IGI Logo

Muted urban/festival demand impacted Q3 sales

APNT’s Q3FY25 print was below our estimates; consol. revenue/EBITDA/PAT declined by 6.1%/20.4%/24.2% (5-year value/volume CAGR at 10%/12%). Management cited weak performance (volume grew 1.6%) due to (1) sluggish demand during festive season, (2) muted consumer sentiments especially in urban market , (3) impact on seasonal markets, and (4) competitive pressure resulting in consumer down trading. Industrial decorative business performed well led by Builder project. Industrial JVs PPG-AP grew 6% driven by Auto OEMs, though AP-PPG remain flat. International business grew 5.0% on back of improved macro-economic conditions in Sri Lanka, Bangladesh and Nepal, yet offset by currency devaluation. Gross margin declined to 42.4% (-116bps) whilst EBITDA margin down to 19.1% (-344bps). Management is cautiously optimistic on demand in next 6 months and expect recovery post 1HFY26 on the back of healthy monsoon and elevated government spending. Further, APNT aspires to retain margins at ~18-20%. Considering weak 9MFY25, we cut our earnings and change rating from BUY to ADD, with a revised DCFbased TP of Rs2,500 (implied 49.0x on 27E EPS)

Weak festive season and multiple external headwinds affected volume/value growth in Q3

APNT’s Q3FY25 consol. revenues at Rs85.5bn declined by 6.1%YoY while volume grew by 1.6% due to weak festive season and subdue consumer sentiments especially in urban market, though rural markets outperformed. The projects/institutional business performed well in factories/Builder segment, though Govt. & Construction Project grew slower. Kitchen/bath segment grew 2.6%/2.7%, yet ‘White Teak’ and ‘Weatherseal’ sales decline by 22.8%/14.1%. APNT launched ‘Beautiful Homes’ store in Mumbai/Surat. International business grew 5.0% on back of improved macro-economic conditions in Sri Lanka, Bangladesh and Nepal, yet offset by currency devaluation in Ethiopia and Egypt. Industrial JVs PPG-AP grew 6% driven by Auto OEMs, though AP-PPG remain flat. Distribution reach now expanded to 169k with a target to add 7-8k in FY25. Management stated, demand condition remain challenging in near term, given stress in urban areas, expect recovery post 1HFY26 on back of healthy monsoon and elevated government spending

Inferior product mix, and consumer down trading impacted gross/EBITDA margin

Gross margin declined to 42.4% (-116bps) due to inferior product mix, higher rebate and consumer down trading. While EBITDA margin down to 19.1% (-344bps) due to higher Employee cost/Other expenses by 7.9%/2.5%. Adjusted PAT cut by 24.2% to Rs10.6bn. APNT executed ~0.4% price increases in Q3 and retained margin guidance at ~18-20% given lower RM prices.

Challenging environment would continue; Downgrade from BUY to ADD

We expect APNT to emerge as strong player, moving from share of surface to share of space inside home in line with its core strategy: (1) upgrade volumes using innovations in economy/luxury emulsions, (2) grow project/institutional business, (3) expand waterproofing business, (4) grow rural reach, and (5) gain volume market share, yet balance margins. We expect with revamp in packaging, innovative regional packs, strengthening ‘Advanced Range’ and exclusive range for Architectural and Interior application would help APNT to lift revenue momentum and profitability. Though industrial business (6% of sales) and International expect to deliver strong growth. Despite challenging demand conditions, APNT expects to deliver single digit volume growth in domestic decorative segment led by bounce back on urban demand along with NPD (~12% of sales). Further, it expects to maintain operating margins at ~18-20% band. Considering weak 9MFY25 and higher competition intensity in the sector, we cut earnings for FY25E/FY26E by 13.5%/21.4% and change rating from BUY to ADD, with a revised DCF-based TP of Rs2,500 (implied 49.0x FY27E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices & rising competition

Valuations

We expect APNT to emerge as strong player, moving from share of surface to share of space inside home in line with its core strategy: (1) upgrade volumes using innovations in economy/luxury emulsions, (2) grow project/institutional business, (3) expand waterproofing business, (4) grow rural reach, and (5) gain volume market share, yet balance margins. We expect with revamp in packaging, innovative regional packs, strengthening ‘Advanced Range’ and exclusive range for Architectural and Interior application would help APNT to lift revenue momentum and profitability. Though industrial business (6% of sales) and International expect to deliver strong growth. Despite challenging demand conditions, APNT expects to deliver single digit volume growth in domestic decorative segment led by bounce back on urban demand along with NPD (~12% of sales). Further, it expects to maintain operating margins at ~18-20% band. Considering weak 9MFY25 and higher competition intensity in the sector, we cut earnings for FY25E/FY26E by 13.5%/21.4%and change rating from BUY to ADD, with a revised DCF-based TP of Rs2,500 (implied 49.0x FY27E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices & rising competition

P/E mean and standard deviation

EV/EBITDA mean and standard deviation

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331