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A beat; paint company volume growth is not equal to paint volume growth

We believe volumes +8% YoY with +19% revenues (~22% higher prices) indicate there is (1)) likely sharp downtrading, (2) adverse product mix and (3) continuing higher (trade) discounts. Considering expansion of distribution network and likely placement growth due to addition of 15,000 new outlets, we believe volume growth in existing retail outlets is largely flat (applying same-store growth concept). With steep input inflation and likely increase in competitive pressure, we believe Asian Paints may find it difficult to achieve 22-24% EBITDA margin in near-medium term. Its plans to focus on Home Décor offers high option value. However, we note there is negligible success in kitchen and bath over past decade. History tells us that APNT is great in India decorative paints and some allied categories but yet to achieve meaningful success in diversification. Given the imminent entry of Grasim Paints in CY23 and likely higher competitive activity in the industry, our neutral sector stance remains. HOLD retained.

* Q4FY22 results: APNT reported consolidated revenue, EBITDA and PAT growth of 18.7%, 9.5% and 13.9%, respectively YoY. Standalone revenue, EBITDA and PAT growth was 19.2%, 11.5% and 16.4%, respectively YoY. Domestic decorative volume growth was 8% YoY. International business reported revenue growth of 12% YoY. Industrial paints also reported double-digit revenue growth. Gross margin declined 448bps YoY but EBITDA margin declined 153bps YoY.

* Focus on Home Décor: After strengthening its position in ancillary products, Asian Paints is focusing more on Home Décor segment. It plans to invest aggressively in strengthening its capabilities in FY23 via acquisitions and setting up manufacturing unit at Maharashtra. We note APNT is great in India decorative paints but has had limited success in diversification.

* Expansion of retail outlets: APNT is following dual model of distribution as well as dealers, and it added 15,000 new outlets in FY22 taking the overall count tally to 145,000. The addition of new outlets in small towns and rural markets is driving growth of Asian Paints higher than peers. We also believe Asian Paints has relatively higher market share in these smaller towns. However, we also note due to steep increase in outlets, some growth is likely attributable to product placement and not completely consumer off-take.

* Benefits of price hikes but margins seem to remain at ~18%: While benefits of price hikes are visible with QoQ margin improvement, we believe the EBITDA margin seems to settle at ~18% for now. After raising prices aggressively in Q3FY22, APNT is steadily raising prices by 1-2% per month and largely tracking inflation. Hence, we do not expect margin decline but also rule out any material improvement.

* Retain HOLD: We model sales and earnings CAGR of 17.7% and 23.5% respectively, for FY22-FY24E. Maintain HOLD with a revised DCF-based TP of Rs3,200 (prior: Rs3,400). Lower-than-expected urban recovery and potential execution challenges in new categories are key risks

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