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Continued RM inflation leads to earnings cut

* APNT declared a stellar topline growth in 4QFY21, with 48% volume growth, led by pent-up demand, especially as demand in Tier I cities recovered sequentially; recovery in the Project business; and gain in market share from organized and unorganized peers. Growth was also aided by a soft base.

* The management said higher severity of the ongoing second wave of COVID-19 is creating a near term impact on demand, particularly due to lockdowns. It was also concerned about the impact spreading to rural India, which has been a major growth driver in recent years. However, it is confident of bouncing back once normalcy returns. In spite of the ~43% YoY sales decline in 1Q, the company achieved ~7% sales growth in FY21.

* While the company has taken a 2.8% price increase in Apr’21 and is considering another hike, the steep material cost inflation since Dec’20 will put pressure on gross and EBITDA margin as it did in 4QFY21, when EBITDA and PAT were below estimates. We expect a 60bp YoY dip on the EBITDA margin front in FY22E from record high levels of 22.4% in FY21, before returning to FY21 levels in FY23E. While sales growth has been strong and we expect the company to bounce back after the impact of the ongoing second COVID wave recedes, valuations at 58.6x FY23E EPS fully capture the upside from a one-year period. Maintain Neutral.

Outstanding topline growth, higher RM inflation led to EBITDA/PAT miss

* Consolidated net sales grew 43.5% YoY to INR66.5b (est. INR58b) in 4QFY21. Volume growth stood at 48% (est. 30%) in the domestic Decorative Paints business.

* Gross margin fell 270bp YoY to 43.2%. As a percentage of sales, lower employee costs (-100bp YoY) and lesser other expenses (-290bp) meant that EBITDA margin expanded by 130bp to 19.8% (est. 24.4%).

* EBITDA grew 53.4% YoY to INR13.2b (est. INR14.2b).

* PBT grew by 65.5% YoY to INR11.5b (est. INR12.7b).

* Adjusted PAT grew 81.1% YoY to INR8.7b (est. INR9.7b).

* Sales/EBITDA/PAT grew 7.4%/16.7%/15.4% YoY in FY21.

* Balance Sheet highlights: On an average basis, inventory/debtor/creditor days increased by one/three/five days to 60/37/46 days in FY21. Cash conversion cycle decreased by one day to 51 days in FY21.

* Cash flows: OCF/FCF grew 40%/51.4% to INR36.8b/INR34.3b in FY21.

Highlights from the management commentary

* Near-term demand uncertainty is again on the rise as the second wave is far more widespread than the first, with COVID-19 cases spreading to the hinterland this time.

* Last year, there was a moratorium on loan repayments, which retained money in the hands of consumers even in a difficult environment. No such measures have been announced in CY21, and such a move would be welcome.

* The management said APNT gained share from other organized players in each of the quarters of FY21, and there were also gains from unorganized players as their supply chain was affected.

* The material cost environment is challenging and the company has taken a 2.8% price increase in Apr’21. Considering more increases, along with cost savings, it could lead to some improvements on a sequential basis over the disappointing 4QFY21 levels.

Valuation and view

* Changes to the model have resulted in a 7.4%/4.8% cut in FY22E/FY23E EPS on account of elevated crude oil-linked material cost pressures and because of the impact of the ensuing COVID lockdown on sales growth v/s earlier expectations.

* APNT has posted a much faster recovery than most peers, ending FY21 with ~7% topline growth post a decline of ~43% in 1Q. This is even more impressive considering the discretionary nature of the business, and gives us confidence of a bounce back in demand after the impact of the second COVID wave recedes.

* Valuations at 58.6x FY23E EPS prevent us from turning constructive on the stock. We maintain our target multiple of 60x FY23E EPS, which gives us a TP of INR2,620/share. Maintain Neutral.

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