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 reflect the company’s well established market position in the domestic paint industry and strong 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 2021 grew 7% y-o-y to Rs. 6,818 (Fiscal 2020: Rs. 6366 crore) crore in-spite of sharp decline during the first quarter owing to temporary shutdown of plants in March-April 2020 due to the nationwide lockdown to contain the Covid-19 pandemic. However, rapid recovery was witnessed from second quarter onwards primarily in the decorative segment driven by pent up demand during the festive season., introduction of new products and slew of measures undertaken by the paint companies like safe painting campaigns etc.  . Operating margins during fiscal 2021 improved by 70 bps to 17.4% (Fiscal 2020: 16.7%) owing to benign raw material prices during the first nine months of the year and various other cost rationalization measures undertaken by the company. 

 

The company’s financial risk profile continues to remain strong marked by high networth of Rs. 3088 crores,  net debt free balance sheet and sizeable liquid surplus of around Rs 649 crores at March 31, 2021. Capital expenditure (Capex) is expected to be high at Rs 700-750 crores for fiscal 2022 on account of offsetting up a fully automated manufacturing plant near Lucknow which is expected to be commissioned during the last quarter of fiscal 2022. With commissioning of this plant, the company is expected to improve its market share in Uttar Pradesh, Bihar and Madhya Pradesh The incremental capex and working capital requirements are expected to be funded entirely through internal accruals and liquid surplus and hence, 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 amortised 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 group has strong brands (Silk, Luxol, Weathercoat, Rangoli, Illusions and Jadoo), extensive distribution network and wide product portfolio encompassing enamels, exterior emulsions, distempers, primers and cement paints. It is present across all product segments, including decorative, general industrial, auto, protective and powder coating. The company is the second-largest player in the domestic decorative paints industry, and the market leader in the protective coating segment; it also has a small presence in the auto and powder coating segments. Aided by increased penetration into newer cities and towns, rapid urbanisation and low per capita consumption of paints relative to global averages, sales increased at a compound annual growth rate (CAGR) of 9% over the three fiscals through 2021. Strong brand, extensive distribution network and wide product portfolio will help sustain strong market position over the medium term.

 

* Strong financial risk profile: The group’s tangible networth was Rs 3,088 crore as on March 31, 2021, and debt was Rs 384 crore, resulting in healthy gearing of 0.12 time. Liquidity was strong, supported by cash and marketable securities of Rs 649 crore as on March 31, 2021. Return on capital employed (RoCE) was healthy at 31.1 times in fiscal 2021. Strong cash accrual and continued focus on pruning the working capital cycle should help maintain the strong financial risk profile.

 

Weaknesses:

* Limited, yet growing, presence in the non-decorative segment: Around 80% of revenue comes from the decorative segment, while the remaining 18% comes from the non-decorative segment (includes protective, powder and auto coatings). Concentration in revenue constrains the ability to fully leverage demand in these segments.

 

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

Liquidity: Superior

Expected cash accrual of Rs 650-700 crore per annum will comfortably cover yearly debt obligation of Rs 100 crore in fiscal 2021 and Rs 69 crore in fiscal 2022. Liquid surplus was Rs 649 crore as on March 31, 2021. Utilisation of fund-based limit of Rs 500 crore was moderate. Cash accrual and cash and equivalent will be sufficient to meet debt obligation and capex.

Outlook: Stable

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

Rating Sensitivity Factors

Downward factors

• Sustained decline in revenues by over 15% in the medium term or sharp decline in market share in the domestic paints industry
• Intense competition or steep increase in input prices affecting profitability, resulting in steep decline in operating margin to below 12%
• 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 more than 25,000 dealers. The company derives around 80% of revenue from decorative paints, with the segment having a healthy CAGR of 9% for the three fiscals through 2021.

 

The company has 14 manufacturing plants: Goa, Puducherry, Maharashtra (Jejuri), Uttar Pradesh (Surajpur factory in Greater Noida, 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 auto three- and four-wheeler 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 company is listed on the Bombay Stock Exchange and the National Stock Exchange. As on March 31, 2021, the promoters held 74.98% stake.

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	500	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit##	NA	NA	NA	200	NA	CRISIL A1+
Na	Commercial Paper	NA	7-365 days	NA	500	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