Akzo Nobel India's Q3FY19 results (Neutral) - Earnings trajectory remains weak

Q3FY19 result highlights

• Akzo Nobel’s Net sales increased by 10% yoy to Rs 7.8bn (est: Rs7.8bn), EBITDA increased by 2.2% yoy to Rs1.0bn (est: Rs1.1bn), PAT decreased by 24% yoy to Rs604m (est:Rs712m).
• Coatings revenues in creased by 9% yoy. EBIT grew by 5.3% yoy with a margin decline of 40bps yoy.
• Gross margins declined by 220bps yoy to 40.6% impacted by higher input costs and rupee depreciation.
• Staff cost increased by 2% yoy and other expenses increased by 8.5% yoy. Resultant EBITDA was up by 2% yoy with a margin decline of 100bps to 12.9%. PBT declined by 10% yoy.
• Other income decreased by 46% yoy. Depreciation expense increased by 16% yoy
• Tax rate was up significantly at 34.6% versus 22% in base quarter, resulting in PAT declining by 24% yoy.

Key positives: Healthy control over other overhead costs

Key negatives: Weak revenue growth in coatings business

Impact on financials: Factoring weak performance, we have cut FY19/20E earnings by 11%/5% respectively

Valuations & view

Akzo’s coatings business revenues grew in double digits but continued to lag peers which is indicative of weaker growth in decorative segment as well as industrial segment. Further margin trajectory was weaker than expectations despite price hike & control over overheads.  While price hikes in decorative, recent moderation in input costs and tight control over other overheads, will aid the margin trajectory in coming quarters, continued underperformance on the volume growth front remains a concern. While valuations at 31.5x 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.