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Short term challenge persist; long term story intact...

Asian Paints (APNT), is engaged in the business of manufacturing, selling and distribution of paints and related product for home décor. APNT is the market leader in the Indian paint manufacturing industry.

* APNT reported a below expected result as inferior product mix and an extended monsoon impacted the top-line growth, which grew by 19% YoY in Q2FY23. • Volume in the decorative business grew by 10% YoY while value growth was 20% YoY.

• EBITDA margin improved by 177bps YoY to 14.5%, which is below the expectation as the recent steep price hike has impacted the product mix. The demand was dominated by economy emulsion & undercoats during the quarter.

• The company announced a capex plan of Rs. 6,750cr over the next three years for capacity expansion and backward integration.

• The company’s foray into the white cement business and in-house capacity expansion by 30% to 22.7 lakh KL per annum to support profitability in the long term. We therefore, reiterate Buy rating on the stock with a TP to Rs. 3,416, based on a P/E of 60x on FY24E EPS

Extended monsoon impacted the decorative business...

APNT reported revenue growth of 19% YoY to Rs 8,458cr, which is below our expectation as the extended monsoon and the recent steep price hikes impacted the product mix. In Q2FY23, decorative volume grew by 10% YoY while value growth was 20% YoY. The kitchen and bath fitting business reported Rs100cr plus revenue for the last four to five quarters, bottom line was impacted due to inflationary pressure. In H1FY23, the company launched 14 new products and added more than 8,000 new retail networks. APNT is entering into the white cement segment as part of their backward integration by setting up its own manufacturing facility in the UAE. We expect volume to continue to grow at double digits due to festival demand and expansion in the dealer network

Inferior product mix impacted margins...

The inflationary pressure and recent steep price hikes have impacted the demand for premium products. The EBITDA margin expanded by 177bps YoY to 14.5 % during the quarter, which is below our estimate due to inferior product mix. During the quarter, the demand was dominated by economy emulsion & undercoats. The company has taken a price hike of 1% to mitigate the pressure on inflation in Q2FY23. APNT expects gross margin to be in the range of 38% to 40% till RM prices moderate and the macro situation improves

Key con-call highlights

* The Kitchen and Bath businesses delivered Rs100cr for the last 3 to 4 quarters, supported by strong network expansion.

* Current capacity utilization stands at 75%. APNT is to increase in-house capacity by 30% to 22.7 lakh Kilo Ltr per annum.

* APNT announces Rs.6,750cr capex, with 50% to be spent on brownfield capacity expansion and 38% on backward integration

Valuations

The foray into white cement as well as VAM (Vinyl Acetate Monomer) and VAE (Vinyl Acetate Ethylene Emulsion) segments is expected to improve gross margin by 400bps to 500bps. Also, raw material inflation is likely to moderate in H2FY23. We value APNT at a P/E of 60x on FY24E EPS and reiterate our Buy rating with a TP of Rs. 3,416.

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