Akzo Nobel India - Turnaround (story) on track - ICICI Securities

With MoM recovery in most segments, Akzo reported strong volume growth in Sept'20 and Oct'20. We reckon volumes grew in high single digits in Q2FY21. It has also introduced (much awaited) economy emulsion recently. Considering ~70% of paint market growth is in economy paints, we like Akzo (now) looking to play the entire portfolio. Cost saving initiatives and better utilization of distribution network will be structurally margin and DCF accretive. Re-opening of economy will drive growth of industrial and automotive paints. We remain positive as it has strengthened the growth drivers over past two years: (1) expanded distribution network to 18,000 outlets, (2) introduced multiple differentiated products, (3) operating margins now in mid - teens (resources to invest for growth). We stay believers (a long-gestation turnaround story). Reiterate BUY (stock trading at 33xFY22e / 28xFY23e P/E).

- Q2FY21 results: Adj. revenues declined 2% but EBITDA and PAT were up 43.6% and 34.6%, respectively. It has posted high single digit volume growth in Q2FY21 with both the segments (decorative & industrial) performing well. Gross margin expanded 150bps due to lower input prices and EBITDA margin expanded 570bps due to cost saving initiatives and lower marketing spends.

- Segment-wise performance: With opening up of economy, festive season and pent up demand, there was recovery in paint demand in metros in Sept'20 (we believe it has continued in October as well). Akzo reported strong growth in tier2 and 3 markets (similar trend seen in peers). Demand for auto refinish paints in low now, its expected to improve as economy opens up. While marine paints have reported strong growth, the protective paints have reported muted growth as there is still slow-down in Oil & Gas sector. Waterproofing and premium exterior emulsions also reported healthy growth.

- Steady flow of new product launches: After launching Interpon coatings (primers) in Q1FY21, Akzo has introduced Dulux Promise SmartChoice in the economy segment in Q2FY21. It also relaunched Dulux SuperClean, premium interior emulsion. Akzo plans to introduce multiple new products over next 12 months.

- Commitment to higher investments in brand building: While there was decline in ad-spend in Q2FY21, we note the company has increased ad-spend in Sept'20 with commencement of IPL. We expect its investment in marketing activities to remain similar to pre-covid period.

- Cost saving initiatives and leverage distribution network: The company is working on multiple cost saving initiatives which will ensure better profitability. We also believe higher revenue growth post new product launches will utilize the current distribution network with better apportionment of fixed costs.

- Higher investments in digitization: In order to strengthen the internal systems as well as supply chain, the company plans to invest in digitization. We believe these investments will help to reduce the bottlenecks in distribution and supply chain.

- Reiterate BUY: We stay believers. Retain BUY with DCF-based TP of Rs2,500. Akzo is trading at lowest valuation (33x FY22E) among its peers in paint sector providing significant margin of safety, in our view. Key risk are execution-linked challenges and demand deceleration.

Shares of Akzo Nobel India Limited was last trading in BSE at Rs.2037 as compared to the previous close of Rs. 2001.3. The total number of shares traded during the day was 1566 in over 448 trades.

The stock hit an intraday high of Rs. 2044.5 and intraday low of 1995.7. The net turnover during the day was Rs. 3168818.

Source : Equity Bulls

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