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The "show" has well begun in CY21

Fundamentally speaking, Akzo’s last two quarter volume performance (growth of >45% in 4Q, in our view) indicates that the turnaround is truly on track. That said, bears are likely to point to “relative underperformance, if any” on a low base. As fundamental analysts, we remain structurally positive on Akzo (1) it has strengthened product portfolio via multiple differentiated launches in FY2021, (2) expanded distribution network to 19,000+ outlets and 14,000 tinting machines and (3) also focused on brand building initiatives such as Dulux Assurance. Stock trades at 32x FY23E (45% discount to APNT), providing margin of safety. BUY; TP Rs2800. Yes, we agree that “value trap” vs “trapped value” debate is feasible in the case of Akzo Nobel India (see our thematic series here 1, 2, 3).

With multiple tailwinds such as (1) revival in economy and industrial production, (2) higher production of consumer goods post PLI and (3) likely success of new products in economy emulsions and waterproofing, we believe Akzo is on track to achieve higher growth than its own history. We model revenue CAGR of 15.4% over FY21-23 vs 8.9% over FY10-21. There will be better utilization of investments in trade (distribution, tinting machines etc.) too ahead leading to higher asset turns and RoI. We stay believers.

* Q4FY21 results: Akzo reported revenue, EBITDA and PAT growth of 34.4%, 30.9% and 18.2%, respectively. Revival in metros and tier-1 cities (key markets of Akzo) as well as higher industrial production led to strong revenue growth. We believe the volume growth in Decorative paints was ~30%. While gross margin declined 216bps due to input prices, EBITDA margin declined just 40bps due to cost saving initiatives.

* Segment-wise performance: With re-opening up of the economy, Paints, Powder, Automotive and Specialty coating have performed well. The company has faced headwinds in Oil & Gas and Power segments. Rest of the sub-categories such as powder, automotive and Industrial did well.

* Turnaround on track: In-spite of headwinds in FY21, Akzo has strengthened its competitive advantages with (1) presence in 19,000+ outlets and 14,000 tinting machines, (2) it has introduced and launched successful products in economy emulsions and waterproofing and (3) has also continued to introduce differentiated products every quarter. It introduced Interpon coatings (primers) in Q1FY21, Dulux Promise SmartChoice in the economy emulsion segment and also relaunched Dulux SuperClean, premium interior emulsion in Q2FY21 and Dulux professional Weathershield Anti-carb in Q3FY21.

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