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Coloured by volumes...

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

* Decorative business recorded 106% YoY volume growth and led to revenue growth of 91% YoY on a low base of Q1FY21.

* Pent-up demand from metros, Tier 1 and Tier 2 cities supported the volume growth while the South India market was impacted given protracted restrictive conditions.

* Input cost inflation led to a contraction in gross margin by –631bps YoY while EBITDA margin was flat at 16.4% YoY due to better operating leverage.

* The company has taken a price hike of 3% in Q1FY22 and 1% in July 2021 to mitigate input cost inflation.

* PAT grew by 162%YoY supported by strong sales growth & higher other income.

* We expect the premium valuation to sustain on account of superior market share and a strong balance sheet. We roll over our valuation to FY24 and revise our rating to Buy from Reduce, our TP of Rs. 3,438 is based on a P/E of 60x on FY24E EPS.

Pent up demand supported volume growth...

APNT reported better than expected revenue growth of 91.1% YoY aided by 106% volume growth. Pent-up demand from metros and Tier1/2 cities aided the top-line growth. Luxury product range and economy product witnessed strong demand. However, the south India market was impacted given protracted restrictive conditions and higher Covid cases in rural areas. Robust growth was seen in projects and large institutional sales. Smartcare waterproofing growth trajectory continues across retail and projects. The management is positive on the demand environment of FY22 aided by pentup demand, festival season, and a good monsoon and expects 15% volume CAGR in the next two to three years. We expect revenue to grow at a CAGR of 16% over FY21-24E.

Higher RM cost continue to add pressure on gross margin...

In Q1FY22, gross margin contracted by –631bps YoY to 38.4% due to input cost inflation. Material price increased 13% - 15% during the quarter while the company has taken price hike of only 3% in Q1FY22 and 1% in July 2021. Crude price was increased by 48% in Q1FY22 vs FY21 average, therefore, we expect RM cost to continue to add pressure on gross margin in H1FY22. EBITDA margin was flat at 16.4% due to better operating leverage. PAT grew by 162% YoY to Rs574cr due to strong sales growth and higher other income.

Key con-call highlights

* APNT will take price hike to maintain EBITDA margin in the range of 19%-21% in the medium term.

* Current capacity utilisation stands at 70% to 75% and no plan for capex in the medium term.

* Waterproofing, adhesives, and home improvement business are getting huge traction.

Valuations

The management remains optimistic about volume growth in the coming quarters due to the long Diwali season, normal monsoon, and declining Covid cases. However, margin pressure remains in H1FY22, given the spike in RM cost. We expect the premium valuation to sustain on account of superior market share and a strong balance sheet. We roll over our valuation to FY24 and revise our rating to Buy from Reduce, our TP of Rs 3,438 is based on a P/E of 60x on FY24E EPS.

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