Decorative volumes robust; firm’s execution stands out; Q4 outlook’s strong too; TP up to Rs 3,150; ‘Buy’ retained
Q3 results beat consensus expectation by a wide margin: (i) APNT delivered 33% decorative volume growth, which was more than double that of Street expectations ; (ii) this rebound was also linked to demand revival in Metros and Tier 1 cities while demand remained strong in smaller towns. This also led to strong growth in the premium and luxury segment; (iii) demand was also distributed almost equally across three months; (iv) consolidated sales/Ebitda/clean PAT grew 25.2%/ 50.3%/62% y-o-y; (v) gross margin expanded by c207bp on superior mix, stable RM and sourcing and formulation efficiencies, while prudent cost optimisation helped it deliver c439bp Ebitda margin expansion; (vi) Other businesses also reported improving demand trends. International business registered strong double-digit top line growth.
Key takeaways from conference call: (i) Decorative volume growth in Q3 was led by a mix of pent-up demand, festive and wedding sales and revival in projects business. Mgmt remains positive on delivering a healthy volume growth in Q4 too; (ii) Asian Paints’ home décor business has received an encouraging initial response. APNT plans to double its store count (16 currently); (iii) while near-term inflation is building up in key inputs, Asian Paints aims to take a judicious approach to pricing, and thinks the relative consumer value proposition is intact.
Why investors should continue to stay positive: (i) Asian Paints is the dominant leader in the lucrative decorative paints industry, a structural winner with superior cost economics; (ii) the COVID-19 crisis has further consolidated its competitive position helped by market share gain; (iii) over the medium term, it is also a key beneficiary of the premiumisation trend in the industry; (iv) we believe demand remains strong and will continue to surprise positively; (v) it is expanding its reach and portfolio to further augment long-term growth.
Reiterate Buy with new TP of Rs 3,150: Asian Paints’ current price builds in long-term earnings growth of c15-16% which, in our view, is achievable given the structural growth of the category, which is also buttressed by near-term strong earnings growth momentum. We retain our Buy with a new TP of Rs 3,150 (from Rs 3,000).