With an eye on profitability, Akzo aims at innovation and increase in distributor-based network to gain market share over the next few years. Maintain ‘Hold’.
Akzo’s lower than industry decorative paints volume growth in FY19 (mid- to high-single digit vs mid-double digit for competition) was due to its focus on premium products and reduced focus on low-margin bottom-of-the- pyramid products. With an eye on profitability, Akzo aims at innovation and increase in distributor-based network to gain market share over the next few years. Maintain ‘Hold’.
Akzo’s strategy is to achieve profitable volume growth rather than chasing higher volumes. For this, the company targets growth at 1.5x GDP for its premium products and aims to recoup its market share in the mid-category product portfolio.
Akzo has announced price cut of 2-3% in its Dulux Gloss Premium enamel range w.e.f. 7-Jun’19 given its high correlation with crude oil price, which has recently declined. We do not expect a significant impact of the cut on the margins due to the low share of enamels in the overall contribution. Akzo was the only company to have taken a price hike (1.0-1.5%) in Feb’19.
Akzo’s distributor-led model has witnessed good traction. It aims to increase penetration in smaller towns over the next few years by improving supply-chain management and ensure product availability for distributors. In a bid to expand its portfolio, Akzo launched products in the fast- growing waterproofing category under the brand Aquatech. Akzo is the fastest company to reach waterproofing revenues of `1 bn in India. Over the next few years, Akzo intends to gain market share.
We maintain our earnings estimates and expect consolidated sales and earnings CAGRs of 10.1% and 15.1%, respectively, over FY19-FY21E. We maintain our ‘Hold’ rating with a target price of `1,730 (unchanged). At CMP, the stock is trading at a P/E of 29.9x FY21E earnings, the lowest among its peers.