Buy Asian Paints Ltd : Impressive margin recovery - Edelweiss Financial Services
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Impressive margin recovery
Asian Paints (APL) posted Q3FY22 revenue (up 25.6% YoY) slightly ahead of Street’s estimate, but undershot on EBITDA (down 13.7% YoY) and PAT (down 18.5% YoY). The decorative business’s volume jumped 18% YoY (base 33% YoY). Steep inflation in raw material prices compressed gross margin by 832bp YoY and EBITDA margin by 825bp YoY; however, they were up QoQ by 201bp and 534bp, respectively— a trajectory we believe would sustain given the two rounds of pricing action in November and December.
Overall, we believe APL’s operational prowess and market leadership will help it sustain volume growth. Maintain ‘BUY’ with a TP of INR3,800.
Revenue growth robust; margins improve sequentially
What we like: Robust volume growth of 18% YoY despite a strong base of 33%. On a two-year basis, revenue, EBITDA and PAT were up 57.3%, 29.7% and 32.3%, respectively. The Home Improvement business sustained its strong performance (Ess Ess and Sleek businesses posted revenue growth of 41.5% YoY and 31.8% YoY, respectively.). The Ess Ess business recorded a positive EBIT for a second consecutive quarter while the Sleek business broke even. The Industrial Coatings business also registered robust double-digit revenue growth, especially in the Protective Coatings segment. Market share gain was 2.7% in Q2FY22; the trend would sustain in Q3FY22.
What we do not like: Gross margin/EBITDA margin compressed 832bp/825bp YoY. The automotive coatings business was impacted by the challenges facing the automotive sector. Among international business, the Middle East, Ethiopia and Sri Lanka businesses faced challenges.
Q3FY22 conference call: Key takeaways Premium and luxury space outgrew the economy space. Launches in the luxury space are doing well. January demand conditions are slow due to many state-level restrictions. APL expects only deferment of demand—demand wouldn’t be lost.
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. Rolling forward the valuation to Jun-23E, we are revising the TP to INR3,800 (from INR3,720); retain ‘BUY/SO’ (68.4x FY23E EPS).
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