We first looked at Berger Paints five years ago during my stint at ChrysCapital. We liked the company but felt the valuation was slightly expensive, so we gave it a pass. In December 2015, Mylen Capital was set up by raising Rs.660 crore.
Berger Paints was on our radar again. It held a lot of promise thanks to the improving dynamics of the Indian paint industry. Valued at about Rs.43,000 crore, decorative paints make up three-fourth of the paint market while industrial paints make up the balance. The sector receives 85-90% of its business from replacement demand and was expected to reach Rs.70,875 crore by FY20. With higher disposable income, the average paint cycle in India has dropped from 15 years a decade ago to 10 years now, thus driving up replacement demand. In a developed market like the US, it is once in four-five years. Higher dependence on replacement demand means that one is protected from the vagaries of real estate. Over the past couple of years, demand from real estate had been on a decline due to fewer launches and growing inventory of unsold properties. However, we expected some recovery in demand given the benefits to first-time home buyers under the government’s initiatives to push for affordable housing.
On an average, the growth of the paint industry has been about 1.5x that of GDP. Since we expected the Indian economy to do reasonably well, our bet was that the industry would ride that growth wave. While it does not see periods of super-normal growth, the paint business brings in a consistent cash flow. There are not too many surprises barring the monsoon when growth slows down.
Over the past five-six years, there was a significant shift from the unorganised to the organised market (58% to 70%). This worked to the advantage of Berger Paints as it all comes down to a consolidation play between two players — Asian Paints and Berger — that have a combined market share of over 70%.
The Kolkata-headquartered company had been steadily gaining market share over the past five years. From 12-13% in 2011, its market share was close to 20% in 2016. There were a coup