Berger Paints (Pakistan) Limited

Berger Paints (Pakistan) Limited (PSX: BERG) was incorporated in Pakistan as a private limited company in 1950 and was converted into a public limited company in 1974. The company is engaged in the manufacturing of paints, varnishes and other related products. A British Island based company; Slotrapid Limited is the holding company of BERG.

Pattern of Shareholding

As of June 30, 2022, BERG has a total of 20.459 million shares outstanding which are held by 1,989 shareholders. Slotrapid Limited holds 52.05 percent shares of BERG followed by local general public holding 37.55 percent shares. Insurance companies account for 2.86 percent shares of the company. NIT and ICP have a stake of 1.45 percent in the company with Banks, DFIs and NBFIs running the close next with 1.42 percent shares. The remaining shares of BERG are held by other categories of shareholders with a stake less than 1 percent in the company.

Historical Performance (2018-22)

BERG’s topline and bottomline which had been falling in 2019 and 2020 rebounded in the subsequent years with 2021 touting the highest growth. The margins follow a mixed pattern whereby the GP has been slowly ticking down over the years. OP margin had been ascending until 2020 and then started falling thereafter while NP margin stayed in the range of 1.8 percent to 2 percent from 2018 to 2020, maxed out in 2021 and then tumbled in 2022. The detailed performance review of each of the year under consideration is give below.

In 2019, BERG’s topline dropped by 6 percent year-on-year due to upward price revisions in response to Pak Rupee depreciation and surging oil prices which raised the cost of raw materials for the company. Reduced demand resulted in a curtailed production and hence 6 percent lesser cost of sales for BERG. GP margin stayed at 21.8 percent in 2019 as in 2018. Distribution and administrative expense also tumbled by 13 percent year-on-year in 2019 on the back of lesser salaries and benefits as well as advertising and promotion expense. Other expense rose by 26 percent year-on-year in 2019 due to higher impairment loss on goodwill while other income slid by 14 percent year-on-year as there was no provision charged for impairment loss against capital work in progress (installation of solar panels at factory). Operating profit rose by 18 percent year-on-year in 2019 with OP margin climbing up from 4.3 percent in 2018 to 5.4 percent in 2019. Discount rate was raised from 5.75 percent to 13.25 percent in FY19. This coupled with increased borrowings culminated into an 87 percent year-on-year growth in finance cost during 2019. This pushed the profit before tax down by 23 percent year-on-year in 2019, however, part of the current year’s tax was deferred by the company, resulting in a drop in tax expense. Consequently, net profit slid by 1 percent year-on-year in 2019 to clock in at Rs.100.825 million with an NP margin of 2 percent versus 1.9 percent in 2018. EPS dropped from Rs.4.99 in 2018 to Rs.4.93 in 2019.

BERG’s revenue fell by another 18 percent in 2020. Economic activity dampened because of the outbreak of COVID-19 and hence reduced demand. Cost of sales also dropped by the same margin, however, GP margin dropped to 21 percent in 2020. Operating expense slid by 24 percent year-on-year. Other expense also posted a steep 58 percent year-on-year fall as there was no impairment of goodwill in 2020 coupled with lesser provisioning against WWF and WPPF. Other income boasted a massive 165 percent year-on-year growth in 2020 on account of insurance claims as well as exchange gain as against exchange loss in 2019. Contained expenses as well as robust other income pushed the operating profit up by 10 percent year-on-year in 2020. OP margin also surged to 7.3 percent – the highest level among all the years under consideration. Finance cost multiplied by 15 percent year-on-year as discount rate was high for the most part of the year except the COVID quarter. Net profit shrank by 26 percent year-on-year in 2020 to clock in at Rs.74.307 million with an NP margin of 1.78 percent. EPS climbed down to Rs. 3.63 in 2020.

After two successive years of lackluster demand and topline contraction, BERG’s topline posted a staggering 34 percent year-on-year rise in 2021. Generous monetary measures, directed fiscal support, refinance schemes etc, played an incredible to put the economy back on track. While the export sales continued to dwindle in 2021, local sales gain a lot of traction. Increase in the prices of raw materials, high freight and handling charges as well market induced rise in salaries and benefits culminated into a 36 percent year-on-year growth in cost of sales, yet gross profit grew by 27 percent year-on-year in 2021, however, GP margin inched down to 20 percent. Operating expenses ascended by 10 percent year-on-year. Other expense magnified by 496 percent year-on-year in 2021 on account of impairment of goodwill. However, it was counterbalanced by a 9 percent year-on-year rise in other income due to exchange gain as well as sale of scrap. Operating profit mounted by 26 percent year-on-year in 2021, however, OP margin trimmed to 6.8 percent. finance cost considerably dropped during 2021 due to monetary easing, resulting in a 163 percent year-on-year growth in net profit. Profit after tax stood at Rs.195.22 million in 2021 with an NP margin of 3.5 percent – the highest among all the years under consideration. EPS also rebounded to Rs.9.54 in 2021.

BERG’s topline grew by another 26 percent year-on-year in 2022 mainly on the back of increase in sales volume by 8 percent year-on-year. Record high inflation as well as Pak Rupee depreciation pumped up the cost of sales by 30 percent year-on-year. Gross profit grew by 9 percent year-on-year in 2022, however, GP margin bottomed out to 17.3 percent. Operating expense grew by 22 percent year-on-year in 2022 owing to inflation coupled with a considerable rise in advertising and promotion budget. Other expense increased only marginally due to cost of provision of services provided to the related party. Other income posted a notable growth of 16 percent year-on-year owing to scrap sales and rental income charged to the related parties. Operating profit grew by 7 percent year-on-year in 2022, but OP margin kept sliding to stand at 5.8 percent. Finance cost grew by 39 percent year-on-year in 2022 on the back of multiple rounds of monetary tightening during the year coupled with a significant increase in both short-term and long-term borrowings during the year to meet working capital requirements and to finance the installation of grid pegged solar panel plant respectively. The bottomline grew by 3 percent year-on-year in 2022 to clock in at Rs.201.886 million with an NP margin of 2.9 percent. EPS posted a slight improvement to clock in at Rs.9.87 in 2022.

Recent Performance (9MFY23)

BERG’s performance in FY23 doesn’t seem encouraging. Lackluster economic activity, low PSDP spending, decline in automobile sales and industrial activity restricted BERG’s sales. 3 percent year-on-year rise in topline during 9MFY23 came on the back of upward revision in prices with no significant progress seen in sales volume. Gross profit grew by 12 percent year-on-year. GP margin also posted an uptick from 18.2 percent in 9MFY22 to 19.8 percent in 9MFY23. Lower sales volume kept the operating expense in check which contracted by 4 percent year-on-year in 9MFY23. Other expense rose by 104 percent year-on-year during 9MFY23 maybe on account of exchange loss. The detailed financial statements are not yet available to comment on the actual reason of a considerable rise in other expense. Other income posted a marginal growth of 5 percent year-on-year during the period under review. Operating profit grew by 38 percent year-on-year in 9MFY23 and OP margin also improved to 8 percent from 6 percent during the same period last year. Finance cost offered negative contribution as it surged by 90 percent year-on-year in 9MFY23 due to excessive monetary tightening. This drove the net profit down by 8 percent year-on-year in 9MFY23 to clock in at Rs.143.619 million with an NP margin of 2.7 percent versus 3 percent during the same period last year. EPS also marched down to Rs.7.02 in 9MFY23 versus Rs.7.63 during the same period last year.

Future Outlook

Rising inflation and high cost of borrowing have one hand restrained the purchasing power of consumers while on the other hand pushed up the cost of industries by manifold. This catch-22 situation is likely to persist with massive fiscal slippages, continuously dwindling foreign exchange reserves, depreciating Pak Rupee and no visible developments on IMF disbursements front. Political instability continues to tag along. With all such macroeconomic headwinds, the future doesn’t seem very promising for BERG.