Asian Paints' Q2FY18 results (Outperformer) - Volume recovery & cost control drives earnings
Q2FY18 result highlights
- Asian Paints (APNT) consolidated revenues (net of excise duty) increased by 15% yoy at Rs42.6bn(est: Rs42bn), EBITDA increased by 13.6% yoy at Rs8.01bn(est: Rs7.7bn), Reported PAT (from continuing operations) increased by 7.5% yoy to Rs5.3bn (est: Rs5.2bn).
- Standalone revenues (net of excise duty) increased by 16.1% yoy at Rs36bn,EBITDA increased by 14.1% yoy at Rs7.2bn, Reported PAT increased by 8.8% yoy to Rs4.7bn.
- Standalone revenue growth was driven by high single digit volume growth in the decorative business and price hikes (~5.7%).
- Consolidated gross margins declined 310bps yoy (standalone margins were down 350bps yoy) impacted by higher input costs. Staff cost increased by 6.0% yoy and other expenses grew by 0.5% yoy, resulting in EBITDA margin contraction of 20bps yoy to 18.8% (standalone EBITDA margins were down 30bps yoy).
- Subsidiary revenues were up 9.1% yoy as healthy operations in Oman, Nepal, Bahrain and Bangladesh was offset by weakness in Egypt (due to currency devaluation) and Ethiopia (forex unavailability).
Key positives: Uptick in decorative volume growth and control over other overheads
Key negatives: Decline in volume market share in decoratives and weakness in gross margins.
Impact on financials: We reduce our FY18/19E earnings estimates by 5% each.
Valuations & View
The quarter has been better than our initial expectations driven by higher volume growth and overhead cost control. We expect volume uptick in 2HFY18 driven by a favourable base, higher network expansion and normalized demand. Further, post festive season if input costs remain elevated, we believe APNT will pass on the same in terms of price increases. Though volume market share loss is a concern, we believe two quarters is not enough in terms of data to extrapolate a trend. Though valuations at 45xFY19E and 37xFY20E restrict near term upsides, we maintain our longer term 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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