EUR 120.00 For Business Accounts Only

MOSL: ASIAN PAINTS (Sell)-Realizations decline sharply, margin growth uncertain

(APNT IN, Mkt Cap USD23.9b, CMP INR1778, TP INR1608, 10% Downside, Sell)

** APNT's ~-8% realization decline (on a base that had an already weak mix in 3QFY19) does not augur well for its sales growth beyond FY20, especially given the uncertain economic revival. While 4QFY20 should continue seeing YoY margin gains, there is uncertainty on further commodity price reduction in FY21/FY22, thereby tempering margin growth expectations. This means that EPS growth is likely to be in line with top line.

** On account of lower FY20 capex assumption and margin beat in 3QFY20, we have upgraded FY20/FY21 EPS estimates at 2%/3%; our FY22 forecast remains unchanged. Maintain Sell on persistent weak earnings and expensive valuations.

Sales in line, margins surprise despite worsening mix
** Consol. net sales grew 3% YoY to INR54.2b (slightly lower than est. INR54.5b), despite volume beat of ~11% (v/s est. 3%) in the Domestic Decorative paints business. Note that 3QFY19 saw 23.5% sales growth.

** Despite significant mix deterioration, gross margins were up 190bp YoY to 43%. However, higher operational expenses mean that EBITDA margin expanded only 100bp YoY to 21.9% (v/s est. 20.7%).

** EBITDA/PBT grew 7.7%/8.2% YoY to INR11.9b/INR10.4b (v/s est. INR11.3b/ INR9.2b). Adj. PAT grew 20.3% YoY to INR7.8b (v/s est. INR7b).

** Consol. revenue/ EBITDA/ PBT/ adj. PAT for 9MFY20 was up 9.2%/14.7%/13.9%/33.4% YoY.

** 2Q-3QFY20 consol. revenue/EBITDA/PBT/adj. PAT growth stood at 6%/10%/10.3%/40.7% YoY.