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Healthy sales outlook; rising material costs a concern

* A confluence of positive factors, including (a) a very strong festive season; (b) pent-up demand; (c) recovery in urban, particularly metro demand; (d) recovery in real estate demand, and (e) low material costs for the quarter led to a strong beat on our forecasts.

* The company reported its highest ever sales/EBITDA/PAT for any quarter in 3QFY21. While the outlook on demand remains healthy, the extraordinary confluence of positives mentioned above, especially festive season and pent-up demand, may not sustain going forward.

* Material cost inflation has also been sharp since December, which means that current all-time high gross and EBITDA margins are unlikely to sustain beyond FY21, especially in a highly competitive industry such as Paints. Valuations are rich at 67.8x FY22E and 58.5x FY23E EPS. Maintain Neutral.

Beat on all fronts

* In 3QFY21, APNT reported consol. net sales growth of 25.2% YoY to INR67.9b (v/s est. INR61.8b), with volume growth of 33% (v/s est. 19%) in the Domestic Decorative Paints business.

* The gross margin was up 210bp YoY to 45.1%. This, along with lower employee costs (-60bp YoY) and lower other expenses (-170bp YoY) as a percentage of sales, meant the EBITDA margin expanded 440bp YoY to 26.3% (est. 24.3%).

* EBITDA grew 50.3% YoY to INR17.9b (v/s est. INR15b).

* PBT grew 61% YoY to INR16.7b (v/s est. INR13.6b).

* Adj. PAT grew 62.3% YoY to INR12.7b (v/s est. INR10b).

* 9MFY21 sales declined 3.3%, while EBITDA/PAT grew 7.1%/1.7% YoY.

Highlights from management commentary

* Very strong festive season demand in October and marriage season demand aided sales growth.

* Pent-up demand was also a contributing factor – although this may not be the case going forward.

* Tier-1 demand has also bounced back and appears likely to sustain.

* Since December, raw material prices have been up in the high single digits.

Valuation and view

* Changes to our model have led to a 13.7%/8.1% increase in FY21/FY22E EPS estimates – owing to improving commentary on topline growth and improving margins.

* APNT has creditably posted much faster recovery than most peers, which is even more impressive considering the highly discretionary nature of the business. This should ensure premium valuations.

* While a strong beat was seen on forecasts and the demand outlook continues to be healthy, the confluence of some positive factors that led to the extraordinary beat – viz. pent-up demand, festive demand, and low material costs – are unlikely to be at play going forward. While we have taken a higher topline/EBITDA/PAT CAGR trajectory at 11.3%/15.4%/17.0% over FY20–FY23 – much higher than the preceding five-year average in the 9–11% range – valuations are rich at 67.8x FY22E and 58.5x FY23E EPS. Maintain Neutral.

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