Neutral Asian Paints Ltd For Target Rs.3,100 - Motilal Oswal Financial Services
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* APNT reported volume growth of 6% in 2QFY24 (est. 8%). The management highlighted a top-line moderation, citing weakened consumer sentiment and emphasizing the sensitivity of demand growth to unpredictable rainfall patterns. Additionally, a decline in demand was observed in rural markets, with urban centers showing better performance than their rural counterparts.
* Gross margins currently reside at the highest levels observed in the last 10 quarters. However, looking ahead, there is an anticipation of potential upward movement in input costs. This is influenced by larger geopolitical factors and currency fluctuations, particularly expecting an upswing in material prices, especially those derived from crude.
* The management has given guidance for the EBITDA margin to be in the range of 18-20%. Management expresses optimism for an extended festival season, foreseeing a rise in rural growth in 2HFY24, buoyed by expectations of a bountiful harvest and an improving economy, supported by effective government spending. APNT’s valuations are fair at 54xFY24E and 48xFY25E EPS. We retain our Neutral rating with a TP of INR3,100 (based on 50xFY25E EPS).
Miss on sales; margin expansion led profit growth
* Asian Paints reported consol net sales of INR84.8b with flat YoY growth (est. INR90.8b).
* Volumes grew 6% YoY (est. +8%) in the domestic Decorative paints business.
* Gross margins expanded 760bp/40bp YoY/QoQ to 43.4%. (est. 42.2%)
* As a percentage of sales, higher employee costs (up 100bp YoY) and other expenses (up 90bp YoY) led EBITDA margin expanded by ~570bp YoY to 20.2% (est. 19.8%).
* EBITDA grew 39.8% YoY to INR17.2b (est. INR18.0b).
* PBT also grew 51.3% YoY to INR16.2b (est. INR16.3b).
* Adj. PAT grew 53.3% YoY to INR12.3b (est. INR12.0b).
* In 1HFY24, Net sales/EBITDA/adj. PAT growth stood at 3.5%/37.9%/50.6% YoY.
* The board has declared an Interim dividend of INR 5.15.
Key highlights from the management commentary
* APNT's top-line witnessed a moderation in growth due to unpredictable rainfall patterns, which impacted overall demand and retail sentiment. This, in turn, influenced stocking decisions and contributed to the evaluation of the affected demand for the quarter.
* The current product mix lays emphasis on a larger economy range, with notable traction in premium and luxury products, particularly in Sep’23.
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