Berger Paint\'s STD Programme-Rated amount enhanced

CRISIL's ratings on Berger Paints India Ltd's (Berger Paints') short-term debt programme and bank facilities continue to reflect Berger Paints' established position in the decorative paints segment, and market leadership in the protective coa

CRISIL's ratings on Berger Paints India Ltd?s (Berger Paints?) short-term debt programme and bank facilities continue to reflect Berger Paints? established position in the decorative paints segment, and market leadership in the protective coatings segment. The ratings also factor in the company?s healthy financial risk profile. These rating strengths are partially offset by the company?s vulnerability to volatility in raw material costs, improving but weak operating performance of its wholly owned subsidiary, Bolix S.A. (Bolix) due to sluggish economic recovery in Europe, and its limited pricing flexibility.

*Interchangeable with working capital demand loan, packing credit, bill discounting, buyers? credit, and short-term loans.
**Bank guarantee is interchangeable with letter of credit

Berger Paints has an established position in the decorative paints market, backed by its strong brand image, well-spread distribution network of more than 14,000 dealers, and a wide product portfolio encompassing enamels, exterior emulsions, distempers, primers, and cement paints. It is the second-largest player in the segment, with an estimated share of around 18 per cent of the organised market. The company continues to maintain its market leadership in the protective coatings segment. The company?s leading position in the protective coatings segment stems from its longstanding relationships with customers, which include players from the infrastructure, oil and gas, and power sectors. CRISIL believes that Berger Paints, backed by its large distribution network and longstanding customer relationships, will maintain its strong business risk profile over the medium term.

Berger Paints? financial risk profile remains healthy, supported by healthy revenue growth. Its gearing remained stable at 0.51 as on March 31, 2011. The company reported a strong revenue growth of 23 per cent for 2010-11 (refers to financial year, April 1 to March 31), driven by healthy growth in sales volumes. Bolix?s performance, after the acquisition, remains weak; it reported a marginal de-growth in its topline to Rs.1.33 billion for 2010 (refers to financial year, January 1 to December 31), as compared to Rs.1.36 billion in 2009. CRISIL believes that the strong performance of Berger Paints in the domestic market will more than offset the impact of the weak performance of Bolix over the medium term. Furthermore, factors such as healthy revenue growth, steady profitability, and minimal dependence on debt to fund future capital expenditure (capex), will help Berger Paints maintain its healthy financial risk profile over the medium term.

The paint industry is raw material intensive; raw material costs account for around 60 per cent of Berger Paints? operating income. Furthermore, petroleum-based products account for around 40 per cent of the company?s cost of raw materials, thereby making Berger Paints? operating margin vulnerable to volatility in crude oil prices. The company also imports some of its key raw materials, resulting in vulnerability to volatility in foreign exchange rates. Berger Paints is the largest player after Asian Paints (India) Ltd (Asian Paints; rated ?AAA/Stable/P1+? by CRISIL) by market share in the decorative paints segment. Asian Paints, leads by a wide margin, has a share of around 52 per cent of the domestic organised market, and dictates the pricing of products due to its greater bargaining power. CRISIL believes that Berger Paints? margin will remain susceptible to volatility in raw material prices and in foreign exchange rates, and its ability to pass on price increases to customers will remain limited, over the medium term.

Outlook: Stable

CRISIL believes that Berger Paints will continue to benefit from its established market position in the decorative paints segment. The outlook may be revised to ?Positive? if the company?s growth initiatives lead to a considerable improvement in its business risk profile. Conversely, the outlook may be revised to ?Negative? if the company undertakes a large, debt-funded capex programme or acquisition, thereby adversely affecting its capital structure.