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Focus on volume growth; margin risk still persists

* Asian Paints (APNT) posted 1%/2% YoY decline in consolidated/standalone revenue in 4QFY24, with decorative volume growth at 10% YoY (vs. est. 9%). The value-to-volume gap expanded to ~12% in 4Q from ~7% in 3QFY24. Revenue growth was hit by price cuts (~3.5% in 4Q), and an unfavorable product mix (subdued growth of the premium segment).

* Benign raw material prices continue to drive GM, which stood at 43.7% in 4Q, the best in the last 12 quarters. APNT’s gross margin will be the key monitorable in FY25/FY26, considering the changing competitive landscape and dwindling raw material price benefits.

* Employee and other overheads (higher marketing and distribution spending) hurt EBITDA margin, which contracted 180bp YoY and 325bp QoQ to 19.4%. The marketing spending also accelerated due to the recently launched Neo Bharat Latex Paint (in the economy segment). EBITDA declined 9% YoY (est. +6%). APNT achieved a 21% EBITDA margin in FY24. Management reiterated its EBITDA margin guidance of 18-20% in the medium term. Due to a changing competitive landscape, a higher mix of the economy/mid segments, and the company’s increased focus on volume traction, we model an EBITDA margin of 20.5% for FY25/FY26 (each).

* Despite APNT’s various initiatives to drive volume growth, the revenue growth trend for FY25 is still weak due to price cuts, downtrading, and competitive pressure. Besides, the elevated EBITDA margin may not sustain in the near term. Consequently, we reiterate our Neutral rating with a TP of INR3,000 (based on 45x FY26E EPS).

Miss on EBITDA margin; EBITDA dipped 9% YoY

* Volume growth in double digits: APNT reported a consolidated net sales decline of 1% YoY to INR87.3b (est. INR91.0b) hit by weak demand conditions and downtrading. Volume grew 10% YoY (est. +9%) in the domestic decorative paints. APNT has taken ~3.5% price cuts in 4QFY24.

* Mixed traction in the non-core business: The Home Décor business continued to see gains from synergies with its Beautiful Homes stores. Bath Fitting sales dipped 8% YoY with a loss of INR100m (vs. INR10m profit YoY). Kitchen business grew 3% YoY, with INR27m EBITDA (vs. INR74m loss YoY). White Teak sales rose 33% YoY, while Weatherseal clocked 63% YoY growth.

* Disappointing margin performance: Gross margins expanded 120bp YoY to 43.7% (est. 43.5%). The employee/other expenses rose 18%/12% YoY. EBITDA margin contracted ~180bp YoY to 19.4% (est. 21.8%). EBITDA declined 9% YoY to INR16.9b (est. INR19.8b). PBT also declined 7% YoY to INR16.0b (est. INR18.5b). Adj. PAT dipped 1% YoY to INR12.8b (est. INR14.0b) during the quarter.

* FY24 performance: Net sales/EBITDA/APAT grew 3%/21%/22% YoY.

Valuation and view

* There are no material changes to our EPS estimates.

* APNT launched the ‘Neo Bharat Latex’ paint in Jan’24 that penetrated into the unorganized segment with a branded solution, which is smart, affordable, and accessible to consumers. It will address a market size of INR50-55b (management aims to achieve a 30% share in the medium term).

* With the entry of new players having deep pockets and massive commitments to investments, the overall industry may see a shift in market share and cost structures. These will be the key monitorables for FY25.

* We remain cautious on both value growth and margin in FY25/FY26. Despite a correction in the stock, the risk of competitive pressure still hovers around its earnings. Consequently, we reiterate our Neutral rating with a TP of INR3,000 (based on 45x FY26E EPS)

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