GST issues, raw material costs hit performance; FY18/19 EPS estimates down 4/3%; valuations are fair
Asian Paints (APNT) reported consolidated sales growth of 6.4% y-o-y (est. of +2%) to Rs 38.2 bn, with volume growth of 4% (est. of flat growth) in the domestic decorative paints business. The quarter failed to build on a good start due to destocking ahead of GST implementation.
Gross margin shrunk sharply by 430 bp y-o-y (est. of +300 bp) to 42.8%, mainly led by higher RM prices. Increase in RM cost, along with slightly higher other expenses (+80 bp y-o-y) and employee expense (+20 bp y-o-y), led to Ebitda margin contraction of 530 bp y-o-y to 17.4% (est. of -200bp). Thus, Ebitda declined 18.5% y-o-y- to Rs 6.7 bn (est. of -7%). Adj. PAT fell 20.4% y-o-y to Rs 4.4 bn.
Standalone performance: Net sales grew 7.3% y-o-y to Rs 32 bn. Gross margin shrunk by 470 bp y-o-y to 43.8% and Ebitda margin by 580 bp y-o-y to 18.6%. Thus, Ebitda fell 18.2% y-o-y to Rs 6 bn. Adj. PAT was down 20% y-o-y to Rs 4 bn.
Subsidiary sales grew 1.5% y-o-y to Rs 6 bn, while Ebitda and adj. PAT declined 21% and 24% y-o-y, respectively.
Concall highlights: (i) While April saw good demand, May and June were affected by destocking; APNT sees good pick-up in July. (ii) There could be some hiccups in Q2FY18 due to GST implementation across channels. (iii) The company will take necessary pricing action if RM costs do not stabilise.
Maintain Neutral: There is 4/3% downward change to our FY18/FY19e EPS. While APNT has an enviable business franchise demonstrating healthy volume growth even during consumer sector downturn, fair valuations (43x FY19 EPS) prevent us from being more constructive. Maintain Neutral with a revised target price of `1,200 (43x June FY19’EPS, in line with three-year average).
Conference call highlights
Performance: Challenging quarter; started on a positive note continuing the momentum from Q4. While April saw good demand, May and June were affected by destocking. Company seeing good pickup in July. There could be still some hiccups for couple of months in Q2FY18 on account of GST implementation across channels.
GST: 90% of the dealers are GST registered. Company did not sell to dealers who were not registered under GST. Will take time to ascertain the exact impact of GST, but is expected to be Neutral.
Margins: Margins affected by increase in raw material prices. Key material: Monomers and TiO2 costs affecting margins. Company will take necessary pricing action if raw material costs do not stabilise. Capacity imbalances affecting monomer supply due to shutdown in supplier’s plant.
International: Egypt (devaluation effect) and Ethiopia (availability of foreign exchange) suffered during the quarter. Causeway Paints (Sri Lanka) revenues included in consolidated numbers. RM prices also affected international margins. Will take 2-3 quarters to understand and sell in the Indonesia market after successful capacity installation.