Akzo Nobel India's Q4FY19 results (Neutral) - Revenue disappoints, tight control over cost drives earnings

Q4FY19 result highlights

• Akzo Nobel’s Net sales increased by 0.7% yoy to Rs 7.05bn (est: Rs7.7bn), EBITDA increased by 48% yoy to Rs1.04bn (est: Rs871m), PAT increased by 54% yoy to Rs703m (est:Rs527m).
• Coatings revenues were flat for the quarter. Adj for promotional expense of Rs143m in 4QFY19, LTL growth was 3%. EBIT grew by 81% yoy with a margin expansion of 630bps yoy.
• Gross margins were flat on yoy basis at 42.7% with impact of higher input costs offset by better mix. Staff cost decreased by 26% yoy and other expenses decreased by 6.3% yoy. Resultant EBITDA was up by 48% yoy with a margin expansion of 470bps to 14.7%.
• Other income increased by 19% yoy. Depreciation expense increased by 23% yoy. Tax rate was was lower by 80 bps yoy, resulting in PAT increasing by 54% yoy.

Key positives: Healthy control over other overhead costs

Key negatives: Weak revenue growth in coatings business

Impact on financials: FY20E remain largely unchanged, we introduce FY21E earnings.

Valuations & view

After registering low double digit growth in 9MFY19, Akzo’s coatings business revenues moderated to 3%, much lower compared to peers like APNT and Kansai Nerolac, indicative of weaker growth in decorative segment as well as industrial segment. Akzo’s margin trajectory remains healthy largely aided by improved mic, focus on premium products and tight control over other overheads. However, revenue growth underperformance in coatings business 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 31x/28x FY20/21E are at sharp discount to its peers, we believe the discount is unlikely to narrow considering weaker execution, earnings delivery and return profile. Maintain Neutral rating on the stock and would await improvement in volume growth to change our rating.