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APNT’s Q1FY24 print was mixed; consol. revenue/EBITDA/PAT grew 6.7%/36.3%/48.5%. APNT’s saw 4-year value/volume CAGR at 17.0%/17.5%. Despite strong painting season, unseasonal rains cut decorative volumes growth to 10%. Management alluded growth to, (1) double digit across urban/rural markets, (2) Q1 product mix led by economy & premium range, (3) uptick waterproofing/wood finishes range, (4) robust growth in project/ institutional business, and (5) distribution reach (160k). International business grew 3.8% CC due to weak macro/forex challenges, yet industrial JVs PPG-AP/ AP-PPG grew 13%/12% driven by price realisation. Gross margin zoomed to 42.9% (+523bp) settling EBITDA margins at 23.1% (+502bp) despite higher employee cost/other expenses by 11.5%/6.3% and ad-spends (3.7% of sales). Management retains double digit volume growth aspiration (1.5x GDP growth) and balancing EBITDA margins ~19-20% band, yet said to pass on benefits arising from lowering inflation. With strong margin trajectory we increased earnings and retain BUY, with a revised DCF-based TP of Rs3,959 (implied 59.0x FY25E EPS)

Double digit volume growth trend continue led economy emulsions and projects business

Off high base (54.1%) Q1FY24 consol. revenue grew to Rs91.8bn (+6.7%) YoY driven by 10% volume growth in domestic decorative segment. Management alluded growth to, (1) DD growth across urban/rural markets, (2) Q1 product mix led by economy & premium range, (3) uptick in waterproofing/wood finishes range, (4) robust growth in project/ institutional business, and (5) distribution reach (160k). International business grew 3.8% CC driven by double digit growth in Middle East, while Asia struggled due to macro/currency headwinds. With better price realisation Industrial JVs PPG-AP/ AP-PPG 13%/22%. Our channel checks indicate dealers stocked up inventory, (1) anticipating strong demand conditions, (2) unseasonal rains impacted demand in May, and (3) exponential growth in waterproofing/ wood finishes segment. Home Improvement (4% sales) - Kitchen/Bath declined -12%/-28.2% due to subdued demand in retail channel, while Home Décor play (44 stores) offering complete range of home solution expect to contribute 8-10% of revenues in FY26. Newly acquired ‘White Teak’ and ‘Weatherseal’ business reported revenues growth of 28.4%/100% led by expansion in geographic footprint and retail touchpoints.

Margin trajectory to continue; Q1FY24 started with big positive surprise

With 6.0% deflation in input prices, Q1FY24 gross margin zoomed to 42.9% (+523bp) settling EBITDA margins at 23.1% (+502bp) despite higher employee cost/other expenses by 11.5%/ 6.3% and ad-spends (3.7% of sales). We note PBT decline in international business was offset by increase in realization for industrial JVs expanding console profits. APNT said to pass on benefits arise from falling input prices post stability in crude oil prices, yet maintained balancing its margins in ~19-20% band. With Rs20bn capex, APNT planned to add capacity of 2.5 Lac KL in FY24, including addition of VAM/VAE and white cement projects.

Investment thesis, valuation and risks

We expect APNT to emerge as a strong player, moving from share of surface to share of space inside home in line with its core strategy: (1) upgrade volumes using innovations in economy/luxury emulsions, (2) grow project/institutional business, (3) expand waterproofing business, (4) grow rural reach & (5) gain volume market share, yet maintain margins. We believe it is a structural growth story, capturing demand across segments and town class. Considering better margin trajectory, we increased earnings for FY24E/FY25E by 12.5%/10.2% and retain BUY, with a revised DCF-based TP of Rs3,959 (implied 59.0x FY25E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices & rising competition.

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