Akzo Nobel India's Q1FY20 results (Neutral) - Revenue disappointment continues…

Q1FY20 result highlights

• Akzo Nobel’s Net sales grew by 0.6% yoy to Rs 7.2bn (est: Rs7.3bn), EBITDA grew by 43% yoy to Rs1.03bn (est: Rs1.08m), PAT increased by 31% yoy to Rs571m (est: Rs650m).
• Gross margins were up 300bps yoy basis at 45.2% aided by benign input cost & improved mix. Staff cost decreased by 8% yoy and other expenses decreased by 0.8% yoy. Resultant EBITDA was up by 43% yoy with a margin expansion of 430bps to 14.4%.
• Adjusting for IND AS 116, benefit EBITDA was up 35% yoy to Rs981m, with a margin expansion of 350bps yoy to 13.6%.
• Other income decreased by 13% yoy. Depreciation expense increased by 36% yoy & interest cost was up 184% yoy impacted by IND AS 116 implementation. Tax rate was up 160 bps yoy, resulting in PAT increasing by 31% yoy.

Key positives: Healthy gross margin expansion.

Key negatives: Weak revenue growth in coatings business.

Impact on financials: Factoring better margins, we have increased our FY20/21E estimates by 8-9%.

Valuations & view

Akzo’s revenue growth remains much lower compared to peers like APNT, Berger as well as Kansai Nerolac (rev growth of 6.6% yoy), which has similar exposure to industrial segment. The revenue growth is indicative of relatively weaker growth in decorative segment (-60-65% of sales) while Industrial business is likely to have seen sharp decline on account of weakness in Automotive and other industrial segments. Akzo’s margin trajectory remains healthy led by improved mix (led by growth in premium decorative portfolio) and control over other overheads. As highlighted earlier too, revenue growth underperformance remains a concern, which we believe is likely due to sharp weakness in industrial segment and lack of participation in the mass decorative segment. While valuations at 30x/27x FY20/21E are at discount to its peers, we believe the discount is unlikely to narrow considering weaker execution and return profile. Maintain Neutral and would await improvement in volume growth to change our rating. ​