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APNT’s 4Q conference call was a unique experience for this analyst with ~14 years of sell-side experience (plus a few earlier years in consumer industry!). Never ever, we had witnessed the confidence which we saw (felt) in APNT’s presentation. In our view and interpretation, it indicated that (1) it’s a likely industry outperformer, (2) there are many examples of global and local players attempting to succeed in paints industry in India, (3) leader behaving like a challenger (see our report series on this – link 1,2,3).

In FY21, it continued to gain market share, in our view. Input cost pressures exist, however, it has raised prices by 2.8% in Q1FY22 and we believe that price-led growth is feasible in FY22 (which was missing in FY21). Consensus appears concerned about short-term input inflation issues – we are not. ADD retained.

* Q4FY21 results:

APNT reported consolidated revenue, EBITDA, PAT growth of 43.5%, 53.4%, 87.2% respectively YoY. Standalone revenue, EBITDA, PAT growth was 46.2%, 57.6%, 68.9% respectively YoY. Domestic Decorative volume growth was 48% (FY21:13%). International business as well as Industrial paints also reported strong double digit growth. Due to higher input prices, gross margin declined 266bps but EBITDA margin expanded 128bps due to cost saving initiatives. With 660bps lower tax rate, adjusted PAT expanded 87.2% YoY.

* Strong market share gains:

APNT continued to gain market share from smaller/ unorganized players in FY21. Due to lockdown, there was impact on supply chain of smaller players. It also focused on economy emulsions as well as ancillary products such as undercoats and waterproofing to strengthen its market position.

* Structural growth opportunities:

The volume growth is likely to sustain at higher levels than historical rates due to (1) reduction in painting cycle from 7-8 years to 4-5 years, (2) opportunity in tier 3 & 4 cities and rural markets due to higher agri income levels, (3) focus on economy emulsions and undercoats and (4) investments in driving trade efficiencies and better servicing to the trade.

* Efficiency gains and price hikes to mitigate inflationary pressures:

While the input prices have increased in past two quarters, the company is focusing on (1) driving RM sourcing efficiencies, (2) value engineering to reduce the costs, (3) efficiency in distribution and trade servicing. It is also focused on curbing overheads as much as possible. It has also raised prices by 2.8% in Apr’21.

* Maintain ADD:

We model sales and earnings CAGR of 17.1% and 18.9% respectively, for FY21-FY23E. Maintain ADD with a DCF-based TP of Rs2,800. Lower-than-expected urban recovery and potential execution challenges in new categories are key risks.

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