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Published on 15/05/2019 10:18:51 AM | Source: Prabhudas Lilladher Ltd

Accumulate Asian Paints Ltd For The Target Rs.1,433 - Prabhudas Lilladher

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6-7% EPS cut on tepid demand, Mix deterioration

We cut our EPS estimates for FY20 and FY21 by 6.3%-6.9% on the back of 1) uncertain demand environment in domestic market 2) deterioration in sales mix with higher sales of Putty, Tractor Distempers and emulsions 3) sensitivity of demand during election period 4) margin volatility due to INR depreciation and fluctuations in crude prices and 5) challenging environment in International business.

We remain positive in APNT’s structural growth story due to 1) likely benefits of GST rate reduction given ability to straddle through price points and deep distribution 2) strong pricing power given 7.4% price increase since March’18 and 3) lower share of Automotive/ Industrial paints which will face more pressure in near term. We estimate 12.6% and 19.2% revenue and Adj. PAT CAGR over FY19-21. We value the stock at 45xFY21 EPS and arrive at a target price of 1433. Retain Accumulate.

 

Analysts meet Takeaways:

1) Challenging domestic economic environment, volatile rupee and elections have been near term drags. Tier II & III cities are growing faster than Tier I and metro cities 2) Demand for coatings has witnessed good growth. However, Auto demand is impacted by slowdown with difficulty in taking price increases 3) Sale of putty and Tractor Distemper and emulsion are growing faster than premium products 4) Cyclone Fani has been less destructive than the Kerala floods and can impact demand in 1Q with expected recovery in 2Q 5) New home painting demand has slowed down and repainting demand has fuelled growth in FY19 6) APNT is confident of turning the Sleek business profitable in FY20 8) Home improvement has slightly lower margins than the paint business. Launch of premium products and increase in scale shall improve profitability 7) Indonesia reported a loss of 450mn on a sale of 700mn in FY19 due to expenses on brand building and distribution. It is expected to turn profitable in the next 5 years. 8) IBD is expected to remain under pressure due to challenges in Egyptian pound and continuing forex scarcity in Ethiopia 9) FY20 capex shall be ~Rs 7bn including maintenance capex, balance work for 2 plants and investments in ESS and Sleek 10) APNT plans to open 4-5 new AP homes in FY20 11) Ad-spends has been increased in regions of stiff competition. 12) APNT is in top 3 players in most of the countries except Indonesia, Singapore and Egypt 13) Paints distribution universe is 0.15mn shops and expands by 10,000/year.

 

Consolidated:

Domestic decorative volumes grew in double digits. Consol. sales increased 11.9% to Rs 50.2bn, Gross margins declined 170bps while EBIDTA margin declined 230bps on higher ad-spends. EBIDTA declined 2% while Adj. PAT declined by 4.6% to Rs4.73bn. Standalone sales increased by 26.4% to Rs 45.3bn. Gross margins and EBITDA margins both declined 150bps and 110bps. EBIDTA increased by 20.5% to Rs9.85bn Adj. PAT up 19.3% to Rs. 6.3bn. Ad-spends was postponed from 3Q19 to 4Q19 for the upcoming IPL in 1Q20. IBD suffered due to pressures in key geographies of Egypt, Ethiopia, Bangladesh and Sri Lanka. Imputed sub sales increased 10.5%, EBIDTA declined 3%. Home Improvement business of Sleek and ESS reported 22% increase in sales contributing 2.2% of the total revenue in FY19.

 

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