Q2FY20 result highlights
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.
ICI India is engaged in the manufacture and sale of paints. Co.'s primary business segments are paints and chemicals. The Paints business segment includes decorative and refinishing and the Chemical business segment includes uniqema, food starch, polymers, adhesives, and rubber chemicals.
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