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Input cost inflation to impact margins...

Asian paints (APNT), is the market leader in the Indian paint manufacturing industry with a market share of ~53%.

* Strong top-line growth of 44% YoY in Q4FY21, with 48% volume growth supported by strong demand from Tier 2 to 4 cities, while demand from Tier 1 and metros improved sequentially.

* Input cost inflation led to contraction in gross margin by - 266bps YoY while EBITDA margin improved by 127bps YoY to 19.8% due to cost control measures & operating leverage benefits.

* PAT grew by 81%YoY supported by strong margins & higher other income.

* We reduce FY22E/FY23E EPS estimate by 4%/5% owing to input cost inflation.

* We revise our rating to Reduce due to premium valuation & recent uptick in price, our TP of Rs.2,470 is based on a P/E of 55x on FY23E EPS.

Volume grew by 48%...

APNT reported better than expected revenue growth of 43.5% aided by 48% volume growth. Good demand traction witnessed from Tier 2 to 4 cities while demand from Tier 1 cities and metros improved sequentially. Management indicated that volume growth is partially aided by pent up demand but other factors like new demand, increase in construction activity, new products and gain in market share from organised & unorganized players resulted in volume growth.

The Industrial coatings business delivered a robust performance aided by rebound in auto sales and resurgence in the industrial activity. Demand may witness near term headwinds due to second wave of Covid and resulting lockdowns. We expect revenue to grow at a CAGR of 13% over FY21-23E.

Input cost inflation dent gross margin...

In Q4FY21, gross margin contracted by –266bps YoY to 43.2% due to input cost inflation. However, EBITDA margin improved by 127bps YoY to 19.8% due to cost controlling measures and operating leverage benefits. The company has taken a price hike of 2.8% in April to counter the adverse impact of input costs pressure. Operational efficiency and higher other income (35% YoY) supported earnings to grew by 81.1% YoY to Rs870cr. We reduce FY22/FY23E EPS estimate by 4%/5% due to inflationary pressure on RM costs and headwinds on near term demand.

Key con-call highlights

* Home improvement revenue (Bath & Kitchen) registered 84% YoY growth.

* Gained market share from organised players (premium paints) & unorganised sector (economy emulsion).

* Inflationary trend in crude derivatives is likely to moderate gross margin in Q1FY22.

Valuations

We expect volumes to remain strong due to recovery in demand from both in rural and urban areas. Management expects demand to bounce back after the impact of ongoing second wave of Covid recedes. However, margin pressure remain, given the spike in RM cost. Due to recent uptick in stock prices and premium valuation we revise our rating to reduce with a TP of Rs2,470, based on a P/E of 55x on FY23E EPS.

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