Akzo Nobel India - The 'show' begins in CY21 - ICICI Securities

Akzo's revenue growth of 6.5% in 3QFY21 was underwhelming. That said, we reckon that Decorative volume growth was >20% - a significant trajectory improvement. It delivered highest-ever EBIT in 3Q and we forecast the trend to continue into CY20-22e. In 3QFY21, most customer segments except Oil & Gas and Power reported healthy growth. It has continued to roll out R&D-backed products with launch of Dulux professional Weathershield Anti-carb in Q3FY21 which is expected to benefit with the uptick in infrastructure & capex. The launches in economy emulsions are also performing well and are expected to improve utilization of tinting machines and reduce freight cost per litre. Market share gains in economy emulsions will be volume as well as margin accretive, in our view. We stay believers as Akzo has further strengthened the competitive advantages with (1) distribution reach of ~20,000 outlets, (2) incremental ~2,000 tinting machines in CY20 and (3) there is steady flow of differentiated launches. The stock is trading at lowest multiple among its peers. Reiterate BUY.

- Q3FY21 results: Akzo reported revenue, EBITDA and PAT growth of 6.5%, 16.4% and 19.9%, respectively. Revival in Indian economy, festive demand, likely pent-up demand led to volume growth of >20% in Decoratives YoY, in our view. While gross margin declined 30bps (higher salience of cheaper emulsions, in our view (which is good)), EBITDA margin expanded 147bps due to cost saving initiatives. The company has likely increased brand investments in Q3FY21, in our view.

- Segment-wise performance: With opening up of economy and festive season, there was recovery in paint demand. There was strong growth in Paints, Powder, Marine and Packaging coatings. However, segments such as Oil & Gas and Power are still impacted. The company generated lower revenues in Oil & Gas from a MNC customer which impacted overall revenue growth. The new launch in economy emulsion is performing well. Waterproofing products also reported strong growth.

- Launches of new products: In-spite of covid and lockdown, Akzo has continued to launch R&D backed new products. 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. Akzo has introduced Dulux professional Weathershield Anti-carb in Q3FY21.

- 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 post PLI announcements. As Akzo is preferred supplier of paints & coatings for multiple MNCs, it is likely to benefit in medium term.

- Cost saving initiatives and leverage distribution network: The company is working on multiple cost saving initiatives which will ensure better profitability. Its distribution network is now ~20,000 retail outlets. Tinting machines are also present in 70% of the outlets. The company has added ~2,000 tinting machines in past 12 months.

- Benefits of entry in economy emulsions visible: Akzo is benefitting via (1) better utilization of tinting machines, (2) reduction in freight cost per litre of paint and (3) higher number of products for tier 2 and 3 towns. Increase in revenues / market share of economy emulsions is likely to be margin accretive.

- Inflation in input prices: While there is >10% input cost inflation, we believe that there are cost saving programs which will help it to reduce the impact. Price hike is an option as well.

- Reiterate BUY: We stay believers. Retain BUY with DCF-based TP of Rs2,800. Akzo is trading at lowest valuation (31x FY23E) 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.2200 as compared to the previous close of Rs. 2201.7. The total number of shares traded during the day was 974 in over 223 trades.

The stock hit an intraday high of Rs. 2215 and intraday low of 2190. The net turnover during the day was Rs. 2144970.

Source : Equity Bulls

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