APNT’s strong volume growth momentum is attributable to its enhanced focus on low-end products, especially so, post GST rate cut.
APNT reported muted 3% y-o-y growth in domestic decorative paints led by low double-digit volume growth, implying 800-900 bps decline in realisations; deterioration of product mix is attributable to APNT’s enhanced focus and associated share gains in the economy segment. Profitability is tracking well aided by RM tailwinds and tight leash on costs. We trim FY2020-22e earnings by 2-4%, roll over and revise DCF-based FV to Rs 1,825 (from Rs 1,800) implying 45X FY2022e earnings.
Revenue growth slows, tight leash on other expenses protects margins
Consolidated revenues grew 2.4% y-o-y (KIE 7%) to Rs 54.2 bn and Ebitda grew 8% y-o-y (LFL adjusted for Ind-AS 116). Standalone revenues (domestic decorative) grew 3% (on high base) led by about 11-12% volume growth (KIE 9%). A 800-900 bps decline in realisations was led by—(i) cumulative price cut of 1% in 9MFY20, and (ii) product mix deterioration owing to strong growth in the economy segment. GM expanded 204/57 bps y-o-y/q-o-q to 43% aided by RM tailwinds; GM was in line with estimate despite weaker-than-estimated product mix. Ebitda was broadly in line on account of tight leash on other expenses (up just 6.6% y-o-y on LFL basis). Net profit grew 20% y-o-y aided by reduction in tax rate.
Unorganised-to-organised shift at play
APNT’s strong volume growth momentum is attributable to its enhanced focus on low-end products, especially so, post GST rate cut. The management called out success of its recently launched ultra-economy emulsion range, SPARC. We believe strong volume growth is partly attributable to unorganised-to-organised shift and the underlying demand environment for decorative paints could be weaker than that reported by organised players. Separately, we note that APNT management indicated that changing product mix doesn’t pose risk to medium-term profitability.
We like APNT’s aggression and focus across price points; it thwarts competition. We like the story but await better entry price; REDUCE stays
We moderate our growth forecast to factor in weak price/mix trends and trim FY2020-22e EPS by 2-4%. APNT’s strong brand, well-entrenched dealer network, talent pool and scale lend it an unparalleled competitive advantage and enable investments in technology/analytics and new/adjacent categories. We like paints category and APNT is our preferred relative pick in the space. Our Reduce rating is in view of the modest absolute upside; we await a better entry price.