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Beat on our forecast; expensive valuations limit upside

Demand has been fairly resilient, with 8% volume growth in 4QFY22, despite a cumulative price increase of ~20% in FY22. In Tier I and II cities, the price rise has been absorbed, but there has been some impact on demand in smaller cities.

The impact of raw material inflation in 4QFY22 was lower than our estimate. However, the management said APNT is witnessing a 5-7% sequential increase in its raw material basket against which it is taking a 2% price increase in May’22 and Jun’22.

The current valuations of ~54.4x FY24E PE fully capture the upside over the next one-year. We maintain our Neutral rating.

Beat on all fronts led by sales

Net sales grew 18.7% YoY to INR78.9b (est. INR73.3b). Volume growth stood at 8% (est. -8%) in the Domestic Decorative paints business.

Gross margin fell 450bp YoY to 38.7%. As a percentage of sales, lower employee costs (-40bp YoY) and other expenses (-250bp) led to a 150bp contraction in EBITDA margin to 18.3% (est. 18.1%).

EBITDA grew 9.5% YoY to INR14.4b (est. INR13.2b).

PBT grew 12.6% YoY to INR13b (est. INR11.7b).

Sales grew 34% YoY in FY22. EBITDA declined by 1.1%, while adjusted PAT remained flat YoY.

Highlights from the management commentary

Volume growth was affected in Jan’22 due to the Omicron COVID wave. It clocked double-digit volume growth in Feb-Mar’22.

Though growth in the International business was good in 4QFY22, profitability was affected by its inability to fully pass on the increase in cost and the currency devaluation in Sri Lanka, Egypt and Ethiopia, which is likely to continue. These three countries account for 40-45% of its international business, which forms 11-12% of its consolidated numbers.

It is witnessing a 5-7% sequential cost increase in its raw material basket in 1QFY23. In 4QFY22, the raw material cost increase was small. It is taking a cumulative price increase of ~2%in early May’22 and in Jun’22.

Gross margin, even after the recovery, may only return to 41-42% levels as against the 43-44% achieved in the deflationary raw material cycle. The management doesn’t want to raise prices by too much as it does not want to give opportunity to competition. EBITDA margin is expected to be in the 18-20% range once the commodity costs stabilize.

Valuation and view

A better-than-expected near-term margin outlook has led to a 14%/6% increase in our FY23/FY24 EPS estimate.

We have assumed FY24 margin at the top end of the management’s stated gross/EBITDA margin threshold of 41-42%/18-20%.

While APNT’s demand outlook is better than its FMCG peers, despite the high price increases, valuations at 54.4x FY24E PE are expensive. We maintain our Neutral rating.

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