In 1955, BPPL established a local manufacturing facility in Karachi and another one in Lahore in 2006. Through a number of technical collaboration arrangements, Berger develops automotive vehicle refinishes, powder coatings, paints for road and runway markings, construction chemicals and decorative paints. This has allowed it to have a relatively diversified portfolio compared to other paint manufacturers. Berger also meets its resin needs through its own resin manufacturing plant.
Berger has entered into different technical collaboration arrangements with leading international manufacturers. These include Japanese companies that enable Berger to develop Automotive Vehicle Refinishes and Industrial paints conforming to international standards. Among its collaborations are PCS Powders, UK, and DPI Sendirian Berhad, Malaysia. Recently, Berger also acquired distribution rights of DuPont, now Cromox, for Pakistan's vehicle refinish paint segment. In 2017, Berger bought distribution rights of another brand Duxone from Axalta Coatings.
Sector overview
The paint industry as a whole did not fare well in FY17. The sector faces competition from imports. As per SBP's annual report, paints and varnish imports from China increased by about 36 percent in FY17. Statistics provided by the latest Economic Survey show that paint and varnish production declined by more than 8 percent.
Pakistan's paint sector is highly competitive with a market valued upwards of about Rs 30 billion. Other than big paint companies such as Berger and AkzoNobel, there is also a flourishing unorganised sector that has the advantage of not paying taxes and selling a substantial discount. Decorative paints dominate the sector at about 60 to 75 percent of the market.
Historic performance
On the whole, BPPL's turnover has been rising steadily over the years. In 2011 and 2012, it faced losses after tax, which was attributed to major challenges that affected Pakistan's economy that included floods that caused massive damage, increasing commodity and oil prices, and worsening law and order that caused strikes and closed down businesses. Negligible growth in the manufacturing sector also adversely affected conditions. Since 2011 however, the picture had been improving till lately.
In 2016, BPPL posted highest profit after tax in the last 10 years till that point. The firm credited the improved performance to a stronger Pakistan economy, improved law and order situation, stability in rupee dollar parity, declining oil prices, reduced interest rates, declining inflation rate and slightly improved power supply.
In FY17, net profit surpassed FY16's by 9 percent, even though gross profit declined and top-line grew by only 1 percent.
The higher PAT was more because of tax reasons than because of superior operational performance. In the latest financial year, though sales have improved, profits have shrunk.
9MFY18 financial performance
Despite inflationary trend, tough competition, and the overall performance of the paint sector, Berger sales increased by double digits. However, increase in cost of raw material reduced margins significantly. Lower gross profit and higher administrative expenses as a percentage of sales, along with lower operating income resulted in a huge decline in the bottom line.
In the backdrop of CPEC, the unorganised sector has become more active. It offers big discount and lucrative incentives in the market.
Given the competition from the formal and informal sector, Berger was unable to pass on the higher cost of raw materials to the final consumers.
It is expected that margins will remain under pressure for the rest of the financial year. The company hopes to end the year in black but given the steep drop in net profit margin, it is possible that the company is headed towards losses.
Future outlook
Berger has a finger in a lot of pies, from decorative paints to construction chemicals, automotive paints, road safety, and printing inks and adhesives. Not only does it count the major auto players as its customers, it also caters to government and marine projects. Thus, it is buffered from major changes by having eggs in a lot of baskets.
However, the sector has a lot of players such as AkzoNobel, Jotun, Kansai and Nippon among international companies, and local companies Brighto, Diamond, Happilac, Master and Nelson. As a result, it has to have marketing and advertising costs to be able to compete successfully. Plus, it has to content with the unorganised sector. In times when its gross margins are under pressure, it makes profitability challenging.
In the long run, if Pakistan remains on its growth trajectory, the paint sector of Pakistan should continue growing. CPEC in particular provides a host of new opportunities. In that case, Berger will remain one of the key players in the market, even if it may face turbulent times going forward.
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Pattern of shareholding (as on June 2017)
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Shares held Percentage
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Directors, CEO and Their spouses
and minor childre n 2,021 0.01
NIT & ICP 324,916 1.79
Banks, DFI & NBFI 568,656 3.13
Modarabas & mutual funds 1,200 0.01
General Public (Local) 4,843,962 26.64
General Public (Foreign) 250,077 1.38
Others 671,493 3.69
Foreign companies 11,524,057 63.37
Shareholders with more than 5%
Slotrapid Limited 9,466,057 52.05
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Source: company accounts
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Berger Paints Pakistan Limited
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Rs mn 9MFY18 9MFY17 YoY
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Net sales 4,123 3,701 11%
Cost of sales (3,127) (2,568) 22%
Gross profit 996 1,133 -12%
Marketing and distribution expenses (724) (754) -4%
Administrative expenses (158) (125) 26%
Operating profit 113 254 -56%
operating income 30 44 -32%
Finance cost (63) (53) 19%
Other operating expenses (5) (17) -71%
Profit before tax 74 228 -68%
Tax (27) (73) -63%
Profit after tax 47 155 -70%
EPS (Rs) 2.58 8.52 -70%
Gross profit margin 24% 31% -21%
Net profit margin 1% 4% -73%
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Source: company accounts