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Seemingly a beat in 3Q, however, flat revenues in 9MFY21 is what we should focus on

While quarterly performance continues to be volatile led by multiple one-offs, 9MFY21 (normalized) results show Revenue, PAT and Volume growth of -3%, 2% and 1%, respectively. While the consensus earnings expectations pre-covid and now have not materially changed, there is significant rerating of valuation multiples (partially attributable to lower cost of capital too). There is no material change in (long term) growth prospects of APNT and we continue to believe the next growth drivers will be (1) ancillary products, (2) Home Décor business and (3) steady market growth of paints led by formalization of the sector. While the consensus appears concerned about inflation in input prices, APNT is expected to pass on costs and maintain margins. Retain ADD (See chart-1 for TTM volume growth).

* Q3FY21 results: APNT reported consolidated revenue, EBITDA, PAT growth of 25.2%, 50.3%, 62.3% respectively in Q3FY21. Standalone revenue, EBITDA, PAT growth was 26.1%, 48%, 56.5% respectively. Volume growth was 33%. While input prices are rising, APNT improved gross margins by 210bps via cost rationalization and lower trade discounts. Cost saving measures (lower rentals, travel & marketing spends) and operating leverage resulted in ‘other expenditure as % of net sales’ declining 170bps YoY.

* Multiple one-offs impacting quarterly financials; important to look 9MFY21: Post the outbreak of covid, the variables which drive quarterly results have increased. These include lockdown in Apr-May’20, localized lockdowns post May’20, lower sales in red zones, changes in channel inventory, changes in trade schemes and slow-down and growth in real estate and industrial demand. Annual variables such as shift of Diwali from Q2 to Q3, marriage season and monsoon have continued to add volatility to quarterly numbers. To avoid the impact of these one-offs, we compare 9MFY21 with 9MFY20. APNT reported consolidated revenue, EBITDA, PAT growth of -3%, 7%, 2% respectively in 9MFY21. Volume growth was 1%.

* Investments in Home Décor and ancillary business to continue: APNT plans to double the number of Home Décor stores (current: 16) over next two years. It also believes offering complete solution such as Home Décor, kitchen and Bath offers huge value to the consumers. It has also introduced waterproofing in all international markets and has introduced bath products in Nepal and Bangladesh.

* Maintain ADD: We model sales and earnings CAGR of 12.5% and 17.3% respectively, for FY20-FY23E. Maintain ADD with a DCF-based TP of Rs2,950. Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.

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