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MOSL: ASIAN PAINTS (Sell)-Stellar results but outlook uncertain; valuations stretched

ASIAN PAINTS: Stellar results but outlook uncertain; valuations stretched

(APNT IN, Mkt Cap USD20.6b, CMP INR1484, TP INR1230, 17% Downside, Sell)

 

• net sales increased 16.9% YoY to INR51.3b (our estimate: INR48.7b; consensus: INR48.9b), with calculated volume growth of ~16% (our estimate: 8%) in Domestic Decorative Paints business. EBITDA was up 24.4% YoY to INR11.6b (our estimate: INR8.5b; consensus: INR9.1b), while adj. PAT rose 17.9% YoY to INR6.7b (our estimate: INR5.2b; consensus: INR5.5b).
• Concall highlights: (1) Management highlighted the need to be watchful given the weak economy and the poor progress on monsoon. (2) The gross margin trend in 1QFY20 is likely to continue going forward.
• Valuation and view: We increase our EPS estimate for FY20/21 by 6.7%/3.7% as we make changes to our model following the beat in 1Q. While results were strong amidst a muted operating environment, the ongoing economic slowdown adds an element of uncertainty to the earnings growth prospects, particularly given APNT's massive capacity expansion (addition of 50% to Sept'18 capacity up to Mar'19; to be scaled up to 100% by Mar'20). The deteriorating product mix and the weak progress on monsoon could further sour the case for earnings acceleration. Moreover the volatile EBITDA growth trajectory in recent quarters (30%, -2%, 17% and -2%, from 1QFY19 to 4QFY19) makes it hard for one to extrapolate on the 1QFY20 results. PAT CAGR has been a meager 6% over the past three years, and given the challenges indicated above (and despite earnings upgrade post the good numbers in 1QFY20), FY20 appears poised for another year of low PAT growth. RoCE, which stood at close to 40% at the beginning of the decade, deteriorated to 28% in FY16 and further to 21.3% in FY19 (far inferior to peers). Against this backdrop, valuations of 49.7x FY21E EPS (40% premium to peer average, despite moderate earnings prospects and inferior RoCE) appear stretched. We, thus, maintain our Sell rating on the stock with a target price of INR1,230 (40x June'21E EPS).