It has not been a good year for Berger Paints. The top-line showed sluggish growth while the bottom-line halved. Lacklustre growth in sales and shrinking profits has been the company’s trend since FY16.

The decline in net profit stemmed from higher cost of raw material which decreased gross profit. Since raw materials account for 50 to 60 percent of net turnover, increase in their prices drove down profitability. As derivatives of crude oil are used in manufacturing paint, increases in oil prices have adversely affected Berger’s fortune. Currency devaluation further aggravated the situation by increasing costs of goods sold as well as causing exchange rate losses.

Other income accounts for about a quarter of its profit before tax. Last year the biggest chunk of other income was exchange gain. Given the exchange rate losses, this contributed in decreasing other income which also played a role in bringing down the bottom line. In an effort to mitigate the decline in profit, selling and distribution costs as a proportion of sales decreased by 4 percent.

Finance costs have increased by 17 percent in FY18. 9MFY18’s figures show a slight increase in trade debts while cash and bank balances have halved. Berger’s short term borrowings have increased by nearly 10 percent as well. Since the bulk of Berger’s finance costs comprise of mark up on short term loans, higher interest rates and increased in short term financing may have led the increase in finance costs.

In the past Berger’s relatively diversified portfolio, which includes paints for vehicles and construction as well as decorative paints, was able to cushion decline in demand. But lower spending on infrastructure projects and cooling of domestic demand of cars has restricted volumetric growth in the top-line.

Berger’s performance is reflective of the challenges the sector faces. On one hand, there is a lot of competition between big players such as Akzo Nobel and the unorganized sector, and on the other hand there are cheap Chinese imports. As a result of market forces and competition, increases in costs cannot be passed on to consumers in the form of higher prices.

One could argue that increase in affordable housing as pledged by the sitting government will increase demand for decorative paint and hence revenue going forward. But since Berger is a premium brand, those opting for low cost housing will probably prefer paints by cheaper local players or imports. On the industrial side, slowing doing of the economy and CPEC-related spending will put pressure on non-decorative paints sales. In the current scenario it seems unlikely that Berger’s financials will see an up tick going forward.