Berger Paints Pakistan Limited

Berger Paints Pakistan Limited (PSX: BERG) was set up as a private limited company in 1950. It was later converted into a public limited company in 1974. It manufactures and trades in paints, varnishes, and other related items. Its holding company is Slotrapid Limited.

Shareholding pattern

As at June 30, 2020, over 62 percent shares are held by the foreign companies. Of this a major shareholder is Slotrapid Limited holding over 52 percent shares. The local general public owns nearly 28 percent shares, while the directors, CEO, their spouses and minor children own less than 1 percent shares. Close to 4 percent shares are owned by banks, DFIs, NBFIs; the remaining roughly 6 percent shares are distributed with the rest of the shareholder categories.

Historical operational performance

Berger Paints topline has been fluctuating over the years, contracting consecutively for the last two years. Profit margins, on the other hand, grew between FY13 and FY17, after which it declined and has remained relatively stable until FY20.

After witnessing the highest growth in topline at 18 percent in FY16, revenue registered a marginal rise in FY17, at close to 1 percent. This was due to increased competition coming from the unorganized sector that offered discounts, given the buzz related to CPEC. Along with rise in raw material prices, gross margin reduced to 29 percent. This was further reduced due to increased spending on advertising and promotions, and a reduction in other income that had been unusually high in the preceding year. The latter was due to a one-off insurance claim. However, owing to a lower tax expense, the company was able to improve net margin marginally from 3.6 percent in FY16, to 3.9 percent in FY17.

In FY18, the company saw its sales revenue growing by over 6 percent year on year. The company earns bulk of its revenue from local sales. In FY18, both export sales and local sales saw a rise. Despite this, gross margin dropped to almost 22 percent, due to cost of production making 78 percent of revenue, up from almost 71 percent in FY17. This was attributed to increased custom and regularity duties, raw material prices, currency devaluation and rising oil prices that collectively hit the company’s profitability. With other income shrinking further, net margin was halved to nearly 2 percent during the year, compared to nearly 4 percent in FY17. In value terms as well, net profit halved from Rs 202 million in FY17, to Rs 102 million in FY18.

Berger Paints saw revenue declining by 6 percent in FY19. Local sales fell from Rs 7.8 billion in FY18, to Rs 6.8 billion in FY19. This was attributed to the challenging economic environment prevalent in the country, with high inflation and interest rates and currency depreciation. As the change in cost of production was in line with sales, gross margin was flat at 21.8 percent. But the reduction in distribution expense coming from lower salaries expense, traveling and advertising and sales promotion, allowed operating margin to improve to over 5 percent. With an even lower tax expense, net margin was marginally higher at 1.97 percent. Although finance expense increased due to a high interest rate, it was not sufficient to offset the gains from lower expenses.

Just when the economy was moving towards some stability in FY20, the world was struck with a pandemic that resulted in lockdowns adversely and significantly impacting businesses. Revenue for the company fell by over 18 percent; both export sales and local sales witnessed a decline, causing gross margin to reduce to nearly 21 percent- the lowest seen since FY12. Operating margin improved somewhat on the back of other income that arose out of “others” and exchange gain under the “income from non-financial assets” category. But the rise in finance expense did not allow for the higher operating margin to translate into a higher net margin. Although interest rates reduced in FY20, it was more towards the end of FY20, therefore its impact is not seen in the financial statements of FY20. Thus, net margin was recorded at 1.7 percent for the year.

Quarterly results and future outlook

Revenue was 14 percent higher in the first quarter of FY21 as lock downs eased and business activities resumed. Cost of production was lower at 77 percent compared to over 81 percent in the same period last year. Therefore, profit margins were also better for the quarter as the company posted a net margin of 3.8 percent compared to a loss of Rs 18 million in 1QFY20.

By the second quarter the large-scale manufacturing sector regained momentum, with the government aiding the process by announcing incentives for the construction sector in particular, and the State Bank lowering interest rates. This is reflected in the higher sales for the second quarter. However, profit margins were slightly lower due to higher costs and expenses.

Third quarter revenue was higher year on year at Rs 1.37 billion, although lower than the previous quarter. Costs also jumped to 81 percent for the quarter, reducing profit margins compared to the previous quarter, but better than the same period last year.

With the ongoing third wave of Covid-19, and the simultaneous vaccine drives, the future is uncertain. On the other hand, the company is enhancing capacity and working towards eliminating bottlenecks to increase its range of products that may translate into future profitability.