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Asian Paints Q3FY18: Volume growth tepid; maintain REDUCE on rich valuations

Equirus Securities | 27 Jan, 2018  | Follow Author | Add to my Favourites 
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APNT’s 3QFY18 consolidated revenues grew 10% yoy to Rs 42.6bn, with standalone sales increasing 11% yoy on mid single-digit volume growth in the domestic decorative paints business. Consolidated gross margins slid 153bps yoy but improved 95bps qoq to 42.2%, whereas absolute EBIDTA stood at Rs 8.9bn, up 18% yoy and 7% above EE. While RM prices trended higher, margins were cushioned by lower other expenses. We broadly maintain our FY18/FY19 EPS estimates to factor in higher RM costs. Despite a likely pick up in the earnings momentum during 2HFY18, we maintain REDUCE on APNT with a Mar’19 TP of Rs 1,155 (Rs 1,110 earlier) and await a better entry point into the stock. At our TP, the stock would trade at 45x its TTM EPS of Rs 25.7.

Domestic volumes tepid despite favorable base, lower other expenses protect profitability: APNT reported mid single-digit volume growth (~5%) in the domestic paints business during 3QFY18 (EE: ~7%). Standalone gross margins improved qoq to 43.5% on better product mix and internal cost-saving initiatives. For 9MFY18, APNT’s domestic volumes grew ~5%, which is lower than some peers and implies loss of market share. Standalone EBIDTA margins expanded 210bps yoy/281bps qoq to 22.8% on account of lower other expenses as the company reduced advertising spends and derived some benefits out of power cost savings. Standalone EBIDTA at Rs 8.18bn grew 22% yoy. We factor in volume growth of 5%/9% for FY18/FY19.

Higher RM costs hit subsidiary business operating profits:
APNT’s subsidiary business revenues grew 9% during 3QFY18. While Nepal, Bangladesh, Oman and Bahrain reported good growth, currency devaluation in Egypt and forex unavailability in Ethiopia hurt overall international business performance. EBIDTA for the subsidiary business declined 15% yoy to Rs 731mn, while profits slid to Rs 217mn. Gross margins plummeted 493bps yoy/76bps qoq to 35.4%.

Valuations & view: We believe earnings momentum for APNT is likely to pick up during FY19, even as near-term demand challenges remain. However, valuations at ~55x/ ~46x FY18/FY19 P/E are expensive and limit upside from current levels. Maintain REDUCE.

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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor accept any liability whatsoever arising from the use of any of the above contents.


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