Akzo Nobel India's Q2FY20 results (Neutral) - Weak performance…

Q2FY20 result highlights

• Akzo Nobel’s Net sales degrew by 11.2% yoy to Rs 6.3bn (est: Rs7.3bn), EBITDA grew by 12% yoy to Rs728m (est: Rs841m), PAT increased by 34% yoy to Rs493m (est: Rs615m).
• Gross margins were up 420bps yoy basis at 47.2% aided by benign input cost. Staff cost decreased by 4% yoy and other expenses decreased by 7% yoy. Resultant EBITDA was up by 12% yoy with a margin expansion of 240bps to 11.5%.
• Adjusting for IND AS 116 benefit, EBITDA was up 4.3% yoy to Rs680m, with a margin expansion of 160bps yoy to 10.7%.
• Other income decreased by 17% yoy. Depreciation expense increased by 33% yoy & interest cost was up 6x impacted by IND AS 116 implementation. Tax outgo declined by 67% yoy, resulting in PAT increasing by 34% yoy.

Key positives: Healthy gross margin expansion.

Key negatives: Continued weakness in coatings business.

Impact on financials: We cut our FY20/21E sales & EBITDA estimates by  4-8%, however EPS estimates stand increased by 9%/7% due to lower tax rate.

Valuations & view

Akzo Nobel India reported weak quarter with revenue growth much lower compared to peers like APNT, Berger as well as Kansai Nerolac (rev decline of 3.8% 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. We believe headwinds on revenue growth are likely to continue given the healthy competitive activity in decorative as well as weakness in industrial segments. Given the weak 2H base on margins, the EBITDA growth is likely to remain strong in the near term. While valuations at 34x/31x 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.