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* Asian Paints (APNT) reported strong volume growth of ~16% in 4QFY23 (est. 6%) and ~14% in FY23. The management also indicated that all the segments, i.e., economy, premium and luxury, grew in double digits, with both urban and rural markets performing well.

* Improvement in gross margin was led by a softening in raw material prices (deflated ~4% YoY), sourcing efficiencies and a decent product mix. With raw material prices being more or less stable, we expect gross margin to be at normative levels. The management has guided for EBITDA margin in the range of 18-20%.

* Although sharp input cost reductions could lead to healthy earnings growth, APNT’s valuations are fair at 57.8xFY24E and 50.3xFY25E EPS. We retain our Neutral rating with a TP of INR3,120 (based on 50xFY25E EPS).

In-line sales; better-than-expected margins

* Consolidated net sales grew 11.3% YoY to INR87.9b (est. INR86.3b).

* Volumes rose 16% (est. +6%) in the Domestic Decorative paints business.

* Gross margin expanded 380bp YoY/390bp QoQ to 42.5%.

* As a percentage of sales, stable employee costs (+10bp YoY) and higher other expenses (+70bp YoY) resulted in EBITDA margin expansion of ~290bp YoY/260bp QoQ to 21.2% (est. 20.1%).

* EBITDA increased by 29.2% YoY to INR18.6b (est. INR17.4b).

* PBT grew 32% YoY to INR17.1b (est. INR15.5b).

* Adj. PAT rose 29.6% YoY to INR12.8b (est. INR11.1b).

* FY23 sales/EBITDA/Adj. PAT grew 18.5%/30.3%/32.6% to INR344.9b/ INR62.6b/INR42.4b.

Key highlights from the management commentary

* At present, the overall market size is ~INR700-750b and the management expects it to grow to INR1000b in the next five years.

* APNT delivered a strong performance in 4Q and FY23, led by strong double-digit volume growth of ~16%.

* Unorganized players lost market share amid the stressed environment due to supply chain issues. However, with a stable environment now, they would regain their share and the market share ratio would be back to 65- 70% organized and 35-30% unorganized.

* APNT now has ~150k retail points. The management targets to add 10k-15k retail points in FY24, mainly in small cities and suburbs of large cities.

* The company did ~250 innovations in the past seven years, which contribute more than 10% to the total turnover.

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