Berger Paints Pakistan Limited (PSX: BERG) was set up as a private limited company in 1950 under the Companies Act, 1913 (now Companies Act, 2017). It was later converted into a public limited company. The company manufactures and trades paints, varnishes, and other items. The holding company of Berger Paints Pakistan is Slotrapid Limited, based in British Virgin Island.
Shareholding pattern
As at June 30, 2021, over 56 percent shares are categorized under “others”. Additionally, 52 percent shares were held by Slotrapid Limited- the holding company, while the local general public held over 38 percent shares. The directors, CEO, their spouses and minor children hold negligible share in the company, while banks, DFIs, and NBFIs own close to 3 percent shares. The remaining about 3 percent shares are with the rest of the shareholder categories.
Historical operational performance
Berger Paints Pakistan Limited has mostly seen a growing topline with profit margins mostly reducing after FY16, except for net margin in FY21 that witnessed some improvement.
Revenue growth improved in FY18 as it posted a rise of 6.4 percent, compared to the marginal growth of less than 1 percent seen in FY17. The company’s major source of revenue is generated through local sales. During the year, both local sales and export sales registered a rise of 6.4 percent and 7.2 percent, respectively. However, this was accompanied by a more than corresponding rise in cost of production that consumed 78 percent of revenue, compared to almost 71 percent in FY17. The increase in cost of production was due to higher custom and regulatory duties, raw material prices, currency devaluation and rising oil prices that caused gross margin to shrink to almost 22 percent for the year. This also trickled to the bottomline with net margin recorded at near 2 percent.
In FY19 revenue contracted by 6 percent with local sales coming down from an all-time high of Rs 7.8 billion in the previous year to Rs 6.8 billion in FY19. Export sales also reduced during the year, by 16.7 percent. The decline in revenue was attributed to the prevalent economic environment noted by high inflation and interest rates as well as currency depreciation. However, gross margin was more or less flat 21.8 percent as the cost of production also reduced in line with the decline in topline. Despite this, operating margin and net margin were marginally higher year on year at 5.4 percent and almost 2 percent, respectively, due to the drop in distribution expenses and a lower taxation. The decline in distribution expenses came from a lower salaries expense, traveling and advertising and sales promotion.
The company witnessed the biggest contraction in topline in FY20 at 18.4 percent with revenue falling to Rs 4 billion in value terms after remaining above Rs 5 billion for the last four consecutive years. Export sales witnessed a decrease of almost 23 percent and local sales saw a decrease of over 10 percent. The loss in revenue was largely attributed to the outbreak of the Covid-19 pandemic that resulted in lockdowns, shut down of production and businesses and border closures. Thus, gross margin fell to almost 21 percent, a level last seen in FY11. While operating margin improved due to other income coming from “others” and an exchange gain, the escalation of finance expense to over 4 percent of revenue, kept net margin nearly flat at 1.8 percent for the year.
Topline recovered in FY21 as it witnessed an all-time high growth rate of 34 percent to reach Rs 5.6 billion in value terms. Local sales reached yet another high of almost Rs 8 billion while export sales continued to reduce. There was a 28 percent improvement in volumes. This can be attributed to the construction package that gave a boost to the construction activity and hence demand for products of related industries. There was also pent-up demand that was contained in the previous year due to the outbreak of Covid-19 and the resultant strict lockdowns. However, the growth in revenue was accompanied by an almost corresponding growth in cost of production keeping gross margin close to 20 percent. This was also reflected in operating margin. But net margin improved to 3.5 percent on the back of a reduction in finance expense. The latter resulted from a reduction in policy rate from 13.25 percent to 7 percent.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by 18.7 percent year on year. This was as per the expectations of the company that the boost in the construction industry would have a positive impact on the related industries as well. However, profitability with a net margin of 2.3 percent, was lower compared to 3.8 percent in the same period last year due to increase in prices of raw materials, oil, and cost of other inputs.
The second quarter of FY22 also saw revenue higher year on year, by almost 41 percent. This was attributed to a growth in volumes as well as a better product mix.
Gross margin was lower year on year again due to an increasing cost of production, but the decrease in distribution expenses allowed for some improvement in profitability.
Thus, net margin was recorded at 5 percent for the period. While the topline has recovered with the opening up of businesses and activities, but the rising global commodity prices continue to pose a challenge to the company’s profitability.