Asian Paints' Q3FY18 results (Outperformer) - Volume miss; lower costs drive earnings growth

Q3FY18 result highlights

• Asian Paints (APNT) consolidated revenues (net of excise duty) increased by 10.5% yoy at Rs42.6bn(est: Rs45bn), EBITDA increased by 17.7% yoy at Rs8.9bn(est: Rs8.8bn), Reported PAT increased by 16% yoy to Rs5.7bn (est: Rs5.6bn).
• Standalone revenues (net of excise duty) increased by 10.7% yoy at Rs35.8bn,EBITDA increased by 22% yoy at Rs8.2bn, Reported PAT increased by 24% yoy to Rs5.3bn. Standalone revenue growth was driven by single digit volume growth (~6%) in the decorative business and price hikes (~5.7%).
• Consolidated gross margins declined 160bps yoy (standalone margins were down 90bps yoy) impacted by higher input costs. Staff cost increased by 8.3% yoy and other expenses declined by 6.4% yoy, resulting in EBITDA margin expansion of 130bps yoy to 20.9% (standalone EBITDA margins were up 210bps yoy).
• Subsidiary revenues were up 9.3% 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:  Healthy EBITDA margin expansion

Key negatives: Lower than expected decorative volume growth

Impact on financials: Factoring a more gradual uptick in volumes, we reduce our FY19/20E earnings estimates by 2.7/3.5% each.

Valuations & View

The ~6% volume growth for the quarter has been disappointing, especially given the relatively low base of ~4% volume growth. However, cost management initiatives and better mix have resulted in a strong margin improvement in a challenging environment. We expect an uptick in volumes going forward driven by a favourable base and improving demand. We also believe that price increases to mitigate the input cost pressure will follow soon which will provide a positive operating leverage, especially when APNT is rationalizing overhead costs. Market share loss over the last 2-3 quarters is a concern; however we believe a positive longer term outlook and valuations at 37xFY20E EPS not being relatively expensive (FMCG sector average valuations are 35xFY20E EPS on a lower volume growth outlook) will provide a support at these levels. Maintain Outperformer.