Is Bolix a good buy for Berger Paints?

Berger Paints will add about Rs 180 crore or about 13% to its existing turnover after the acquisition of Polish company Bolix. Berger bought out the company on April 28, 2008 giving an exit to private equity company, Advent International.

Bolix is in the exterior building materials business; it makes external insulation finishing systems (EIFS). It was acquired by Advent in 2003 when it had a turnover of $26mn, which has grown at a CAGR of 15% to $45.5mn in 2007. That is a smart growth rate, indicative of the demand for this business.

What is EIFS? The Bolix website ( lists it as a “modern and complex set of materials designed for insulating external walls of any building using the light wet method.” It goes on to add that foamed polystyrene boards are fixed using adhesives and connection rods to the building wall. A reinforcing layer is made with fibre glass mesh immersed in adhesive mortar. Then a thin-layer plaster is used to finish the process after which the building will be painted.

Bolix claims to have a 12% share in the Polish market and also exports to neighbouring markets like Russia. Berger too has a presence in Russia. Rising energy costs and focus on the environment will mean that this form of insulation, which optimizes heating requirement in severe winters, will gain currency.

For Berger, the immediate impact will be the aforementioned addition to revenues, though impact on profitability is not available, since profits have not been disclosed. Since the acquisition has been made at about 0.7 times estimated 2008 revenues, the business it would seem does not enjoy very high margins. Berger aims to gain from access to a new product line, new markets and perhaps even market some of its own products along with Bolix.

The valuation seems reasonable given available information. At this stage, it is not clear if there are any immediate local synergies with the Bolix product line. But both Asian Paints and Goodlass Nerolac have been strengthening their industrial non-automotive portfolio, a sign of good growth potential in this segment. A large number of industrial, commercial and infrastructure projects are giving rise to demand for various protective coatings.

The acquisition cost of $38.6mn or Rs 154 crore is quite significant, given its FY07 balance-sheet size of Rs 398 crore. The company had issued warrants to promoters which, when converted, will bring in about Rs 100 crore in cash. The acquisition will be partly funded through this warrant issue but the company has other capital expenditure plans too. So it could either raise further equity capital or debt in due course. That could strain its earnings growth in the near term.

Berger has not announced its results for FY08 yet, in the nine months ended December 2007, its sales grew by15% to Rs 1009.9 crore while its net profit grew by just 8%. A sharp increase in interest costs and its tax burden were the main reasons for the lower growth in profits. The stock has not been quite itself after the acquisition, rose 10% to Rs 44 after the announcement but is now trading at below Rs 40.

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