MOSL: ASIAN PAINTS (Neutral)-Volumes recover but delay in price increase dents margins

​Asian Paints: Volumes recover but delay in price increase dents margins

(APNT IN, Mkt Cap USD17.3b, CMP INR1221, TP INR1280, 5% Upside, Neutral)

• Asian Paints (APNT) reported consol. sales growth of 15% YoY to INR42.7b in 2QFY18, with volume growth of ~9% (est. of +15%) in the domestic decorative paints business. EBITDA and adj. PAT grew 13.6% and 7.5%, respectively.
  
• Gross margin shrunk sharply by 310bp YoY to 41.3%. Increase in raw material cost YoY was partly offset by lower other expenses (-230bp YoY) and employee costs (-60bp YoY), leading to EBITDA margin contraction of 20bp YoY to 18.8%.
  
• 1HFY18 performance: Sales rose 10.7% YoY, while EBITDA and adj. PAT fell 3.6% and 7.3%, respectively. EBITDA margin shrunk 270bp YoY to 20.9%.
  
• Standalone performance: Net sales grew 16.1% YoY to INR36b. Gross margin shrunk by 340bp YoY to 42.2% and EBITDA margin by just 40bp YoY to 22.2%. Thus, EBITDA grew 14.1% YoY to INR7.2b. Adj. PAT was up 8.8% YoY to INR4.7b.
  
• Subsidiary sales grew 0.3% YoY to INR6.6b. EBITDA margin contracted 10bp YoY to 12.2%.
  
• Concall highlights: 1) Early onset of the festive season and restocking from September helped 2QFY18 performance. 2) No price increase taken in the quarter. 3) Capex will be INR12b in FY18, including greenfield expansion at Mysuru and Vizag (INR10b combined), both of which will be commissioned in FY19. 4) Management stated that APNT did not lose market share to competitors in the states where it has presence. There is some regional variance in terms of paints category growth.