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Stronger than expected recovery; demand outlook healthy

* Despite sales being significantly affected in May’21 due to the nationwide lockdown, sales were able to rebound sharply in Jun’21, abetted by significant benefits on account of pent up demand. This led to a significant beat on sales, EBITDA, and PAT v/s our expectations, despite materially higher than expected gross and EBITDA margin pressure.

* While YoY growth numbers can be misleading due to the sharp sales/EBITDA/PAT decline of 43%/58%/67% witnessed in the base quarter, a 9.4% sales growth over 1QFY20 was impressive given the lockdown during 1QFY22. EBITDA/PAT was, however, down ~28%/23% over 1QFY20 levels because of the ongoing sharp material cost inflation.

* Demand outlook remains healthy as the reported number of COVID-19 cases continue to decline significantly week after week. APNT has reported a commendable bounce back in FY21, ending up with positive sales growth of 7% for the full year (despite a 43% sales decline in 1QFY21) as well as in 1QFY22, despite the significant impact of the lockdown from mid-Apr’21 to the end of May’21. Rich valuations of 69.5x FY23E EPS prevent us from taking a more constructive call on the stock. We maintain our Neutral rating.

Strong beat on sales; profit higher than expected despite a margin miss

* Consolidated net sales grew 91.1% YoY to INR55.9b (est. INR35.7b) in 1QFY22. Volume growth stood at 106% (est. 26%) in the domestic Decorative Paints business.

* Gross margin contracted 630bp YoY to 38.4%. As a percentage of sales, lower employee costs (-460bp YoY) and lesser other expenses (-150bp) led to EBITDA margin contracting by 20bp to 16.4% (est. 19.1%).

* EBITDA grew 88.7% YoY to INR9.1b (est. INR6.8b).

* PBT grew 144.1% YoY to INR7.8b (est. INR5.3b).

* Adjusted PAT grew 161.5% YoY to INR5.7b (est. INR4b).

Highlights from the management commentary

* Unlike 1QFY21, Tier I and II cities did well in 1QFY22, while smaller urban centers and towns posted a weak performance YoY.

* Apart from South India, which was significantly disrupted in 1QFY22, the management believes it has gained market share from other organized players.

* Material costs were up 8-10% in 4QFY21 and a further 13-15% in 1QFY22. The management expects material costs to sustain at these levels.

* APNT took a 3% price hike in 1QFY22. The management wants to take gradual increases to avoid destabilizing demand.

* As a result of sustained high material cost pressures and gradual price increases, the management is targeting EBITDA margin in the 19-21% range going forward.

Valuation and view

* We have increased our FY23E EPS by 4%, while maintaining our FY22E EPS forecast. Higher RM inflation will continue to put pressure on margin, while a continued weak mix will chip away at our double-digit sales forecast upgrade.

* APNT has shown remarkable resilience, with sales rebounding sharply after tough periods, a testament to the strength of the business franchise. This is even more impressive considering the discretionary nature of the business.

* Valuations at 69.5x FY23E EPS prevent us from turning constructive on the stock. We maintain our target multiple of 60x even as we roll forward to Sep’23E EPS, giving us a TP of INR3,070/share. We maintain our Neutral rating.

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