be around ~400 crores for fiscal 2023 on account of setting up new facilities and for maintenance. Even though, the rising working capital requirements are expected to be funded partially through short term borrowings, CRISIL Ratings expects the group to sustain its strong financial risk profile over the medium term.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Berger Paints, its subsidiaries, and joint ventures (JVs), as these entities are in the same business. For analytical purposes, CRISIL Ratings has amortized goodwill created upon acquisition over five years.

 

Please refer Annexure – List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established position in the domestic paint industry: The Berger group has strong brands (Silk, Luxol, Weathercoat, Rangoli, Illusions and Jadoo), an extensive distribution network- (over 35,000 dealers) and a wide product portfolio, encompassing enamels, exterior emulsions, distempers, primers and cement paints. It is present across all segments, including decorative and general industrial, auto, protective and powder coating. It is also the second-largest player in the domestic decorative paints industry, and the market leader in the protective coating segment, with a small presence in the auto and powder coating segments. Sales have been increasing through the years led by increased penetration into newer cities and towns, rapid urbanization and low per capita consumption of paints relative to global averages. The strong brand, extensive distribution network and wide product portfolio should help the company sustain its strong market position over the medium term.

 

Strong financial risk profile: Tangible networth of Rs 3,644 crore against total debt of Rs 668 crore as on March 31, 2022, kept gearing low at 0.18 time. Liquidity was adequate, supported by cash and marketable securities of Rs 400 crore as on same date. Return on capital employed (RoCE) was healthy at 29.4% in fiscal 2022. Strong cash accrual and continued focus on pruning the working capital cycle should help maintain the strong financial risk profile.

 

Weakness:

Limited, yet growing, presence in the non-decorative segment: Around 80% of revenue comes from the decorative segment, while the non-decorative segment accounted for the balance (including protective, powder and general industrial and auto coatings). Concentration in revenue constrains the ability to fully leverage demand in these segments. The conglomerates looking to disrupt the decorative paints market is another monitorable.

 

Vulnerability to volatility in raw material prices and limited pricing flexibility: Despite the oligopolistic nature of the organized paint industry, players face competition from strong regional players, especially in mass-market products. Consequently, while paint manufacturers have adequate flexibility to pass on the increase in cost, their ability to increase the margin is restricted. Hence, the operating margin was in the range of 14-17% for the past four fiscals.

Liquidity: Superior

Expected cash accrual of Rs 800-1000 crore per annum coupled with liquid surplus of around Rs.400cr will provide cover for the expected debt of Rs 1000 crore as on Mar 31, 2023. The fund-based limit of Rs 1100 crore was utilized at 82% as of May 2022.

Outlook: Stable

The business risk profile of Berger Paints will remain healthy over the medium term, driven by its established market position, sustained revenue growth and stable operating margin. The financial risk profile will remain strong, aided by healthy cash accrual and improvement in networth, led by steady accretion to reserve and moderate reliance on external debt.

Rating Sensitivity Factors

Downward Factors

• Sustained decline in revenues by over 15% in the medium term or steep increase in input prices affecting profitability, resulting in decline in operating margin to below 12%.
• Increased competitive intensity also leading to sharp decline in market share in the domestic paints industry
• Large, debt-funded acquisition or capex that may impact financial risk profile
• Material reduction in liquid surplus

About the Company

Berger Paints, incorporated in 1923, is one of India’s oldest paint companies. It manufactures paints and varnishes, and has a strong distribution network, including 110 stock points, catering to over 25,000 dealers. The company derives around 80% of revenue from decorative segment and the balance from the industrial segment.

 

The company has 14 manufacturing plants: Goa, Puducherry, Maharashtra (Jejuri), Uttar Pradesh (Surajpur factory in Greater Noida, Sandila and Sikandrabad), Rishra, Jammu and Howrah. It had commissioned a large greenfield unit in Hindupur, Andhra Pradesh, in September 2014, and a second unit in Naltoli, Assam, in 2016. The company also caters to overseas markets such as Nepal, Bangladesh, Poland and Russia. It has a production facility in Krasnodar, Russia, and two manufacturing units in Nepal. It has also acquired Bolix SA of Poland, which is a leading provider of external insulation finishing systems (EIFS) in Europe.

 

In June 2016, Berger Paints divested its three- and four-wheeler vehicle businesses (accounting for less than 1% of total turnover) into its existing JV (with Nippon Paints Automotive Coatings Ltd, Japan), Berger Nippon Paints Automotive Coatings Pvt Ltd, matched by an almost equal-sized auto four-wheeler business from Nippon Paints India. The rest of the general industrial and auto (two-wheeler and commercial vehicle) businesses will remain with Berger Paints.

 

In May 2017, Berger Paints acquired Saboo Coatings Pvt Ltd (which makes specialty liquid coatings used in farm and construction equipment, automobiles, fans, electronics, elevators, handicrafts and home furnishing) for Rs 83 crore. In July 2018, the former entered into a JV with Rock Paints Co, Japan, to manufacture auto refinish paints. Berger Paints holds 51% stake in the JV.

 

In November 2019, Berger Paints acquired 95.5% stake in Shalimar Tar Products Ltd (STP Ltd) for a consideration of Rs 130 crore. STP Ltd manufactures construction chemicals, waterproofing chemicals, construction admixtures and tar-based products.

 

The operating income for Q1FY23 was 2,760 crores.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Date of redemption	Coupon rate (%)	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Fund-Based Facilities#	NA	NA	NA	1300	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit##	NA	NA	NA	450	NA	CRISIL A1+
NA	Commercial paper	NA	7-365 days	NA	1300	Simple	CRISIL A1+

#Interchangeable between cash credit, working capital demand loan, packing credit, bill discounting, buyer's credit and short-term loans

##Interchangeable between bank guarantees and letters of credit

Annexure - List of Entities Consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Beepee Coatings Pvt Ltd	100%	Subsidiary
SBL Specialty Coatings Pvt Ltd (formerly known as Saboo Coatings Pvt Ltd)	100%	Subsidiary
Berger Jenson & Nicholson (Nepal) Pvt Ltd	100%	Subsidiary
Berger Paints (Cyprus) Ltd consolidated with Berger Paints Overseas Ltd	100%	Subsidiary
Lusako Trading Ltd consolidated with Bolix SA and group*	100%	Subsidiary
Berger Rock Paints Private Limited	100%	Subsidiary
Berger Becker Coatings Pvt Ltd	48.98%	Joint venture
Berger Nippon Paints Coatings Indian Ltd	49%	Joint venture
STP Ltd	100%	Subsidiary

*Group includes Build-Trade Sp zoo, Soltherm External Insulations Ltd and Soltherm Isolation Thermique Exterieure SAS