Akzo Nobel India's Q2FY19 results (Neutral) - Earnings delivery remains muted..

Q2FY19 result highlights

• Akzo Nobel’s Net sales increased by 8.4% yoy to Rs 7.1bn (est: Rs7.3bn), EBITDA increased by 4.3% yoy to Rs652m (est:Rs586m), Adjusted PAT decreased by 6% yoy to Rs363m.
• Gross margins declined by 350bps yoy to 43% impacted by unfavourable sales mix, higher input costs and rupee depreciation.
• Staff cost increased by 3% yoy and other expenses decreased by 2% yoy. Resultant EBITDA was up by 4% yoy with a margin decline of 40bps to 9.1%.
• Other income increased by 4% yoy. Depreciation expense increased by 3% yoy while interest expense was down 28% yoy.
• Tax rate was up by 710bps yoy (tax refund in base quarter) resulting in Adj PAT decline of 6% yoy for the quarter. Write back of divestment provisions no longer required for Rs4.5m led to reported PAT decline of 5% yoy.

Key positives: Healthy control over other overhead costs

Key negatives: Weak revenue growth in coatings business

Impact on financials: Factoring weak performance in 1HFY19, we have cut FY19/20E earnings by 9% each

Valuations & view

Akzo’s coatings business revenues grew in high single digits &, performance continued to lag peers which is indicative of likely market share loss in the decorative segment and continued weakness in certain segments (wind and marine coatings) in the industrial business. While margin trajectory is expected to improve in 2HFY19 aided by price hike, recent moderation in input costs and tight control over other overheads, however, with higher focus on profitability, uptick in volume growth trajectory is likely to remain below peers. While valuations at 33x FY19E and 28x FY20E are at sharp discount to its peers, we believe the discount is unlikely to narrow considering weaker execution, earnings delivery and return profile. Hence, we maintain Neutral rating on the stock and would await further improvement in volume growth to change our rating on the stock.