Asian Paints Ltd - Q4FY21 Result Update - YES Securities

Blockbuster growth with all engines firing, set to gain further share once pandemic subsides; earnings upgrades should drive outperformance

View - While the stock might look expensive trading at 55x FY23E earnings, we would expect earnings upgrades to drive some more outperformance for the stock as revenue growth trajectory seems to have shifted upwards due to a combination of market share gains, pick up in institutional business and structural uptick in demand for value for money branded products in both rural and urban markets. In addition, recent price hikes, cost initiatives and recovery in premium products will also drive better margins and higher earnings growth.

Results summary - 46% revenue growth, PAT growth of 81% and EBITDA margins up 200bps in standalone business; 43% revenue growth, PAT growth of 81% and EBITDA margins up 120bps on consolidated basis; dividend increased from Rs 12 to Rs 17.85, a payout of 56%.

Decorative business - 46% value and 48% volume growth in decorative with further pick up in metros and tier 1 and continued momentum in smaller cities; growth more than 30% adjusting for base effect; 13% volume and 8% value growth in a difficult FY21; high commodity inflation since December impacted GMs, refrained from taking price hikes to retain demand momentum, have increased prices by 2.8% in April.

International business - Double digit volume growth for all units, focus on premium products and portfolio expansion have helped, have launched waterproofing and paint services, revenue up 22% for 4Q and 6.5% for FY21; high material inflation impacted margins.

Industrial business - Auto OEM business was impacted due to volatile auto demand in FY21 but 4Q very strong, GI business saw strong 4Q and registered 7% growth in FY21.

Home Improvement business - Both kitchen and bath business did well in FY21 with 11%/13% growth with a blockbuster 4Q with 84% growth from a small base, margin break-even achieved in 3Q and 4Q.

Strategic drivers - Looking to get more patent protection for protecting product innovation, improving retail presence in multiple formats with best-in-class visualization, increasing focus on at-home services like safe painting, waterproofing and sanitization, strong foray into other home décor segments with Beautiful Homes website and service offering, strong growth in projects and large institutional sales.

Outlook - Uncertainty higher due to second wave of pandemic which is more widespread, vaccination progress is very critical, company well positioned to capture the recovery cycle once this wave is behind us, working on sustaining operations across production, warehousing and logistics, RM challenges remain which can necessitate a few more price hikes.

Road to profitability in kitchen and bath business - Trying to drive kitchen and bath business by reaching out aggressively to decision makers like architects, contractors etc and looking at an integration with the home décor offerings which has led to strong growth in the business, well on way to profitability in both businesses.

Margin outlook - Margins at all-time high without passing on full commodity inflation to consumers, will dynamically manage the margin structure according to changes in mix and discounting strategies; strong sourcing efficiency measures by diversifying vendor base, improving formulation efficiencies using technology, also strongly controlling overheads.

Volume-value divergence - Has shrunk from 7-8% in last few quarters has shrunk to 2%, FY21 still has 5% divergence but 4Q was an exception where metros and Tier 1 cities did really well due to pent-up demand which improved product mix in favor of luxury and premium products; 3-5% is a sustainable divergence going forward as company going deeper into mass markets.

Market share trends - Strong share gains from Top 3-4 pan-India peers, also taking share for unorganized players due to supply chain disruptions.

Volume growth outlook - Will keep aspiring for strong volume growth; Key drivers - Tier 3,4 cities doing well due to rising agri income, increasing consumer aspirations leading to upgradation to emulsions; mass population in metros and Tier 1 cities are also seeing shift towards value for money offerings from branded players; under penetration of undercoats category is improving given awareness initiatives, low construction quality is also driving undercoats demand, waterproofing segment is also fueling volume growth.

Drivers of exceptional demand in 4Q - Not only pent-up demand, saw new demand from projects, new products, market share gains; urban markets and premium products grew faster than rural markets and economy products in 4Q which was a trend change from earlier quarters.

Grasim entry impact on margins - Many large MNCs have entered earlier like Sherwin Williams, Nippon, Jotun; don't think pricing is the key driver as that is not sustainable; difficult to replicate brand equity, mind share, pan-India supply chain efficiencies, hi-tech products for current and future competitors.

Current pandemic situation - Situation is not normal as of now with a lot of markets closed, but production and supply chain is not impacting revenue as company is able to service all open markets from its depots, hopeful of pandemic peaking out and sales normalizing.

Shares of ASIAN PAINTS LTD. was last trading in BSE at Rs.2773.6 as compared to the previous close of Rs. 2556.1. The total number of shares traded during the day was 503178 in over 36531 trades.

The stock hit an intraday high of Rs. 2839 and intraday low of 2600. The net turnover during the day was Rs. 1393863364.

Source : Equity Bulls

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