Akzo Nobel India's Q4FY18 results (Neutral) - Higher input costs drags profitability

Q4FY18 result highlights

• Akzo Nobel’s base quarter results are restated to exclude the chemical business. Net sales increased by 10.3% yoy to Rs 7bn, EBITDA declined by 6.5% yoy to Rs 699m, PAT decreased by 33% yoy to Rs462m.
• On reported basis, Coatings sales declined by 1.6% yoy to Rs7bn. Adjusting for excise, comparable sales were up by 10% yoy.
• Gross margins declined by 320bps yoy to 42.6% impacted by higher input costs. Staff cost increased by 18.8% yoy and other expenses decreased by 0.4%. Resultant EBITDA declined by 6.5% yoy with a margin decline of 180bps to 10%.
• Other income decreased by 8% yoy. Depreciation expense decreased by 9% yoy while interest expense was up 28% yoy. Effective tax outgo was up 231% yoy as base quarter had certain tax reversals, resulting in PAT decline of 33% yoy for the quarter.

Key positives: Control over other expenses.

Key negatives:  Muted revenue growth and margins.

Impact on financials: We have increased our FY19/20E estimates by 2%/4% respectively.

Valuations & view

Akzo’s revenue growth in the coatings business has seen recovery on sequential basis. However it continued to lag its peers (Asian Paints & Kansai Nerolac revenues grew by 14% and 17% in 4QFY18) impacted by lower focus in the high growth economy segment in decorative business and weak 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). Valuations at 37x FY19E and 31x FY20E, look fair considering relatively inferior profitability and return metrics. Maintain Neutral rating on the stock.