Rating Rationale
August 20, 2018 | Mumbai
Berger Paints India Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.700 Crore
Long Term Rating CRISIL AAA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

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

The ratings continue to reflect the company's established market position in the domestic paint industry and its strong financial risk profile. These rating strengths are partially offset by limited, yet growing, presence in non-decorative segment, and susceptibility to volatility in raw material prices and limited pricing flexibility.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Berger Paints, its subsidiaries and joint ventures, as all companies are engaged in the same business. For analytical purposes, CRISIL amortises goodwill created upon acquisition for a period of five years.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the Indian paints industry: Berger Paints has an established position in the decorative paint market, backed by strong brands (Silk, Luxol, Weathercoat, Rangoli, Illusions, and Jadoo), well-spread 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, automotive, protective, and powder coatings.
 
The company is the second-largest player in the domestic decorative paint industry, and the market leader in the protective coating segment; it also has a small presence in the automotive and powder coating segments.
 
Increased penetration into newer cities and towns, and favourable demand dynamics augur well for domestic paint manufacturers. Aided by these factors, Berger Paints is well positioned to sustain revenue growth of 10% compounded annual growth rate (CAGR) over the medium term.
 
* Strong financial risk profile: Financial risk profile is backed by sizeable adjusted networth, comfortable debt protection metrics, and healthy cash generating ability. Prudence in undertaking capital expenditure (capex) has ensured lower reliance on debt over the years. Liquidity is also supported by healthy surplus of around Rs 433 crore as on March 31, 2018, and negligible bank limit utilisation, averaging 6% for the nine months through July 2018.
 
Moderate capex plans of Rs 200-220 crore per annum should be funded through sufficient cash accrual expected over the next three fiscals. This, coupled with continued focus on efficient working capital management, should help maintain strong credit metrics (gearing below 0.20 time over medium term), besides enhancing liquid surplus.
 
Weakness
* Limited, yet growing, presence in non-decorative segment: Around 80% of revenue comes from the decorative segment, and only about 20% is derived from the non-decorative segment, which includes protective, powder and automotive coatings. This constrains the company's ability to fully leverage demand prospects in these segments.
 
* Susceptibility to volatility in raw material prices and limited pricing flexibility: Despite the organised paint industry being oligopolistic, manufacturers face competition from strong regional players, especially in mass-market products. Consequently, while paint manufacturers have adequate flexibility to pass on any increase in cost, ability to absorb benefits and thereby increase margin is limited. While Berger Paints will maintain its operating margin at 15-16%, any steep increase could be limited by competition.
Outlook: Stable

CRISIL believes Berger Paints' business risk profile will remain healthy over the medium term, supported by a strong market position, healthy revenue visibility due to favourable demand, and stable operating margin leading to healthy cash accrual. Financial risk profile will also remain strong, with moderate capex and low reliance on debt, besides build-up in liquid surplus.
 
Downward scenario
* Sharp deterioration in operating performance, severely impacting cash generation
* Sizeable debt-funded acquisitions and material depletion of cash surplus
* Any unrelated diversification, especially if funded by large debt and weakening credit metrics

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 more than 80% of revenue from decorative paints, with revenue growing by a compound annual rate of 8% between fiscals 2013 and 2018.
 
The company has 13 manufacturing plants across India: Goa, Puducherry, Maharashtra (Jejuri and Taloja), Uttar Pradesh (Surajpur factory at Greater Noida, and Sikandrabad), West Bengal (Rishra and Howrah), Jammu, Andhra Pradesh (2 units at Hindupur) and Assam (Naltoli  and Nalbari). The company also caters to overseas markets such as Nepal, Bangladesh, Poland and Russia. It has a production facility at Krasnodar, Russia and two manufacturing units in Nepal.  The company has also acquired Bolix SA of Poland, which is a leading provider of external insulation finishing systems (EIFS) in Eastern Europe.
 
In June 2016, Berger Paints divested its auto three-wheeler and four-wheeler businesses (accounting for less than 1% of total turnover) into its existing joint venture (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 remaining parts of the general industrial and auto (two-wheeler and commercial vehicle) business 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 Berger Paints has entered into a joint venture (JV) with Rock Paints Co. (Japan) to manufacture automotive refinish paints. Berger Paints will hold 51% stake in the JV.
 
The company is listed on the Bombay Stock Exchange and the National Stock Exchange.
 
For the three months of fiscal 2019, Berger Paints' consolidated net profit was Rs 135 crore on revenue of Rs 1,483 crore, vis-a-vis Rs 113 crore and Rs 1,247 crore, respectively, in the previous fiscal.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 5,203 4,493
Profit after tax Rs crore 461 474
PAT margin % 8.8 10.4
Adjusted debt/adjusted networth Times 0.22 0.24
Interest coverage Times 32.87 45.55

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)
Rating assigned
with outlook
NA Fund-Based Facilities# NA NA NA 500 CRISIL AAA/Stable
NA Non-Fund Based Limit## NA NA NA 200 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 500 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 - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500.00  CRISIL A1+      15-12-17  CRISIL A1+    --    --  CRISIL A1+  
            31-10-17  CRISIL A1+  05-01-16  CRISIL A1+    --   
            19-01-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  500.00  CRISIL AAA/Stable      15-12-17  CRISIL AAA/Stable  05-01-16  CRISIL AA+/Positive      CRISIL AA+/Stable 
            31-10-17  CRISIL AAA/Stable           
            19-01-17  CRISIL AA+/Positive           
Non Fund-based Bank Facilities  LT/ST  200.00  CRISIL A1+      15-12-17  CRISIL A1+  05-01-16  CRISIL A1+      CRISIL A1+ 
            31-10-17  CRISIL A1+           
            19-01-17  CRISIL A1+           
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities# 500 CRISIL AAA/Stable Fund-Based Facilities# 500 CRISIL AAA/Stable
Non-Fund Based Limit## 200 CRISIL A1+ Non-Fund Based Limit## 200 CRISIL A1+
Total 700 -- Total 700 --
#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
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for rating short term debt

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