Buy Asian Paints Ltd For Target Rs.3,550 - Edelweiss Financial Services
Profitable volume growth desirable
Asian Paints (APL) posted Q2FY22 revenue ahead of estimate (up 32.6% YoY), while EBITDA (down 28.5% YoY) and PAT (down 29% YoY) missed our estimates. The decorative business’s volume shot up 34% YoY (base 11% YoY) led by tier 1 and 2 towns. Steep unprecedented inflation in raw material prices compressed gross margin 966bps YoY (lowest quarterly GM in several years) and EBITDA margin by 1,090bps YoY. However, we believe this is temporary, and APL has strong pricing power and is hiking prices with a lag to combat inflation.
Overall, we believe APL’s operational prowess and market leadership will help it sustain volume growth. Maintain ‘BUY’ with a revised TP of INR3,550.
Revenue robust; margins under pressure
What we like:
Net sales were up 32.6% YoY (5% ahead of Street estimates). Domestic business continued to grow logging 34% YoY volume growth. The Ess Ess business recorded a positive EBIT after many quarters while the Sleek business is also close to breaking even. Other income shot up 67% YoY.
What we do not like:
EBITDA fell 28.5% YoY (23% below our estimate although it is 33% below Street’s estimate). Gross and EBITDA margins contracted 966bps YoY and 1,090bps YoY, respectively.
Other highlights:
The industry took price hikes in Q1FY22 and Q2FY22 totalling 7%. However this is still not enough to tackle the unprecedented raw material inflation. South Asia showed good growth while the Middle East and Africa were sluggish (in international business). Industrial coatings registered strong double-digit growth.
Q2FY22 conference call:
Key takeaways APL is expanding ‘Rurban’ footprint – into new towns and suburbs, with 40,000+ new retail points added over the last year and a half. Twenty six Beautiful Homes stores are functional. By Q4FY22, the company is confident of getting into reasonable EBITDA margin range on the back of price increases and formulation changes.
Outlook and valuation:
Strong pricing power; maintain ‘BUY’ We expect double-digit growth in decorative volumes to sustain, riding potential demand shift from unorganised segment (~30%). Going ahead, APL’s ability to raise prices should help it improve margins. Considering the miss on margins, we are lowering the TP to INR3,550 (from INR3,755); retain ‘BUY/SO’ (63.4x FY23E EPS).
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