Asian Paints' Q3FY20 results (Outperformer) - Weaker mix but volume & marginssurprise positively...
Q3FY20 result highlights
- Consolidated sales grew by 3% yoy to Rs54.2bn (est:Rs55.2bn, Cons est: Rs 56.9bn), EBITDA increased by 7.7% yoy to Rs11.9bn (est:Rs11.6bn, Cons est: Rs11.7bn), PAT increased by 20% by Rs7.8bn (est:Rs7.7bn, Cons est: Rs 7.8bn)
- Standalone sales grew by 2.7%yoy to Rs46.6bn (est:Rs47.2bn), EBITDA increased by 8% yoy to Rs11.1bn (est:Rs10.9bn), PAT increased by 20% yoy by Rs7.6bn (est:Rs5.3bn)
- Standalone sales growth is indicative of ~10-11% volume growth (2yr/3yr CAGR – 16% /13%). Lower value growth is largely on account of weaker mix, impacted by higher growth in lower end products in the Tier2/3 markets.
- Consol gross margins were up 190bps yoy (60bps qoq). Standalone gross margins were up 190bps yoy/ (60bps qoq)
- Staff cost up 9% yoy, other expenses up 7% yoy. Consol EBITDA margins increased by 90 bps yoy. Standalone EBITDA margins were up 110bps yoy.
Key positives: Double-digit volume growth in decorative segment, healthy gross margins
Key negatives: Weaker mix.
Impact on financials: Factoring weaker mix we have cut revenue est. for FY21/22E by 3% each. Resulting in EPS cut of ~4% for FY21/22E.
Valuations & view
Despite high base and challenging demand conditions, APNT reported low double-digit volume growth in decorative segment. While weaker mix & higher discounts resulted in revenue growth being below expectations, qoq improvement in gross margins & tight control over costs surprised positively. Management reiterated its strategy to focus on the growth at bottom of the pyramid (distempers/putty/economy emulsions), especially in Tier 2/3 towns, and recent product launches in the segment have seen healthy success, which is also evident from double-digit volume growth for last 8 consecutive quarters. While mix is likely to remain weak in near term, given the slowdown in Metros/Tier 1 & focus on low-end segment, however, benign input costs, similar gross margins in economy segment and tight control over cost will continue to protect overall earnings trajectory. A relatively better earnings visibility (19% CAGR over FY19-22E) justifies premium valuations. Maintain Outperformer with revised target price of Rs1,882 (50x Sep’20 E).
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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