Volume growth for Asian Paints was strong at 13-14% (above our estimates) though the mix deteriorated with lower end growing faster. Management mentioned that 2H has been stronger than expected but stopped short of calling out for a recovery.
Gross margin expansion was strong at ~400 bp but management pointed out that all of the raw materials which go into paints seem to have bottomed out. We believe margins may have peaked out especially given the 2% price cut effected in Feb 2016. Ebitda margin expansion was lower given an increase in other/staff costs.
Home improvement continues to see tepid demand trends given a slowdown in new home sales, said management. Company has introduced adhesives in certain western parts of the country in a distribution arrangement with Henkel, Germany.
We moderate our margin assumptions on the back of raw material prices bottoming out and the recent price cut taken by the company. This leads to a 4-6% EPS cut to FY17/18. Our target price moves to R880 (from R870) on roll forward.
Double-digit volume growth but not the ideal mix: Asian Paints grew decorative paint volumes in double digits for Q4 (we estimate 13-14%) though the mix continues to be less than ideal with lower end growing faster. Management highlighted that 2H demand was ahead of their expectations but would wait out a couple of more quarters to call out for a recovery. Management shared that rural grew significantly higher versus urban and contributed ~55% of sales.
Gross margins have likely peaked: Management said that all of the inputs which go into paint manufacturing including TiO2 have bottomed out and are trending up. This coupled with the most recent 2% price cut in Feb 2016 should limit gross margin gains from here on. We are cutting earnings as we believe margins have peaked out with no scope for further expansion. Ebitda margin expansion for the quarter was benign at 190 bp due to spike in other expenses. Management explained this was due to rebates passed on to the institutional segment and was more of a response to competition.
Home improvement continues to be weak; performance linked to new home sales: This was a soft year for the home improvement business and demand trends remain weak. As per management, this business depends more on new home sales which have seen a slowdown across most markets this year. Demand for decorative paints largely comes from older homes and is thus holding up. This explains the divergent trends between the two businesses.
The company has launched adhesives in western parts of the country: Asian Paints has entered into a distribution agreement with Henkel Adhesives Technologies, Germany and will sell their ‘Loctite’ brand of adhesives in the retail channel under a co-branding initiative. The company will use its existing distribution channel to sell the product and has flexibility on the pricing strategy.