Asian Paints rating – Add: Firm’s focus on market share gains is paying off

By: |
July 26, 2021 2:35 AM

Two-year revenue growth CAGR of 4% was a surprise; earnings CAGR of 17.3% estimated for FY21-23; ‘Add’ retained with TP of Rs 3,400

Management guides for an operating margin band of 19-21%. In the near-term, there will be (likely) pent-up demand in Q2FY22; we model higher price growth in FY22 (vs. FY19-21). Our optimistic stance stays; retain Add.Management guides for an operating margin band of 19-21%. In the near-term, there will be (likely) pent-up demand in Q2FY22; we model higher price growth in FY22 (vs. FY19-21). Our optimistic stance stays; retain Add.

Two-year CAGR revenue growth of 4% in Q1FY22 surprised consensus positively. While APNT’s gross margins declined a steep 630bps, its focus on market shares gains appears to be successful – it says it has gained from organised players also (vs. consensus view of accelerating industry formalisation). It is outperforming in ancillary segments too (waterproofing, adhesives). We believe APNT’s (higher-than-normal) price aggression in the market is a strategic choice which it is exercising prior to the (likely) increase in competitive activity when Grasim enters the market. While mgmt expects some softening of input prices going forward, PPG US expects that aggregate input and logistics costs will be sequentially higher.

While input prices are up ~15%, APNT has raised prices by just 3-4%. While consensus appears concerned about input inflation, market share gains (vs. maintaining margins) is DCF-accretive, in our view. It plans to focus on newer formulations (selectively), efficiency in sourcing, distribution and value engineering to mitigate inflationary pressures instead of raising product prices. Management guides for an operating margin band of 19-21%. In the near-term, there will be (likely) pent-up demand in Q2FY22; we model higher price growth in FY22 (vs. FY19-21). Our optimistic stance stays; retain Add.

Q1FY22 results: APNT reported consolidated revenue, Ebitda, PAT growth of 91.1%, 88.7%, 159.2% y-o-y, respectively. Standalone revenue, Ebitda, PAT growth was 95.6%, 88.9%, 136.6% y-o-y, respectively. Domestic decorative volume growth was 106%. International business as well as Industrial paints also reported strong growth. Due to 13-15% higher input prices, gross margin declined 678bps but Ebitda margin fell just 20bps due to cost saving initiatives. With 104% higher other income, adjusted PAT was up 159.2% y-o-y.

Market share gains from organised & unorganised players: APNT has gained market shares from both organised and unorganised players at an accelerated rate in FY21 and Q1FY22 (per management). While small regional players are performing well, some of the organised players with pan-India presence have lost market shares. It believes the market share gain is structural.

Operating margin range of 19-21%: While the company has hiked prices by just 3- 4%, it plans to raise prices again and also expects some softening of input prices. It wants to operate in an operating margin range of 19-21%. It is also working on sourcing efficiencies and value engineering to reduce the inflation impact.

New segments doing well: Waterproofing is gaining market shares in retail as well as projects business and adhesives is also performing well. The economy emulsion paints also continue to do well. There is additional focus on wood coating now as it has relatively higher profitability. It has introduced multiple innovative products like (i) All Protek Fire Retardant Paint, (ii) Smart Care Tile Grout, (iii) Royale Glitz Teflon with Luxury and (iv) Ingenio PU.

Maintain ADD: We model sales and earnings CAGR of 17.1% and 17.3% respectively, for FY21-FY23e. Maintain Add with a DCF-based TP of `3,400. Lower-than-expected urban recovery and potential execution issues in new categories are key risks.

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