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Asian Paints - Q2FY22 Result Update - ICICI Securities

Posted On: 2021-10-24 15:33:19 (Time Zone: IST)

APNT has ~80% consumer mindshare, ~70% profit-pool share and ~60% value market share. ~1000bps gross margin decline (though for one quarter) is unprecedented. While management commented about "steep input cost inflation", we reckon that keeping lower profit pools and competitor signalling are important decision-drivers for APNT (which we agree). We stay believers of life-cycle value of consumer concept, an important input for our DCF assumptions. APNT says it plans to maintain operating margin (our interpretation) in band of 18-20% via (1) selective price hikes, (2) formulation and sourcing efficiencies (Rs3bn savings). We model higher price growth in FY22 and FY23 (vs. FY18-21). Maintain ADD.

  • Q2FY22 results: APNT reported consolidated revenue growth of 32.6% YoY; however, EBITDA and PAT declined 28.5% and 28.1%, respectively. Standalone revenue growth was 35.9% YoY, whereas EBITDA and PAT declined 23.9% and 22%, respectively. Domestic decorative volume growth was 34%. International business as well as Industrial paints also reported strong volume-led growth. Consol. gross margin declined 970bps YoY and EBITDA margin declined 1090bps to 12.7% (lowest in past ~14 years). With stable tax rate, adjusted PAT declined 28.1% YoY.
  • Strategy to focus on market expansion as well as share gains: APNT is expanding market size via (1) introducing products in adjacent categories like waterproofing, primer, putty, adhesives, (2) expanding in niche segments like wood coating via introduction of differentiated products and (3) expanding market size at bottom-of-pyramid via launch of products like economy emulsions. It has also added 40,000 (direct + indirect) retail outlets in past 18 months. It has gained market shares from smaller / unorganized players at an accelerated pace in past 18 months.
  • Intent to maintain operating margins in the band of 18-20%: While the input inflation is at an unprecedented levels in past 40 years, APNT aspires to maintain EBITDA margins in band of 18-20% via (1) cost-saving initiatives, (2) formulation and sourcing efficiencies and (3) steady price hikes. We expect it to reach this band by Q1FY23.
  • Maintain ADD: We model sales and earnings CAGR of 21% and 17.7% respectively, for FY21-FY24E. Maintain ADD with a revised DCF-based TP of Rs3,400 (was Rs3,500 earlier). Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.

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.

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