Asian Paints' Q2FY20 results (Outperformer) - Resilient volume growth offsetby weaker mix...

Q2FY20 result highlights

• Cons. Rev. grew 9.4% yoy to ~Rs50.5bn (est: Rs52.0bn), EBITDA grew 13% yoy to ~Rs9.5bn (est: Rs9.8bn), PBT grew 13.1% yoy to ~Rs8.4bn (est: Rs8.2bn). PAT grew 67.1% yoy to ~Rs8.5bn (est: Rs7.2bn). All financials are comparable yoy as Ind-AS 116 impact has been accounted for in the base quarter, as well.
• Standalone rev. grew by 9.3% yoy at Rs42.8bn, EBITDA grew by 12% yoy at Rs8.7bn and PAT grew by 65% yoy to Rs7.9bn. Standalone rev growth was lower despite high double-digit volume growth (albeit lower than ~15-16% yoy reported in Q1FY20) due to weaker mix and higher discounts.
• Cons. Gross margins expanded 250bps yoy to 42.4% (standalone gross margins +260 bps yoy to 43.4%) on the back of benign input costs. Staff costs were up 16.3% yoy and other expenses were up 20.7% yoy. Given higher growth in overheads, EBITDA margin improved just ~60 bps yoy to 18.9% (std. EBITDA margin +50 bps yoy to 20.4%).
• Cons. PAT performance was driven by higher other income (~62% yoy) and lower tax rate (~1% vs 32.8% yoy).

Key positives: Double-digit volume growth in decorative segment.

Key negatives: Weak mix & higher other overheads costs.

Impact on financials: Factoring weaker mix we have cut revenue est. for FY20/21E by 3% each. Tax benefit to result in EPS increase of 13%/9% for FY20/21E.

Valuations & view

Despite challenging demand environment, Asian paint reported high double-digit volume growth in decorative segment; however, weaker mix & higher discounts resulted in revenue growth being below expectations. Management strategy is to capitalise on the growth at bottom of the pyramid (distempers/putty/economy emulsions), especially in Tier 2/3 towns, gain market share from the unorganised segment and then drive consumer upgrades over the medium to long term. The success of the same is also evident from double-digit volume growth for last 7 consecutive quarters. Given the high base, volume growth might see some moderation in near term; however, a likely improvement in mix coupled with benign input costs will continue to aid overall operating performance. A relatively better earnings visibility (22% CAGR over FY19-22E) justifies premium valuations. Maintain Outperformer with revised target price of Rs1,959 (50x Sep’20 E).