Akzo Nobel India's Q3FY18 results (Neutral) - Continues to lag behind peers

Q3FY18 result highlights

• Akzo Nobel’s base quarter results are restated to exclude the chemical business. Net sales increased by 5.8% to Rs 7bn, EBITDA declined by 1.6% to Rs 638m, PAT increased by 18.7% yoy to Rs796m.
• On reported basis, Coatings sales declined by 5% yoy to Rs7bn. Adjusting for excise, comparable sales were up by 6% yoy. We believe the revenue growth would have been an equal mix of volume and value, implying a 3-4% volume growth.
• Gross margins declined by 210bps yoy to 42.8% impacted by higher input costs and a weaker mix. Staff cost increased by 15.7% yoy and other expenses decreased by 3.4%. Resultant EBITDA declined by 1.6% yoy with a margin decline of 100bps to 13.9%.
• Other income increased by 86% yoy due to sale of the chemicals business and a one-time profit of Rs30m. Depreciation expense increased by 13% yoy while interest expense was down 15% yoy. Effective tax outgo declined by 24% yoy (tax rate was down by 870bps yoy) resulting in PAT growth of 18.7% yoy for the quarter.

Key negatives:  Muted revenue growth and margins

Impact on financials: Factoring weak performance we have reduced our FY18/19/20E estimates by 4%/5%/5% respectively.

Valuations & view

Akzo’s revenue growth has continued to lag its peers (Asian Paints, Berger & Kansai Nerolac) which is indicative of continued loss of market share in the decorative segment as well as weak pricing environment in the industrial segment. We expect volume growth & margin improvement for Akzo to remain lower compared to peers considering strong competitive intensity and superior execution from top 3 players. The key monitorable  going forward will be Akzo Nobel’s execution on its stated intent of increasing presence in the mass paint segment. Valuations at 35x FY19E and 30x FY20E, look fair considering relatively weak earnings CAGR of 5% over FY17-20E. Maintain Neutral rating on the stock.