Fixed deposit programme- FAAA/Stable(Upgraded from FAA+)
Rs 800 million commercial paper programme- P1+ (Reaffirmed)
The rating upgrade on Berger Paints India Ltd’s fixed deposit programme is based on the Sustained improvement in its financial profile
• Favourable capital structure
• Steady growth in revenues
• Moderate but consistent profitability
• Superior debt protection measures
Strong position in domestic paints industry
• Healthy position in decorative paints
• Leadership in performance coatings
But these strengths are partly offset by its Limited presence in
• Western and southern markets, and
• Automotive paints
• Consistently improving and strong financial profile
Berger Paints’ financial profile has consistently improved over the last three years with a healthy revenue growth of 9-10 per cent per annum, moderate but steady profitability and superior debt protection measures.
The company has benefited from the strong annual growth of over 8 per cent in the domestic decorative paints segment over the last five years, which has resulted in stable operating (10-11 per cent over the last five years) and net (5-6 per cent) margins and good cash accruals.
Berger Paints has a highly favourable capital structure with a low gearing of 0.23x as at March 31, 2003, as compared to 0.61x as at March 31, 2001. It has accomplished this through a consistent improvement in its working capital management, good cash accruals and limited capital expenditure.
Moreover, steady profitability and declining interest expenses have helped to improve Berger Paints’ debt protection ratios. It had a net cash accruals /total debt of 0.76x, cash debt service coverage ratio of around 10 times and an interest coverage of over 7x in FY2003, as compared to 0.25x, 3 times and 5x for the above parameters respectively in FY 2001. The company does not have any long-term loans and its entire short-term borrowings are used to fund its working capital requirements.
Crisil expects the company’s financial profile to remain strong in the medium term. For the next two years , revenues will grow at the current rate of 9-10 per cent. Capital expenditure of Rs. 250-300 million for its new plant in Jammu, which is scheduled over the next two years, will be funded through internal accruals. Berger Paints’ financial flexibility will remain comfortable through steady accruals, a low gearing and the availability of under-utilised bank lines.
• Established player in decorative paints
Berger Paints continues to be the second-largest player in the decorative paints segment. The company’s strong market position emanates from its wide product mix, strong brands (top six brands account for over 60 per cent of its sales), long-standing presence and extensive distribution network (12,000 dealers) spread across the country. It has consistently maintained its market position in most decorative paints categories such as enamel, exterior emulsions, distempers, primers and cement paints.
Berger Paints, however, remains a distant competitor to the decorative segment’s market leader, Asian Paints India Ltd (Asian Paints), which has a stronger brand position and highly integrated operations.
Berger Paints’ distribution network is enhanced by its over-2000 colour-tinting machines (branded as ‘Colour Bank’). These are used to sell emulsion paints at the dealer level. In terms of geographical distribution, the company is strongest in the eastern market followed by the northern region. It has higher realisations in these markets but continues to be weak in the western and southern regions. The company’s ability to increase its penetration in the latter regions will hold the key to Berger Paints’ growth in the long term.
• Strong player in protective and powder paints but limited presence in automotive paints
In the industrial paints segment (constituting around 20 per cent of its sales), Berger Paints derives strength from its leadership position in the performance coatings segment, its established position in powder coatings as well as from its strong technological tie-ups with leading international players.
The company has technology tie-ups with Nippon Paint Company Ltd, Japan, for automotive coatings, Orica, Australia, for protective coatings and with Tigerwerk Lack-u, Austria, for powder coatings. Berger Auto and Industrial Coatings Limited (Berger Auto), its 100 per cent subsidiary, has a tie-up with Dupont Herberts Performance Coatings (Du-Herberts), Germany, for automotive coatings.
In the automotive paints segment, both Berger Paints and its subsidiary, Berger Auto, are confined to the two- and three-wheeler segments. Their key customers are TVS Motors, Yamaha Motors, Bajaj Tempo and LML Limited. In FY2003, Berger Paints (through Berger Auto) acquired a new three-wheeler account, Piaggio Vehicles Private Ltd, because its technological partner, Du-Herberts, is associated with Piaggio worldwide.
In the growing passenger car segment, however, the company’s presence is limited to financially weak players like Fiat India, for its Palio and Siena models, and Hindustan Motors.
Moreover, key auto multinational original equipment manufacturer (OEM) present in the country have international tie-ups with Kansai Paints, PPG Industries or BASF AG (the joint-venture partners of Goodlass Nerolac, Asian Paints and BASF Industries respectively).
Hence, Berger Paints’ automotive paints business’ growth hinges on its ability to strengthen and leverage its alliance with its international partners.
• Multi-locational facilities lead to good operating efficiencies
Berger Paints has manufacturing facilities in all four regions of the country, facilitating better logistics management and significant savings in transportation costs. Its new plant in Jammu will further improve its logistics in the northern markets.
Crisil expects Berger Paints to maintain its improved financial performance in future over the medium term, on the back of strong cash accruals and the absence of any large investment plans. Crisil also expects the company to maintain its strong business position.
Berger Paints was incorporated in 1923 as Hadfields (India) Limited. After a series of shareholding changes, about 65 per cent of its stake is today held by KS Dhingra and GS Dhingra (through their associates).
Berger Paints manufactures decorative and industrial paints. Decorative paints accounted for about 80 per cent of its sales in 2002-03 with industrial paints (performance coatings, powder coatings, general industrial and automotive paints) accounting for the rest. The company has manufacturing plants at Howrah with an installed capacity of 16,920 tonnes per annum (tpa), Pondicherry (18,000 tpa), Sikandarabad (12,300 tpa) and Goa (9200 tpa). The Goa and Pondicherry plants currently offer tax benefits in the form of sales tax and income tax exemptions.
The new plant at Jammu also offers excise, sales tax and income tax exemption benefits. In addition, the company has a 100 per cent subsidiary, BeePee Coatings Limited, which has a capacity of 17,000 tpa at Vallabh Vidyanagar, Gujarat, and acts as a processor for Berger Paints. The company extended its presence outside India in 2000-01 by acquiring a controlling stake in Jenson & Nicholson (Nepal) Private Ltd.
In May 2001, Berger Paints formed a 50:50 joint-venture with ICI India Limited (ICI India) in the automotive and industrial paints segment. ICI India transferred its automotive and industrial paints business as a going concern, including all assets at its Rishra plant, to the joint-venture company, Berger Auto.
Berger Auto was finally bought over by Berger Paints in February 2002 and complements its industrial paints business. For the year ended March 31, 2003, Berger Auto reported a loss of Rs 11.7 million (loss of Rs 2.5 million in the previous year) on net sales of Rs 291.6 million (Rs 289.7 million).
In FY2003, both the decorative and industrial paint segments grew by a healthy 7-8 per cent on the back of strong demand from the housing and construction sectors and OEM demand from end-user segments like auto and consumer durables. The industry’s medium- to long-term prospects continue to be favourable with an expected growth rate of 8-9 per cent in the medium term.
The decorative paints segment’s prospects would be linked to the state of the economy, construction activity and disposable income levels. Given the continued boom in the housing sector and increased construction activity, its short- to medium-term prospects are highly positive. Crisil expects this segment to grow by around 8-9 per cent annually over the next three years. In addition, the paints industry is likely to consolidate in the medium term and large, organised sector players are expected to further improve their market position.
Despite the likely slowdown from its robust growth levels of FY2003, the industrial paints segment would benefit from the continued healthy prospects of user industries like engineering, consumer durables and automobiles. Margins, however, are likely to be under pressure as automobile OEMs will pass on market-driven pricing pressures to their suppliers.
Rating Sensitivity Factors
Berger Paints’ credit profile would depend on its
• Financial risk profile, and
• Ability to sustain its strong business position in decorative paints.