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Mix deterioration continues; Margin expansion in Q1FY24 is fleeting respite

While Q1FY24 PAT growth of 48.9% YoY was higher than consensus estimates, the results were qualitatively weaker in our view as (1) In-spite of delay in monsoon and stronger Apr’23, the revenue growth was muted at 6.7% YoY, (2) volume growth was 330bps higher than revenue growth indicating mix deterioration and higher volumes of low value products such as putty and (3) B2B portfolio (Industrial paints and Projects) has reported double digit revenue growth indicating weaker growth of consumer portfolio. APNT is likely to report EBITDA margin (Q1FY24 standalone: 24.6%) higher than its target range of 18-20% in FY24 due to lower RM prices. However, we believe the margin expansion is likely to be short lived and is likely to correct with increase in competitive intensity from Q4FY24. Maintain REDUCE.

Q1FY24 results

Asian Paints reported revenue, EBITDA and PAT growth of 6.7%, 36.3% and 48.9%, respectively YoY. Gross and EBITDA margins expanded 523bps and 502bps, respectively YoY due to correction in commodity prices. Domestic decorative volume growth was 10%. Industrial paints reported double digit revenue growth YoY. International business revenues declined 1.4% YoY but constant currency revenue growth was 3.8% YoY. Standalone revenue, EBITDA and PAT growth was 7%, 36.7% and 48.3%, respectively YoY

Mix deterioration

We note (1) volume growth was higher than value growth which indicates the company has sold low value products such as putty more during Q1FY24, (2) the company indicated that economy and premium segments have done well but the luxury segment reported weak numbers and (3) B2B portfolio (relatively lower realizations and margins) has done well during the quarter.

Strong growth in Institutional / Industrial sales

Post recovery in Industrial capex and infrastructure spends, the company has reported strong recovery in Industrial paints. Recovery in Automotive sector also resulted in higher revenue of automotive paints. Apart from real estate sector led demand, there is healthy growth from Government projects as well as private capex.

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