Double digit volume growth a positive surprise; earnings momentum to slow down while rich valuations limit upside; Retain REDUCE
APNT reported revenue growth of 8% yoy, in-line with EE on consolidated basis with standalone sales increasing by 9% yoy with strong volume growth (low double digit volume growth in decorative paints). Gross margins contracted by 151/16bps on yoy/qoq basis in 4QFY17. Absolute EBIDTA for the quarter stood at Rs. 7.1bn, 2% higher on yoy basis and 4% below EE. Although APNT is a company with proven track record; earnings growth is likely to slow down as compared to the last 2-3 years. APNT valuations currently are very rich with the stock currently trading at ~44x our FY19 estimated EPS of Rs. 26.4. Hence we maintain our REDUCE rating on the stock with Sep’18 TP of Rs. 1,059 (previously Jun’18 TP of Rs. 1,017) and await better entry point. At our TP the stock would trade at 43x its TTM EPS of Rs. 24.6.
Volumes higher than expectations and could also be on account of some channel filling due to price hikes and A&P costs:
Despite challenging environment, APNT reported low double digit volume growth in decorative paints segment during 4QFY17 and was ahead of EE of 9%. Our channel checks indicate that some portion of it could be attributed to sales push through higher consumer and dealer promotions (other expenses higher by 9% qoq) and some channel filling might have occurred due to price hikes in Mar’17. Positive impact of monsoons and seventh pay commission is likely to come in during FY18. We estimate volume growth for FY18E/19E to be around 9%/10%.
Sales in subsidiary business declined 9% on yoy basis; while EBIDTA declined 9%:
APNT witnessed subdued revenues from subsidiary business which de-grew by 9% during 4QFY17. International business was led by strong performance in regions like Nepal, Fiji and Middle East business continued their strong momentum. EBIDTA in subsidiary business declined by ~8% and stood at Rs. 727mn during 4QFY17, while profits increased by ~8% and stood at Rs. 196mn as performance of PPG-AP was strong during FY17. We introduce revenue of Causeway paints in our numbers for FY18E/19E.
Smartcare range of products getting good traction in the market while ESS ESS and SLEEK breakeven a couple of years away:
APNT has been heavily advertising for its SmartCare range of waterproofing products and has been getting good traction in the market for the same. The company has also managed to witness good growth in adhesives and wall paper business. We believe that APNT will continue to be aggressive in waterproofing business and it would be interesting to see how they ramp up in the adhesives business for which we believe they will need to advertise heavily and create a brand recall. APNT will also continue to invest in SLEEK and ESS ESS over the coming years as it believes that these are businesses for the future. The management expects ESS ESS to breakeven by the end of 1HFY19.
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