Asian Paints Report - Demand rebound strong; profitability, not so much! - HDFC Securities

Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

APNT's topline delivery (91% YoY) exceeded expectations (HSIE: 64%). Growth was all-round. The decorative business clocked 106/96% volume/value growth, underpinned by (1) strong pent-up demand in paints and adjacencies (waterproofing/adhesives) and (2) stronger pick-up in metros/tier 1/2 cities and projects & large institutional sales (vis-à-vis the previous year). Despite a meaningful revenue beat, EBITDA (INR 9.1bn) missed expectations (HSIE: INR 9.3bn) as RM inflation dragged it down. Note: price hikes (3% in Q1/1% in Jul- 21) remain incommensurate vis-à-vis the steep RM inflation (21-25% in the past six months). Our FY23/24 EPS estimates largely remain unchanged. Maintain SELL with a DCF-based TP of INR 2,460/sh, implying 54x Jun-23 P/E.

Q1FY22 highlights: Revenue grew 91% YoY (two-year CAGR: 5%) to INR 55.85bn (HSIE: INR 47.85bn) as all business vectors rebounded strongly. Decorative volume/value grew 106/96% YoY, underpinned by (1) strong pent-up demand in paints and adjacencies (waterproofing/adhesives) and (2) stronger pick-up in metros/tier 1/2 cities and projects & large institutional sales. Industrial subsidiaries (PPG-AP and AP-PPG) too staged a strong recovery. Within non- auto, both industrial liquid and protecting coatings recovered well in 1Q.

On profitability: The overall trade-off between growth-profitability was starker than expected. Despite a meaningful revenue beat, EBITDA (INR 9.1bn) missed expectations (HSIE: INR 9.3bn) as RM inflation dragged GM/EBITDAM down (- 480/-350bp resp) to 38.4/16.4%. Note: price hikes (3% in Q1/1% in Jul-21) were incommensurate vis-à-vis the steep RM inflation (21-25% in the past six months). More rounds of prices hikes are expected in the ensuing quarters.

Outlook: APNT's wide distribution arbitrage has helped it recoup most of its lost demand YoY. However, margin pressures remain, given the steep RM price spikes. Our FY23/24 EPS estimates largely remain unchanged. Maintain SELL with a DCF-based TP of INR 2,460/sh, implying 54x Jun-23 P/E.

Shares of ASIAN PAINTS LTD. was last trading in BSE at Rs. 3104.45 as compared to the previous close of Rs. 3159.2. The total number of shares traded during the day was 173530 in over 14769 trades.

The stock hit an intraday high of Rs. 3180 and intraday low of 3090.6. The net turnover during the day was Rs. 540862638.

Source : Equity Bulls

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