Akzo Nobel India - The 'show' has well begun in CY21 - ICICI Securities

Fundamentally speaking, Akzo's last two quarter volume performance (growth of >45% in 4Q, in our view) indicates that the turnaround is truly on track. That said, bears are likely to point to "relative underperformance, if any" on a low base. As fundamental analysts, we remain structurally positive on Akzo (1) it has strengthened product portfolio via multiple differentiated launches in FY2021, (2) expanded distribution network to 19,000+ outlets and 14,000 tinting machines and (3) also focused on brand building initiatives such as Dulux Assurance. Stock trades at 32x FY23E (45% discount to APNT), providing margin of safety. BUY; TP Rs2800. Yes, we agree that "value trap" vs "trapped value" debate is feasible in the case of Akzo Nobel India (see our thematic series here 1, 2, 3). With multiple tailwinds such as (1) revival in economy and industrial production, (2) higher production of consumer goods post PLI and (3) likely success of new products in economy emulsions and waterproofing, we believe Akzo is on track to achieve higher growth than its own history. We model revenue CAGR of 15.4% over FY21-23 vs 8.9% over FY10-21. There will be better utilization of investments in trade (distribution, tinting machines etc.) too ahead leading to higher asset turns and RoI. We stay believers.

- Q4FY21 results: Akzo reported revenue, EBITDA and PAT growth of 34.4%, 30.9% and 18.2%, respectively. Revival in metros and tier-1 cities (key markets of Akzo) as well as higher industrial production led to strong revenue growth. We believe the volume growth in Decorative paints was ~30%. While gross margin declined 216bps due to input prices, EBITDA margin declined just 40bps due to cost saving initiatives.

- Segment-wise performance: With re-opening up of the economy, Paints, Powder, Automotive and Specialty coating have performed well. The company has faced headwinds in Oil & Gas and Power segments. Rest of the sub-categories such as powder, automotive and Industrial did well.

- Turnaround on track: In-spite of headwinds in FY21, Akzo has strengthened its competitive advantages with (1) presence in 19,000+ outlets and 14,000 tinting machines, (2) it has introduced and launched successful products in economy emulsions and waterproofing and (3) has also continued to introduce differentiated products every quarter. It introduced Interpon coatings (primers) in Q1FY21, Dulux Promise SmartChoice in the economy emulsion segment and also relaunched Dulux SuperClean, premium interior emulsion in Q2FY21 and Dulux professional Weathershield Anti-carb in Q3FY21.

- Introduction of Dulux Assurance: Probably first ever program in India for premium emulsions, Dulux Assurance promises the consumers about the colour, coverage as well as uniform finish. We believe such initiatives will strengthen the brand equity in medium-long term.

- Price hikes to partially pass on input prices: Akzo has raised prices in May'21 by 3% and plans to hike prices again in June'21. Though it will be passing on a large part of the inflation, there will still be under recovery of higher costs.

- Likely beneficiary of large capex and infrastructure over next 2-3 years: The government capex is expected to increase sharply as per budgetary provisions. There will also be higher investments in capex in multiple industries such automotive, consumer durables post PLI announcements. As Akzo is preferred supplier of paints & coatings for multiple MNCs, it is likely to benefit in medium term. It will also benefit with improving maturity of market to accept high end products.

- Re-iterate BUY: We stay believers. Retain BUY with DCF-based TP of Rs2,800. Akzo is trading at lowest valuation (32x FY23E) among its peers in paint sector providing significant margin of safety, in our view. Key risks are execution-linked challenges and demand deceleration.

Shares of Akzo Nobel India Limited was last trading in BSE at Rs.2250.4 as compared to the previous close of Rs. 2256.35. The total number of shares traded during the day was 1425 in over 395 trades.

The stock hit an intraday high of Rs. 2271.85 and intraday low of 2244.95. The net turnover during the day was Rs. 3218743.

Source : Equity Bulls

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