Asian Paints' Q2FY19 results (Outperformer) - Challenging but likely the worst quarter for FY19
Q2FY19 result highlights
- Asian Paints (APNT) consolidated revenues (net of excise duty) increased by 8.8% yoy at Rs46.4bn(est: Rs48.3bn), EBITDA decreased by 2% yoy at Rs7.8bn(est: Rs9.1bn), Reported PAT decreased by 4% yoy to Rs5.06bn (est: Rs6.0bn).
- Standalone revenues (net of excise duty) increased by 8.7% yoy at Rs39.1bn,EBITDA increased by 1.0% yoy at Rs7.3bn, Reported PAT increased by 1.7% yoy to Rs4.8bn. Standalone revenue growth was driven by low double digit volume growth in the decorative business.
- Consolidated gross margins decreased by 150bps yoy impacted by higher input costs. Staff cost increased by 9% yoy and other expenses were up by 11% yoy. EBITDA margins declined by 190bps yoy to 16.9%.
- Subsidiary revenues were up 9% yoy while profitability was also weak with EBITDA decline of 30% yoy. The performance continues to remain weak impacted by challenging economic conditions, forex unavailability and high input cost inflation.
- Industrial coating JV (AP-PPG) growth was driven by Protective coatings. Automotive JV (PPG-AP) saw good growth in general industrial business however profits declined by 47% yoy impacted by higher input costs.
Key positives: Double digit volume growth in decorative segment
Key negatives: Decline in gross margins, weak subsidiary performance
Impact on financials: Factoring weak performance we have reduced our FY19/20/21E earnings estimate by 7% each.
Valuations & view
APNT’s volume growth and adequate gross margins adjusting for rebates were the positive factors in an otherwise weak quarter. With demand environment remaining stable, we expect 11% volume CAGR, which coupled with price hikes should drive 15% revenue CAGR over FY19-21E. While headwinds from input cost inflation remain, we believe APNT has adequate levers in terms of pricing and cost reduction to adjust to the same over the next two quarters. We have cut our target multiple to factor in the overall correction in the sector. However, given its better execution capabilities, higher earnings visibility (18% CAGR over FY19-21E) compared to peers and valuations at 39xFY20E, which is below its 5 year average, we believe the weakness is factored in the price and maintain our Outperformer rating on the stock.
Asian Paints is engaged in manufacturing of a range of decorative paints, varnishes, enamels, and black & synthetic resins. Co., through its subsidiaries, also manufactures specialty industrial chemicals and vinyl pyridine latex products which are used in the manufacture of rubber tires.
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