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, 2023, BERG has a total of 24.552 million shares outstanding which are held by 1,972 shareholders. Slotrapid Limited has a stake of 52.05 percent in BERG followed by local general public holding 38.21 percent shares of the company. Modarabas & Mutual Funds have a stake of 3.44 percent in BERG while Insurance companies account for 1.87 percent shares of the company. Around 1.45 percent of the company’s shares are held by NIT & ICP and 1.42 percent by Banks, DFIs and NBFIs. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

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. OP margin had been ascending until 2020 followed by two lackluster years. In 2023, OP margin attained its highest level. NP margin stayed in the range of 1.8 percent to 2 percent from 2018 to 2020, maxed out in 2021 and then tumbled in 2022. In 2023, NP margin also recovered. 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 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 costs of sales for BERG. GP margin stayed intact at 21.8 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 1.872 percent 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 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 year-on-year fall as there was no impairment of goodwill recorded in 2020 coupled with lesser provisioning 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 7.3 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 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 expenses 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 8.97 percent year-on-year rise in other income due to exchange gain as well as sale of scrap. Operating profit mounted by 26.34 percent year-on-year in 2021, however, OP margin descended to 6.8 percent. Finance cost considerably dropped 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 in 2022 mainly on the back of 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 17.2 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 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 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 5.77 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 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 significant progress seen in 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 primarily due to low 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 31.3 percent year-on-year growth in other income during 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 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.

Recent Performance (9MFY24)

BERG’s net sales grew by 19.69 percent during 9MFY24. This was driven by better sales mix. Optimization of raw material prices enabled the company to enhance its gross profit by 19.55 percent during 9MFY24 with GP margin clocking in at 19.75 percent versus GP margin of 19.78 percent recorded during the same period last year. Distribution and administrative expenses surged by 17.92 percent and 13.71 percent respectively during the period. The main drivers were advertising & promotion budget and payroll expense. Other expense slid by 29 percent during 9MFY24 while other income inched down by 2.12 percent during the period. Operating profit multiplied by 25.97 percent during 9MFY24 with OP margin clocking in at 8.5 percent versus 8 percent during 9MFY23. Finance cost ticked up by 4.91 percent during 9MFY24 due to higher discount rate and increased short-term borrowings. Net profit improved by 40 percent during 9MFY24 to clock in at Rs.201.14 million with EPS of Rs.8.19 versus EPS of Rs.5.85 recorded during 9MFY23. NP margin picked up from 2.7 percent in 9MFY23 to 3.16 percent in 9MFY24.

Future Outlook

Depressed political and economic outlook in the country coupled with increased competition from regional players will continue to take toll on the demand of BERG’s products. The company will continue to focus on cost optimization, timely price revisions, concerted promotion drives and execution of better sales mix to improve its financial performance.

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