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Able and willing to take price increases

After the steep gross margin deterioration in Q2FY22, the street had begun questioning APNT’s ability and willingness to pass on cost inflation. However, our recent interactions with channel partners (paint dealers) suggest that APNT is planning to execute the steepest price increases of 15-45% in the history of the paint industry, effective from November 12th. This should remove concerns around the company’s ability to take price increases when necessary.

In H1FY22, APNT has taken six rounds of price increases to mitigate ~20% cost inflation. Though the trade would benefit, as they hold lower price inventory, such steep price increases would improve profitability for the company too. However, this could also raise concerns on whether APNT would be able to maintain its volume growth trajectory. We retain BUY, with DCF-based TP of Rs3,425 (implied 65.4x FY24E EPS).

Trade-off on margins helped fuel growth in the past

We note that APNT reported a surge in decorative volumes in Q1FY22 (106%) and Q2FY22 (34%), choosing to trade-off on margins by taking measured price increases to mitigate ~20% cost inflation in the input material. Management had alluded that volume growth was driven by (1) network expansion to 40k dealers, (2) consumer upgrade to economy and luxury emulsions, (3) robust demand for exterior paints, (4) trajectory in waterproofing/adhesives segment, and (5) robust growth in projects sales. Management cited resilient demand in T2/T3 and rural markets, but feared that very sharp price increases could disrupt the market and could weaken consumer sentiments.

Steep price increase likely from November 12th

Unprecedented cost inflation impacted Q2 gross margin, which shrank 966bp to 34.7%. Management stated that it took ~7.5% price increase in six tranches and the impact of cost inflation was partially negated by some unique work on sourcing and formulation efficiencies. However, our interactions with channel partners (dealers) suggest that in addition to the 7.5% price increase taken, the company plans to execute 15-45% price increases effective from November 12th . Such high price hikes are unprecedented in the paint industry. While on the one hand, this would improve APNT’s profitability, on the other hand, it could result in a moderation in its volume trajectory.

Valuations and risks

We expect the high input cost inflation to impact unorganized players more, enabling APNT to emerge even stronger, based on its core strategy of moving from share of surface to share of space inside home. Its recent conscious strategy of delayed price increases has helped it to gain volume market share, in our view. While the impending price hikes could moderate its volume growth trajectory, concerns on margins would be addressed. We believe APNT remains a structural growth story, capturing demand across segments and town class. We retain our BUY rating, with a DCF-based TP of Rs3,425 (implied 65.4x FY24E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices, and currency depreciation.

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