Rating Rationale
December 15, 2017 | 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
* Earlier short-term debt including commercial paper
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+'.
 
In the first-half of fiscal 2018, the company achieved 12% revenue growth, while maintaining healthy operating margin of 15.2%. Debt however was higher on September 30, 2017 compared to March 31, 2017 due to sizeable dividend and Goods and Services Tax (GST) payments. Given the expected steady operating cash flows and prudent working capital management, debt levels are expected to reduce and capital structure to be strong. Besides, the strong financial risk profile is also backed by healthy liquid surplus; investments in marketable securities was Rs 346 crore as on September 30, 2017 in the standalone entity.
 
The ratings continue to reflect Berger Paints' established market position in the domestic paint industry and the strong financial risk profile. These strengths are partially offset by moderate segmental diversity in revenue, fluctuations in raw material cost 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. It is present in all paint 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.
 
Revenue is likely to register a healthy compound annual growth rate of 8-10% over the medium term, driven by strong brand equity, steady demand prospects for decorative paints, and growing penetration in Tier-II and Tier-III cities and rural areas, aided by a wider distribution network. Operating margin is likely to remain healthy at 15-16%, driven by product launches, and prudent spending on promotional activities.
 
* Strong financial risk profile: Financial risk profile is backed by sizeable adjusted networth, comfortable debt protection metrics, and healthy cash generating ability. The company has exhibited prudence in undertaking capital expenditure (capex) over the years, ensuring lower reliance on debt. Liquidity is further supported by healthy surpluses of Rs 346 crore as on September 30, 2017, and negligible bank limit utilisation, averaging 17% for the nine months through July 2017.
 
Moderate capex plans of Rs 200- 220 crore per annum should be covered through sufficient cash accrual expected over next three years. Adequate accrual and continued focus on pruning the working capital cycle, should help maintain strong credit metrics, besides enhancing liquid surplus.
 
Weakness
* Segmental concentration in revenue: Around 80% of revenue comes from the decorative segment, and the balance 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.
 
* Fluctuations in raw material cost 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%, incremental growth 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 demographics, 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 the 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 more than 25,000 dealers. The company derives more than 80% of its revenue from decorative paints, with the segment having recorded a healthy CAGR of 12% between fiscals 2012 and 2017.
 
The company has 10 manufacturing plants across India: Goa, Puducherry, Maharashtra (Jejuri), Uttar Pradesh (Surajpur factory at Greater Noida, and Sikandrabad), Rishra, Jammu, and Howrah. It commissioned a large greenfield unit in Hindupur, Andhra Pradesh, in September 2014, and a second unit at Naltoli, Assam in 2016. The company also caters to overseas markets such as Nepal, Bangladesh, Poland and Russia. It has a production facility at Krasnodar, Russia and two units in Nepal.  The company has also acquired Bolix SA of Poland, which is a leading provider of external insulation finishing systems 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 rest of the general industrial and auto (two-wheeler and commercial vehicle) business will remain with Berger Paints.
 
The company is listed on the Bombay Stock Exchange and National Stock Exchange.

During the first half of fiscal 2018, Berger Paints' consolidated net profit was Rs 224 crore on revenue of Rs 2,529 crore, vis-a-vis Rs 259 crore and Rs 2,265 crore, respectively, in the previous fiscal.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs crore 4,493 4,169
Profit after tax Rs crore 474 371
PAT margin % 10.4 8.8
Adjusted debt/adjusted networth Times 0.24 0.26
Interest coverage Times 45.55 24.01

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 facilities## 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
* Earlier short-term debt including commercial paper
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  500  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  500  CRISIL AAA/Stable  31-10-17  CRISIL AAA/Stable  05-01-16  CRISIL AA+/Positive    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Non Fund-based Bank Facilities  LT/ST  200  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
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
@ Includes Rs.100 crore of facilities that is yet to be allocated among the banks
@@ Includes Rs.75 crore of facilities that is yet to be allocated among the banks
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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