Asian Paints - Better-than-expected trajectory - ICICI Securities

APNT, under the new CEO & CFO (Amit Syngle & R J Jeyamurugan) has improved execution a notch higher than its already high (historical) standards. It is managing multiple growth avenues of (1) increasing the salience of emulsions, (2) ramping up waterproofing segment and ancillary products simultaneously. We note, (1) there is faster recovery in paint demand in tier 2 & 3 towns and rural markets, (2) ‘Safe painting' initiative has helped it to regain consumer trust and (probably) market share too, (3) Waterproofing segment ramp-up. As of now, consumer off-take in metros and Western India continues to be impacted. While overall volume growth in June'20 was 14%, we reckon rest of the India has reported 20%+ growth. While we continue to see medium-term paint volume growth headwinds due to likely lower economic growth, post a 15% underperformance versus Nifty in last 3 months, the stock provides a tactical opportunity. Upgrade to ADD (HOLD earlier).

- 1QFY21 results: APNT reported consolidated revenue, EBITDA, PAT decline of 43%, 58%,66% respectively in 1QFY21. Standalone revenue, EBITDA, PAT decline was 44%, 57%, 61% respectively. Volume decline (India) was 38%. Standalone gross margins expanded 150 bps despite (likely) inferior product mix (due to lower input costs, in our view). Cost saving measures resulted in ‘other expenditure' decline of 36.8% yoy. Employee costs were up 9.8% due to a combination of salary hikes and a one-time impact due to gratuity actuarial valuation (adjusting for lower bond yields).

- Strong recovery in paint demand: APNT's volume index recovered to 80% in May'20 and to 114% in June'20. While there was some pent up demand in May'20, the volume growth in June'20 indicates improving consumer sentiment. As there is no material change in the trade inventory levels, we believe the recovery in paint demand in June'20 is encouraging.

- Region-wise performance: There is strong demand recovery in tier 2, tier 3 cities and rural regions. While there is some recovery in paint demand in metros and urban markets too, the recovery is relatively slower than rural markets. West India is the most impacted region in India.

- Higher focus on waterproofing segment: This segment has continued to perform well in May-June'20. The size of waterproofing market is US$22bn in China whereas it is less than US$1bn in India. We believe there is structural growth potential in waterproofing market in India over the next few decades.

Shares of ASIAN PAINTS LTD. was last trading in BSE at Rs.1777.75 as compared to the previous close of Rs. 1710.95. The total number of shares traded during the day was 224535 in over 15635 trades.

The stock hit an intraday high of Rs. 1788 and intraday low of 1718.1. The net turnover during the day was Rs. 395837365.

Source : Equity Bulls

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