MOSL: ASIAN PAINTS (Neutral)-Demand for paints remains subdued-raw material prices inching up

Asian Paints: Demand for paints remains subdued; raw material prices inching up

(APNT IN, Mkt Cap USD17.7b, CMP INR1177, TP INR1270, 8% Upside, Neutral)

• Asian Paints (APNT) reported consol. sales growth of 10.5% YoY to INR42.6b in 3QFY18, with volume growth of ~6% (est. of +15%) in the domestic decorative paints business. EBITDA and adj. PAT grew 17.7% and 19.6% YoY, respectively.
• Gross margin shrunk sharply by 150bp YoY to 42.2%. Increase in raw material cost YoY was offset by lower other expenses (-270bp YoY) and employee costs (-10bp YoY), leading to EBITDA margin expansion of 130bp YoY to 20.9%.
• Standalone performance: Net sales grew 10.7% YoY to INR36b. Gross margin shrunk by 90bp YoY to 43.5%, while EBITDA margin expanded 2,100bp YoY to 22.7%, as other expenses contracted 270bp YoY. Thus, EBITDA grew 21.9% YoY to INR8.2b. Adj. PAT was up 24.2% YoY to INR5.3b.
• 2Q+3Q standalone performance: Sales, EBITDA and adj. PAT rose 13% YoY, 15.7% and 13.5%, respectively. EBITDA margin expanded 90bp YoY to 21.4%.
• Subsidiary sales grew 9.3% YoY to INR6.7b. EBITDA margin contracted 310bp YoY to 10.9%.
• Concall highlights: (1) Indian economy seems to be on a recovery path, but demand recovery for paints is still subdued. (2) Early onset of the festive season in 2QFY18 impacted 3QFY18 sales to some extent. (3) No price increase taken in the quarter.