Asian Paints’ (APL) Q2FY17 consolidated sales at 9.6% y-o-y were slightly ahead of our estimate led by ~12% y-o-y volume growth. Ebitda and PAT spurt at 17.3% and 18.1% y-o-y, respectively, came in line. Fourth consecutive double-digit domestic volume growth despite prolonged monsoon in West and Central India was commendable —building material companies clocked soft numbers (Kajaria’s volume growth mere 3% y-o-y). Though gross and Ebitda margins expanded 171 bps and 124 bps y-o-y, they tapered 271 bps and 360 bps q-o-q, respectively, as input prices inched up. GST rate and price hikes amidst rising input prices are key monitorables.
All segments painting strong growth
APL’s standalone paint revenue grew 9.4% y-o-y (8.8% y-o-y in Q1FY17). Growth in automotive segment was driven by auto OEM and general industrial business with liquid paints driving a spurt in industrials. International business growth was also robust (consolidated and standalone paint segments grew ~10% y-o-y each) led by Nepal, Fiji and Middle East. While Ess Ess spearheaded surge in home improvement (HI) with 57.4% y-o-y growth, Ess Ess and Sleek combined grew 38.4% y-o-y. HI losses dipped to R77m in Q2FY17 vs R128m in Q2FY16.
Conference call takeaways
In decorative paints, rural growth surpassed urban counterpart. Good rainfall distribution was positive—retail demand picked up post monsoon. If input prices rise, further price hike is likely (APL operates in a band of gross margin). Adhesive is currently sold via paint dealer network; it will launch new products and enter new channels. Waterproofing business has received good response—strong presence in repairs; presence in new homes is limited as of now. Indonesia plant is under construction and should be ready by Q4FY17. Currently, APL is pilot testing products.
Outlook and valuations: Lush growth; maintain ‘BUY’
APL remains key beneficiary of recovery in urban demand and GDP revival. In our view, decorative volumes will sustain double digit growth—penetration level at 43% bodes well for the paint industry. We estimate 22% EPS CAGR over FY16-18. The stock is trading at 49.4x FY17e and 39.9x FY18e EPS. We maintain ‘BUY/SO’ with R1,228 TP.
Conference call takeaways
Paint business: Broadly, demand scenario remains challenging. However, rainfall, though slightly below normal, was well spread out, which is good. Asian Paints recorded low double digit volume growth in decorative business in Q2FY17. However, a prolonged monsoon did affect demand in West and Central India. The company does not see low double digit volume growth as recovery. Rural India still continues to grow faster than urban India. Overall retail demand has improved after monsoon eased out. There has been no major change in revenue mix, except for some premiumisation. No price revision this quarter. Asian Paints will closely monitor movement of input prices and GST rate before deciding on price revision, if any. Good demand in auto OEM and general industrial business segment led to improved performance of automotive coatings JV. In the industrial coatings JV, the industrial liquid paints segment continued to grow well. International business performed well aided by markets like Nepal, UAE and Fiji. A&P spends will not dip in Q3FY17 and will remain in the current range.
Home improvement business: Home improvement delivered good top line due to network expansion and new product launches. Good improvement in Ess Ess and Sleek business. New products launches under Ess Ess have resulted in better traction. The company has launched smart kitchens and a few new components in the Sleek business. However, traction has been comparatively slower.