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Akzo Nobel India's Q3FY20 results (Neutral) - Revenue trajectory remains weak…

Q3FY20 result highlights

• Akzo Nobel’s net sales declined by 7.2% yoy to Rs 7.3bn (est: Rs7.1bn), EBITDA grew by 14.7% yoy to Rs1.16bn (est: R1.11bn), PAT increased by 27.5% yoy to Rs77m. Adj for exceptional income of Rs35m, PAT increased by 23% to Rs744m (est: Rs703m).
• Gross margins were up 520bps yoy basis at 45.8% aided by benign input cost. However, qoq basis margins were down 140bps. Staff cost and other expenses were flat on yoy basis. Resultant EBITDA was up by 14.7% yoy with a margin expansion of 310bps to 16%.
• Adjusting for IND AS 116 benefit, EBITDA was up 9% yoy to Rs1.1bn, with a margin expansion of 230bps yoy to 15.2%.
• Other income decreased by 27% yoy. Depreciation increased by 17% yoy & interest cost was up 32% impacted by IND AS 116 implementation. Tax outgo declined by 24% yoy,

Key positives: Tight control over costs.

Key negatives: Decline in revenues, sequential drop in gross margins.

Impact on financials: Factoring weak performance, we cut our FY20/21E EPS estimates by 6-7%.

Valuations & view

Akzo Nobel India reported weak quarter with revenue performance being lower compared to peers like APNT and Berger but similar to Kansai Nerolac (rev decline of 7.7% 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 Real Estate segments. We believe lack of presence in low end products and slowdown in Urban markets continues to impact decorative volume growth too for Akzo. Sequential decline in gross margins is a negative, which none of the peers have reported. While the control over costs and focus on achieving the EBIT margin target of 15% is positive, volume recovery & market share gains remain elusive. Hence, the valuation discount is unlikely to narrow in the near-term, in our view. Maintain Neutral and would await improvement in volume growth to change our rating.