APNT reported low double digit volumes in decorative business and improved growth in automotive and Industrial paints indicating gradual improvement in demand. Long term demand outlook looks bright, notwithstanding near term disruption in 1HFY18 due to GST implementation. Input cost scenario looks challenging with firm Tio2 and monomer prices forcing 5.7% price increase in past 3 months. We believe that decorative paints industry will grow volumes in midteens for coming 5‐10 years led by rising consumerism, buoyant housing demand and increased application in small towns and rural India. We factor in 13% and 15% volume growth in FY18 and FY19 but flat margins as operating leverage will compensate for 130bps decline in gross margins. We expect premium valuations to sustain and retain “Accumulate” with target price of Rs1171 (Rs1051 earlier).
* Analyst Meet Highlights:
1) Demand conditions are improving, however GST is likely to result in volatility in near term 2) APNT has received subsidy of Rs3b in khandala unit so far, any reduction in tax rates in GST will require renegotiation of time period for availing subsidy 2) APNT has incurred capex of Rs5.5bn (2bn on new plants) in FY17, FY18 capex is likely at Rs 12.5bn (Rs 10‐11bn on new units) 3) First phase of Mysuru and Vizag plant (3,00,000 KL/annum each) would be completed in Oct 2018 and March 2019 respectively 4) IBD business constant currency growth was at 15%, however currency devaluation in Egypt impacted growth 5) APNT has entered adhesives for wood and furniture segment in select regions and is looking at more comprehensive portfolio in home improvement beyond coatings 6) Currency availability remains an issue and would impact demand in Ethiopia in near term 7) APNT has started a plant with capacity of 9000TPA in Indonesia and is awaiting license for commercial production and sale 8) APNT has completed acquisition of Causeway paints in Sri Lanka, it had sales of Rs2.7b in FY17
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