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, 2024, BERG has a total of 24.552 million shares outstanding which are held by 1,857 shareholders. Slotrapid Limited (the holding company)has a stake of 52.05 percent in BERG followed by local general public holding 39.44 percent shares of the company.

Around 1.45 percent of the company’s shares are held by NIT & ICP and 1.35 percent by Banks, DFIs and NBFIs. Insurance companies account for 1.07 percent shares of the company. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-24)

BERG’s topline and bottomline which had been falling until2020 rebounded in the subsequent years with 2021 touting the highest year-on-year topline growth.

The margins follow anirregular trajectory over the years (see the graph of profitability ratios). GP margin, which had been slowly ticking down over the yearsbounced back in 2023 followed by a marginal downtick recorded in 2024. OP margin ascended until 2020 followed by two lackluster years. In 2023 and 2024, OP margin grew and attained its optimum level in 2024.

NP margin stayed range bounduntil 2020, maxed out in 2021 and then tumbled in 2022. In 2023, NP margin slightly recovered followed by a minor dip registered in 2024. The detailed performance review of the period under consideration is given below.

In 2019, BERG’s topline dropped by 6.10 percent year-on-year to clock in at Rs.5120.44 million. This was 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 curtailed production and hence 6 percent lesser cost of sales recorded in 2019. GP margin stayed intact at 21.80 percent in 2019.

Operating expenses tumbled by 12.94 percent year-on-year in 2019 on the back of lesser salaries and benefits as well as curtailed advertising and promotion expense. Other expense rose by 26.28 percent year-on-year in 2019 due to higher impairment loss on goodwill while other income slid by 14.20 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 18.15 percent year-on-year in 2019 with OP margin climbing up from 4.32 percent in 2018 to 5.43 percent in 2019.

Discount rate was raised from 5.75 percent to 13.25 percent in FY19. This coupled with increased borrowings culminated into 87.27 percent year-on-year growth in BERG’s finance cost during 2019. This pushed profit before tax down by 23.24 percent year-on-year in 2019; however, part of the current year’s tax was deferred by the company, resulting in 73 percent drop in tax expense for the year.

Consequently, net profit slid by 1.25 percent year-on-year in 2019 to clock in at Rs.100.825 million with NP margin of 1.969 percent versus NP margin of 1.872 percent posted in 2018. EPS dropped from Rs.4.99 in 2018 to Rs.4.93 in 2019.

BERG’s net revenue fell by another 18.41 percent to clock in at Rs. 4177.95 million in 2020. Economic activity dampened because of the outbreak of COVID-19. This resulted in reduced demand.

Cost of sales also dropped by 17.54 percent in 2020. GP margin dropped to 20.975 percent in 2020. Operating expense slid by 23.85 percent year-on-year on account of lower payroll expense and reduced advertising & promotion budget.

Other expense also posted a steep 57.65 percent fall year-on-year as there was no impairment of goodwill recorded in 2020 coupled with lesser provisioning done for WWF and WPPF. Other income boasted a massive 165.27 percent year-on-year growth in 2020 on account of insurance claims as well as exchange gain registered during the year. Contained expenses as well as robust other income pushed operating profit up by 9.54 percent year-on-year in 2020.

OP margin also surged to 7.30 percent in 2020. Finance cost multiplied by 15.14 percent year-on-year as discount rate was high for the most part of the year except the COVID quarter. Net profit shrank by 26.30 percent year-on-year in 2020 to clock in at Rs.74.307 million with 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 to clock in at Rs.5,602.16 million in 2021. Generous monetary measures, directed fiscal support, refinance schemes and housing schemes played an incredible role to put the economy back on track.

While export sales continued to dwindle in 2021, local sales gained 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 35.86 percent year-on-year growth in cost of sales.

Gross profit grew by 27.41 percent year-on-year in 2021, however, GP margin inched down to 19.93 percent. Operating expense ascended by 9.83 percent year-on-year in 2021. Other expense magnified by 496.44 percent year-on-year in 2021 on account of impairment of goodwill.

However, it was counterbalanced by 8.97percent rise in other income due to exchange gain as well as sale of scrap. Operating profit mounted by 26.34percent year-on-year in 2021; however, OP margin descended to 6.87 percent. Finance cost considerably dropped by 38 percent during 2021 due to monetary easing, resulting in 162.72 percent year-on-year growth in net profit.

Profit after tax stood at Rs.195.22 million in 2021 with NP margin of 3.48 percent – the highest among all the years under consideration. EPS also rebounded to Rs.9.54 in 2021.

BERG’s topline grew by 26.83 percent year-on-year to clock in at Rs.7105.23 million in 2022. This was mainly on the back of an increase in sales volume. Record high inflation as well as Pak Rupee depreciation pushed up the cost of sales by 31.16 percent year-on-year in 2022.

Gross profit grew by 9.42 percent year-on-year in 2022, however, GP margin bottomed out to 17.20 percent. Operating expense grew by 22.28 percent year-on-year in 2022 owing to inflation coupled with a considerable rise in advertising and promotion budget. Other expense dipped by 61.59 percent in 2022 due to lower provisioning done for WWF and WPPF.

Besides, BERG didn’t book impairment of goodwill and impairment of investment in associate in 2022. Other income posted year-on-year growth of 18.75 in 2022 owing to scrap sales as well as rental income and other services charged to the related parties. Operating profit grew by 6.68 percent year-on-year in 2022; however, OP margin kept sliding to stand at 5.78 percent.

Finance cost grew by 38.82 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.

BERG’s gearing ratio surged from 33 percent in 2021 to 41 percent in 2022. The bottomline grew by 3.41 percent year-on-year in 2022 to clock in at Rs.201.886 million with NP margin of 2.84percent and EPS of Rs.8.22. EPS declined due to the issuance of bonus shares during the year.

Lackluster economic activity, low PSDP spending, decline in automobile sales and constricted industrial activity restricted BERG’s sales which was recorded at Rs.7341.17 million in 2023. 3.32 percent year-on-year rise in topline in 2023 came on the back of significant upward revision in prices with no noteworthy progress seen in the sales volume.

Gross profit grew by 21.39 percent year-on-year with GP margin ticking up to 20.20 percent. Lower sales volume kept operating expense in check which contracted by 8.95 percent year-on-year in 2023. This was primarily due to lower advertising & promotion budget. BERG also streamlined its workforce from 413 employees in 2022 to 324 employees in 2023.

Other expense rose by 423.13 percent in 2023 due to higher profit related provisioning, exchange loss, advance income tax written off as well as impairment on investment in associate and impairment on revaluation of building booked during the year.

Other expense was largely offset by 31.30 percent year-on-year growth in other income recorded in 2023. This was primarily driven by higher profit on term deposits and long-term loans and also because of increased gain recorded on the disposal of fixed assets in 2023. During the year, BERG also recorded impairment loss of Rs. 73.08 million versus reversal of Rs.3.07 million booked in 2022.

Operating profit grew by 49.76 percent year-on-year in 2023. OP margin also attained its highest level of 8.37 percent in 2023. Finance cost surged by 73.45 percent in 2023 due to excessive monetary tightening. BERG’s outstanding loans considerably declined during the year, resulting in a gearing ratio of 25 percent in 2023. Net profit grew by 18.91 percent to clock in at Rs.240.061 million in 2023 with EPS of Rs.9.78 and NP margin of 3.27 percent.

BERG’s net sales grew by 16.38 percent to clock in at Rs.8543.91 million in 2024. This was driven by better sales mix. BERG’s sales revenue also included Rs.450.259 million charged to Buxly Paints Limited, an associated company for material and toll manufacturing. Export sales amounted to Rs.56.586 million which included sales to Afghanistan.

Optimization of prices enabled the company to enhance its gross profit by 16 percent in 2024 with GP margin clocking in at 20.15 percent. Distribution and administrative expenses surged by 23.15 percent and 10.60 percent respectively in 2024.

The main drivers were advertising & promotion budget and payroll expense. BERG expanded its workforce from 324 employees in 2023 to 341 employees in 2024.

Other expense slid by 52.21 percent in 2024 due to considerably lower exchange loss, no impairment recorded on the revaluation of building, no advance income tax written off and no sales tax on royalty recorded during the year. Other income also inched down by 28.64 percent in 2024 due to lower scrap sales and lesser gain recognized on the sale of property, plant & equipment in 2024.

Operating profit multiplied by 18 percent in 2024 with OP margin clocking in at 8.50 percent, slightly higher than the previous year.

Finance cost ticked up by 7.42 percent in 2024 due to higher discount rate and increased short-term borrowings. Gearing ratio ticked up to 26 percent in 2024. Net profit improved by 9.50 percent in 2024 to clock in at Rs.262.863 million with EPS of Rs.10.71 and NP margin of 3.1 percent.

Recent Performance (9MFY25)

During the nine months of the ongoing fiscal year, BERG posted year-on-year uptick of 6.11 percent in its net sales, which clocked in at Rs.6759.89 million. This was due to better sales mix and price optimization measures implemented during the period. This resulted in 11.21 percent stronger gross profit in 9MFY25 with GP margin clocking in 20.70 percent versus GP margin of 19.75 percent recorded during the same period last year. Distribution expense mounted by 24.83 percent in 9MFY25 in line with the company’s marketing and promotion plans.

Administrative expense ticked up by 4.50 percent in 9MFY25 on account of inflationary pressure. BERG recorded a marginal 0.67 percent uptick in its operating profit in 9MFY25 with OP margin clocking in at 8 percent versus OP margin of 8.50 percent recorded in 9MFY24. Finance cost tumbled by 20.40 percent in 9MFY25 due to monetary easing.

Net profit strengthened by 15.72 percent to clock in at Rs.232.77 million in 9MFY25 with EPS of Rs.9.48 versus EPS of Rs.8.19 recorded in 9MFY24. NP margin ticked up from 3.16 percent in 9MFY24 to 3.44 percent in 9MFY25.

Future Outlook

BERG is emphasizing cost reduction, cash flow generation and upward price revision. This coupled with the improvement in macroeconomic indicators, revival of automobile sector, stimulation of infrastructure investment and increased demand of white goods will result in stronger financial results for BERG.