Akzo Nobel India's Q1FY19 results (Neutral) - Revenue growth continues to lag peers

Q1FY19 result highlights

• Akzo Nobel’s base quarter results are restated to exclude the chemical business. Net sales increased by 10.4% yoy to Rs 7.15bn, EBITDA increased by 9.9% yoy to Rs724.5m, Adjusted PAT increased by 11% yoy to Rs435m.
• Adjusting for excise, comparable sales for Coatings segments were up by 10% yoy.
• Gross margins declined by 160bps yoy to 42.2% impacted by higher input costs. Staff cost increased by 14.3% yoy and other expenses increased by 1.3%Resultant EBITDA was up by 10% yoy with a margin decline of 10bps to 10.1%.
• Other income increased by 35% yoy. Depreciation expense increased by 6% yoy while interest expense was up 98% yoy, resulting in Adj PAT growth of 11% yoy for the quarter.

Key positives: EBIT margin expansion in coatings business

Key negatives:  Revenue growth below peers.

Impact on financials: No change in estimates

Valuations & view

Akzo’s coatings business revenues grew in double digits; however, performance continued to lag its peers (Asian Paints, Berger Paints & Kansai Nerolac revenues grew by 15%, 17% and 17% in 1QFY19). The underperformance is indicative of likely market share loss in the decorative segment and subdued demand environment in certain segments (wind and marine coatings) in the industrial business. We believe volume growth trajectory is likely to remain below peers given the management’s focus on profitability (inline with parent company’s strategy). While valuations at 34x FY19E and 28x FY20E are at sharp discount to its peers but so has been the execution and earnings delivery too. Hence we maintain Neutral rating on the stock and would await further improvement in volume growth to change our rating on the stock.