Asian Paints' Q4FY18 results (Outperformer) - India decorative business drives operational beat

Q4FY18 result highlights

• Asian Paints (APNT) consolidated revenues (net of excise duty) increased by 14.7% yoy at Rs44.8bn(est: Rs44bn), EBITDA increased by 18.7% yoy at Rs8.4bn(est: Rs8.1bn), Reported PAT increased by 4.2% yoy to Rs4.95bn (est: Rs5.5bn).
• Standalone revenues (net of excise duty) increased by 13.7% yoy at Rs37.7bn,EBITDA increased by 22.9% yoy at Rs7.8bn, Reported PAT increased by 11.5% yoy to Rs4.9bn. Standalone revenue growth was driven by double digit volume growth (~10%) in the decorative business and price hikes (~4%).
• Consolidated gross margins declined only 50bps yoy (standalone margins were up 20bps yoy) despite higher input costs. Staff cost increased by 9% yoy and other expenses declined by 10% yoy, resulting in EBITDA margin expansion of 60bps yoy to 18.7% (standalone EBITDA margins were up 160bps yoy). Consolidated PAT growth was lower at 4.2% yoy impacted by lower other income (down 44% yoy) and higher tax rate (ETR up 480bps yoy).
• Subsidiary revenues were up 20.4% yoy as healthy operations in Oman, Nepal and Bangladesh.

Key positives:  Healthy volume growth and EBITDA margin expansion in the standalone entity

Key negatives: Weak international business performance

Impact on financials: We have reduced our FY19/20E estimate by 2% each.

Valuations & View

APNT’s 4QFY18 performance provides a suitable response to key questions such as a) when will volume growth return to double digits and b) to what extent will the higher commodity prices impact margins. We expect APNT’s double digit volume growth trajectory to continue and are more confident now of the company leveraging price increases and lower overheads to improve margins. Further, we believe staggered price increases in the industrial business and recovery, albeit gradual, in certain pockets of the international business will drive overall margin improvement. We believe in the medium term, given APNT’s portfolio’s lower elasticity to rising crude oil prices as well as valuations of 39.5xFY20E, APNT stands as safer bet in the paints space given a more favourable risk reward. Maintain Outperformer.