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Strong show of volume growth continues…

Asian Paints continued its growth momentum with 48% volume growth in Q4FY21 (11%, 33% YoY volume growth in Q2, Q3 respectively). This resulted in annual volume growth of 13% YoY for the company making up the 38% volume loss that occurred in Q1 due to lockdown. Better than expected volume growth (I-direct estimate was: 28%YoY) in Q4FY21 came in on the back of strong paint demand in Metros and Tier 1 cities. Additionally, new product launches in the waterproofing segment also helped drive volume growth. On the margin front, while no price hike in Q4 weighed on gross margins (down ~266 bps YoY), savings in employee & other costs to the tune of 100 bps and 290 bps YoY, respectively, led to ~127 bps YoY increase in EBITDA margin. PAT came in higher by 81% YoY to | 864 crore.

The key takeaways of the conference call:

1) Strong sales in April 2021 before the lockdown was imposed in various states, 2) new launches in the lower end products categories along with back up of strong supply chain helped it to gain market share from regional/organised players, 3) continued focus on educating painter community on increasing undercoat products, 4) focus on protecting market share but not at the cost of margin, 5) well positioned to capture the recovery cycle once the economy opens up, 6) price hike of 2.8% effective from May 2021. We revise our revenue, PAT estimate downside for FY22E by 1.2%, 8%, respectively, factoring in the impact of lockdown and higher input costs.

Home, international business aids in overall sales recovery

Asian Paints witnessed a strong recovery in all business segments despite sales losses in Q1. For FY21, revenue growth at 7% YoY to | 21713 crore was led by 7% and 11% growth in paints & home improvement business to | 21206 crore & | 509 crore, respectively. The international business, which contributes ~11% to topline, also registered growth of 6.5% YoY to | 2490 crore led by strong performance in Asia, Middle East & Africa regions.

Long term growth outlook intact

We build in consolidated revenue CAGR of ~18% in FY21-23E led by 17% and 37% revenue CAGR in paints and home improvement business respectively. For the paint business, we build in volume CAGR of 14% in FY21-23E supported by shortening repainting cycle and increasing penetration of undercoat paints.

Valuation & Outlook

We continue to believe in the inherent strength of Asian Paints considering its 80 years old business legacy, strong balance sheet and its supply chain networks. This has not only helped the company to come out strongly from the lockdown disruptions but also register market share gains. We upgrade our recommendation from HOLD to BUY with a revised target price of | 2970/share (earlier | 3010).

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