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MOSL : ASIAN PAINTS: Weak mix impact realization and margin

 

ASIAN PAINTS: Weak mix impact realization and margin

(APNT IN, Mkt Cap USD36.4b, CMP INR3142, TP INR3150, Neutral)

• Results were well below estimates as realizations and gross margins were severely impacted, primarily led by product mix deterioration caused by (a) slower growth in high margin urban sales unlike the preceding couple of quarters and (b) the adverse impact of downtrading. The management guided that recovery in margins is expected to be gradual with majority of raw material (crude price) cost decline likely to come in only from 4QFY23 onwards.
• APNT also announced its capex plans for the next three to four years with a total outlay of INR67.5b. It will be expanding its existing capacity by 30% to 2.27m KL p.a. It plans to set up a new facility to manufacture VAM/VAE with a capacity of 0.1/0.15m tonnes p.a. and acquire a nanotechnology player ‘Harind’, which is into surface coating.
• The current valuations (~53.6x FY24E P/E) fully capture the upside over the next one year. We reiterate our Neutral rating on the stock.

Miss on all fronts

• Net sales grew 19.2% YoY to INR84.6b (est. INR92.2b). Volume growth stood at 10% (est. 12%) in the domestic Decorative Paints business.
• Gross margin expanded 100bp YoY and contracted 200bp QoQ to 35.7%. As a percentage of sales, flat employee costs (-10bp YoY), and lower ‘other expenses’ (-60bp YoY) meant that EBITDA margin expanded by 180bp YoY (contracted 360bp QoQ) to 14.5% (est. 19.5%).
• EBITDA grew 35.7% YoY to INR12.3b (est. INR18.0b).
• PBT grew 31.4% YoY to INR10.7b (est. INR16.7b).
• PAT grew 32.8% YoY to INR8b (est. INR12.5b).
• Three-year revenue/EBITDA/PAT CAGR stood at 18.7%/8.7%/-1.7%.

Key highlights from the management commentary

• Tier 3/Tier 4 cities are witnessing double-digit growth and it is higher than Tier 1/Tier 2 cities.
• Product mix was dominated by economy emulsions and undercoats. Downtrading was evident in the luxury and premium category, due to steep price increases over the last six months.
• Sustainable gross margin going ahead to be in the range of 39-40%.
• Total capex outlay is expected to be ~INR67.5b over the next three to four years, including capex related to acquisitions, and brownfield and greenfield expansions.