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Annual Report update: ‘Grow & Deliver’ on track

The ‘Grow & Deliver’ Strategy is working well for Akzo as it reported third consecutive year of double digit profitability with market share gains. Company also maintained its record of generating strong EVA led by RoE of 22.6% in FY22 (Highest in past decade). Chief reasons for improvement in 618bps YoY improvement in RoE were better profitability and higher dividend payouts. Ahead, we believe (1) Akzo will benefit from its investments in Distribution 2.0. Major benefits of distribution expansion will be realized in FY23-24 and FY21-22 were covid affected, (2) revival in industrial segments like Infrastructure, real estate, power, marine augurs well, (3) steady launches of premium /differentiated products will likely lead to superior margins and market share gains and (4) Developments in EV augur well for its powder coating segment.

We stay believers. Stock trades at 19x FY24E (>50% discount to APNT), providing significant margin of safety. Dividend yield of 4.6% (FY23E) also provides downside support. ADD; TP Rs2,000.

* Strong EVA creation by Akzo:

The company has continued its record of creating strong EVA over past 16 years even in FY22. Its RoE of 22.6% in FY22 was highest in past decade and chief reasons were (1) Sharp improvement in profitability and (2) higher dividend payouts. We believe with likely elevated dividend payouts, reduction in working capital and improvement in profit margins (with likely correction in input prices) in FY23-24, the EVA creation will remain stronger.

* Grow & Deliver strategy working well:

Staying on course on ‘Grow & Deliver’ strategy, Akzo has maintained third straight year of double digit profitability and has also gained market shares in FY22. India is identified as growth market within South Asia Pacific region which indicates strong support from parent to drive growth.

* Takeaways from Managing Director’s letter:

(1) With healthy festive season, traction in Projects business and launch of premium paints, Akzo has gained market shares,

(2) Uptick in infrastructure, power, marine, real estate, packaging and mining led to growth in Industrial paints,

(3) Due to geo-political concerns, the inventory and working capital have remained at elevated levels for entire industry,

(4) Innovations in EV space are creating new opportunities in powder coatings for Akzo.

* Distribution 2.0:

The company has now reached ~20,000 paint outlets and has installed ~15,000 tinting machines. The number of outlets have increased by 50% now. It also covers 5,000+ towns now. We believe the benefits of these investments are not yet fully reflected in financials as FY21 and FY22 were covid affected years and expect the benefits to play out in FY23-24.

* Reiterate ADD:

We stay believers. Retain ADD with a DCF-based TP of Rs2,000. Akzo is trading at lowest valuation (19x FY24E) among its peers in paint sector providing significant margin of safety, in our view. Dividend yield of 4.6% (FY23E) also provides downside support. Key risks are execution-linked challenges and demand deceleration.

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