1:5 Bonus Issue: Berger Paints Share Drops 15% In 5 Sessions After Turning Ex-Bonus; Buy Or Sell?

The second largest paint company in India, Berger Paints had been grappled by bears during the last trading week from September 25th to 29th, as the company's shares nosedived nearly 15% on BSE. The bearish week of Berger Paints also comes after it turned ex-bonus for bonus shares in the ratio of 1:5. Going ahead, Berger Paints faces risk from rising crude oil prices. But that's not all, the company is more vulnerable to the launch of a paint business by Grasim than its rival Asian Paints which is the largest paint company in the sector.

Berger Paints' share price ended at Rs 568.90 apiece on last week's Friday session on BSE. Its market cap is over Rs 66,317 crore. A week ago, on September 22, which was the day when Berger Paints turned ex-bonus, the share price was at Rs 667.80 apiece on the exchange.

Since then till September 29th, Berger Paints' share price has dropped by 14.8% on BSE.

The company fixed September 23rd as the record date to ascertain the eligibility of shareholders entitled to issue of bonus equity shares in the ratio of 1:5. But since September 23rd was a market holiday due to the weekend, the shares turned ex-bonus on September 22 to determine eligible shareholders.

The bonus ratio of 1:5 means that the company will issue 1 new bonus share having a face value of Re 1 each for every five existing equity shares having a similar face value.

Following the drop in Berger Paints share price, Kotak Institutional Equitites in its research note dated September 26, said, "BRGR's stock price is up 9% in the past three months (even after yesterday's 9% fall); it is trading at 54X FY2025E PE (a 4% discount to APNT). Even as
BRGR has outperformed APNT on decorative paints growth in the past four quarters, we believe that the quantum of outperformance does not merit this kind of stock outperformance."

Kotak also took note of the decorative paints value growth which has decelerated to 3-4% in 2QE of FY24 compared to the preceding quarter, partly due to the late festive season.

According to the brokerage, Berger's CEO, in a recent media interaction noted that '2Q might face some challenges' while reiterating the company's full-year guidance of DD volume/value growth. Industry participants (including BRGR) are pinning their hopes on a robust 3Q, perhaps due to a longer gap between the monsoon and the festive season.

However, it added, given the marked slowdown visible across categories (staples, QSR, footwear/apparel), it remains to be seen if industry value growth recovers to DD in 2HFY24E.

For overall FY24E, Kotak said, "While BRGR had guided for FY2024E gross margins in the range of 38-40%, the Street is expecting the company to report GMs at the higher end of the band (considering 1Q's healthy GM and benign RM environment at that point). However, crude prices (INR terms) have jumped by about 10% qoq in 2Q, at a time when the competitive landscape is prompting higher rebates and discounts. We believe that this development presents a potent risk to our (17.7%)/Street's (17%) FY2024E EBITDA margin forecasts."

Also, Kotak believes that Berger Paints is more vulnerable than Asian Paints to Grasim's entry, as Grasim would likely avoid a head-on battle with Asian Paints and focus on displacing #2-#4 brands in dealer outlets. Further, APNT's strength in adjacencies (waterproofing and Home Décor) could help it defend market share better in large retail outlets (Mega/platinum dealers).

Last month, Aditya Birla Group's flagship company, Grasim unveiled the brand name of its paints business, 'Birla Opus'. The market launch of Birla Opus is scheduled for Q4FY24. Grasim will offer a full suite of high-quality products in the decorative paints segment. Grasim had previously committed an investment of Rs 10,000 crore towards setting up the paints business.

On the valuation of Berger Paints, Kotak said, "BRGR's valuation discount to APNT has narrowed to 4%. Even as BRGR has outperformed APNT (on domestic decorative paint growth) in the past four quarters, we don't believe that the quantum of outperformance merits the recent stock outperformance (on an absolute basis and relative to APNT). We downgrade BRGR to SELL with an unchanged FV of Rs500 (42X September 2025E EPS)."