Maintain SELL on Asian Paints - Demand rebound strong; profitability cut steeper - HDFC Securities

Mr. Varun Lohchab, Institutional Research Analyst, HDFC Securities and Mr. Jay Gandhi, Institutional Research Analyst, HDFC Securities

Asian Paints' (APNT) topline delivery (33% YoY) exceeded expectations (HSIE: 22%). The decorative business clocked 34/35% volume/value growth, underpinned by (1) strong pick-up in metros/tier-1/2 cities and expansion in projects business and (2) strong momentum in waterproofing. Despite a meaningful revenue beat (8.5%), EBITDA missed expectations by a mile (INR 9bn vs 13.2bn) as steep RM inflation dragged profitability down. Note: price hikes (3/4% in Q1/Q2) remain significantly incommensurate vis-à-vis the steep RM inflation (22% in H1). Consequently, we tone down our FY23/24 EPS estimates by 7% each. Maintain SELL with a DCF-based TP of INR 2,600/sh, implying 57x Dec-23 P/E.

Q2FY22 highlights: Revenue grew 32.6% YoY (two-year CAGR: 18.5%) to INR 70.96bn (HSIE: INR 65.43bn) as APNT's aggression in gaining volume share continued unabated. The decorative business clocked 34/35% volume/value growth in Q2 (two-year CAGR for H1: 17.5/12.3% respectively), underpinned by (1) strong pick-up in metros/tier-1/2 cities and expansion in projects business and (2) strong momentum in waterproofing. Unlike FMCG companies, APNT is confident on prospects of rural demand in H2 as it continues to aggressively add dealers (40k added in urban/rural markets in the past year and a half). The festive season momentum remains strong. International performance was a mixed bag.

On profitability: The overall trade-off between growth and profitability was starker than expected. Despite a meaningful revenue beat (8.5%), EBITDA missed expectations by a mile (INR 9bn vs 13.2bn) as steep RM inflation dragged profitability down. GM contracted 966/368bps YoY/QoQ to 34.7% (HSIE: 39.7%). Note: price hikes (3/4% in Q1/Q2) remain significantly incommensurate vis-à-vis the steep RM inflation (22% in the past H1). A&P spends remain elevated to spur demand. Price hikes in H2 are expected to be sharper and more frequent (vs. H1).

Outlook: APNT's 'volume (ergo market share) now, value later' strategy seems in sync with the evolving competitive landscape (read Grasim's entry). However, margin pressures, given steep RM inflation and incommensurate price hikes, corner us into toning down our FY23/24 EPS estimates (by 7% each). Maintain SELL with a DCF-based TP of INR 2,600/sh (57x Jun-23 P/E).

Shares of Asian Paints Limited was last trading in BSE at Rs. 2984.65 as compared to the previous close of Rs. 3003.50. The total number of shares traded during the day was 193344 in over 31734 trades.

The stock hit an intraday high of Rs. 3002.00 and intraday low of 2912.10. The net turnover during the day was Rs. 569544237.00.

Source : Equity Bulls

Keywords

AsianPaints INE021A01026 HDFCSecurities