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Growth outlook remains hazy

Quick Pointers:

? 3Q decorative volumes up 1.6%, outlook cautious for next couple of quarters, more so in urban India. Projects and Govt business have a positive outlook.

? APNT aims for single digit volume growth, realization (-9.1% in 3Q) will depend upon sales mix and urban demand

We cut FY25/FY26/FY27 EPS by 0.4%/3.6%/4.6% given 24% decline in 9mFY25 PAT and tepid outlook in medium term. We believe APNT is facing pressures on multiple fronts led by 1) tepid urban demand due to high inflation 2) consumer downtrading as mass and economy segments are growing faster and 3) rising competitive intensity in decorative paints post entry of Birla Opus. While we expect demand scenario to improve post 1Q/2Q26 aided by benefits of recently announced tax cuts by GOI, the impact of competitive intensity is here to stay. We believe the acquisition of decorative business of AKZO Nobel by a strong player will further add to competition

We also note that APNT has suffered a bigger hit in volumes so far in comparison to other listed players and even if it achieves a mid-to-high single volume growth, sales and profit growth can continue to languish in single digits. The forays in other segments in home improvement like Bath, Kitchen and Home décor have been slow to scale up and can’t cushion the slow growth in core business of decorative paints. We estimate a CAGR of 5.8% in revenue and 3.5% in PAT over FY25-27. APNT trades at 50x FY27 EPS, which looks expensive given the tepid growth scenario. Retain reduce rating with target price of Rs2123 (DCF Based, Rs2230 earlier).

Decorative volume grew by 1.6% amid muted demand conditions coupled with downtrading & weak festive demand; Industrial Business registered 3.8% revenue growth supported by General Industrial, Protective Coatings and Refinish segments. Consol Revenues declined by 6.1% YoY to Rs85.5bn (PLe: Rs90.5bn). Gross margins contracted by 116bps YoY to 42.4%(Ple:41.7%). EBITDA declined by 20.4% YoY to Rs16.4bn (PLe: Rs16.93bn) Margins contracted by 344bps YoY to 19.1% (PLe:18.7%). Adj. PAT declined by 23.3% YoY to Rs11.1bn (PLe: Rs11.2bn). Adj. PAT was in line with estimates due to higher other income of Rs.1.4bn (Ple:1.25bn). Standalone Revenues declined by 7.5% YoY to Rs73.2bn; Gross margins contracted by 98bps YoY to 43.4%; EBITDA margins contracted by 337bps YoY to 20.6%; Adj. PAT declined by 23.2% YoY to Rs11.1bn

Concall Takeaways: 1) 3Q delivered a subdued performance due to tepid festive season and a slowdown in urban demand, seen after a couple of decades. 2) The month of October was sluggish, with muted consumer demand in the northern and central regions. 3) APNT saw better consumer traction in the General Industrial and Refinish segments. 4) Beautiful Homes Painting Services and Trusted Contractor Services received good responses and sustained acceptance. 5) APNT plans to focus on innovation, with new products contributing to over 12% of overall revenues in Q3. 6) APNT is seeing a good pick-up in demand in the Projects/Institutional Business, driven by the Factories & Builders' segment. 7) In the Middle East, there was strong double-digit growth, while continued recovery was seen in Sri Lanka. 8) Demand conditions remain challenging due to stress in urban areas, and APNT is cautious about a recovery in the next couple of quarters. 9) Adequate monsoons, coupled with an expected boost in government spending, should continue to support rural demand. 10) A softening in raw material prices is expected, while the weakness in the rupee remains a key concern. 11) APNT expects Neo Bharat to grow with 7-9% market share currently. APNT has opened 23 new centers to train painters with mechanisms. 12) APNT maintains EBITDA guidance of 18-20% 13) Innovation pipeline remains healthy with new packaging in Royale Glitz, new wood finishes in polish and Glomax, Smart Care Infinia waterproofing, Nilaya Play and Nilaya Once and exterior texture paints.

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