Berger Paints Pakistan Limited

Berger Paints Pakistan (PSX: BERG) began its operations three years after the inception of Pakistan- in 1950. It later became a public limited company in 1974.

Berger Paints established its first plant in 1955 in Karachi. With the country’s industrial sector expanding the demand for paints also grew. In 2006 it established another plant, this time in Lahore, which allowed Berger Paints to increase its production, thus expanding customer base as well.

Apart from decorative paints, Berger also caters to automotive business whereby it provides paints for cars as well as tractors, trucks, two and three wheelers. Its other business lines also include powder and protective coatings, vehicle refinishes, road safety which refers to road marking products, government and marine whereby it caters to the needs of armed forces, aviation sector, utility corporations, ports and shipping, research and development organizations, educational institutions and the health sector.

Shareholding pattern

Foreign companies hold majority of the shares of Berger Paints Pakistan- around 63 percent. According to their recent annual report, the holding company of Berger Paints Pakistan is Messrs. Slotrapid Limited. About 28 percent of the shares are held by the local general public, while directors, CEO, their spouses and minor children hold less than 1 percent share in the company.

Historical operational performance

Despite lower sales in FY15, Berger Paints managed improve margins as a result of curtailment of cost of manufacturing. Sales declined year on year by a little over 4 percent due to competition from the unorganised sector. As a result, the company had to offer extended credit and trade discounts. Costs on the other hand reduced due to cost of raw material declining in the international market, in addition to petroleum products.

In FY16 the company experienced considerable improvement in its year on year topline growth- at 18 percent. This can be attributed to an overall improvement in the economic environment of the country noted by declining interest rates, oil prices, inflation rate and better power supply. Cost of manufacturing, - although increased in absolute terms - rather declined as a percentage of revenue.

Distribution expenses particularly increased during the period due to additional promotional activities and advertising and freight charges. A notable increase was also seen in other expenses which came mainly from ‘inventory items written off’. Despite this, the company managed to improve its margins as a result of better revenue and lower costs.

The growth in topline during FY17 was negligible at less than 1 percent. The commencement of activities with regard to CPEC created a lot of competition with the unorganised sector giving stiff competition to companies. With the increase in price of raw material as well, the gross margins declined slightly. Berger Paints continued to spend on advertising and promotion which added to costs.

During FY18, the cost of production increased significantly. This can be attributed to the rupee devaluation which resulted in increase in prices of raw material; oil prices also increased whereas the company also had to pay higher customs and import duties. Although topline registered a year on year growth of 6 percent, the company could not pass all of the burden of increase in cost to the customer, thus squeezing profit margins.

In FY19, GDP of the country was 3.3 percent, the lowest recorded in nearly a decade. This was accompanied by a rise in interest rates, inflation rates, oil prices and currency depreciation. Fluctuation in prices due to currency changes caused sales to decline- the latter declining by 6 percent annually. Income earned from other sources also continued to decrease while finance costs surged due to doubling in policy rate. With a decrease in administrative and distribution costs, operating margins improved while a lower tax expense allowed net margin to remain stable.

Half yearly results and future outlook

In the first half of FY20, topline fell by 7 percent due to subdued economic activity overall. In 1HFY20,costs consuming 79 percent of the net revenue. Operating and net margin managed to improve year on year as a result of higher income earned from other sources and lower expenses related to distribution and administration. Gross margins remained unchanged between the two periods.

The company foresees economic stability if revenue is generated form broadening the tax net. Moreover, if the country’s foreign exchange reserves remain at staggering levels then it will continue to threaten business activity. Moreover, in the event of a decline in foreign exchange reserves, if currency further devalues, it can adversely affect the profitability of the company. In the current situation of Covid-19, with many offices and plants halting their operations indefinitely, demand for the company’s products is likely to be impacted in the ongoing year to say the least.