We are cutting FY17 and FY18 EPS estimates of APNT by 2.5‐5.7% due to 1) ~40% increase in crude prices from the bottom 2) increase in rebates and discounts in the institutional segment of decoratives 3) uncertainty on growth in highly profitable markets of Ethiopia and Egypt 4) lower than expected growth in new ventures in Home Improvement. APNT remains in investment mode as it has announced 1) 2new paint units at a cost of Rs40b 2) AP Home decor stores 3) Increased investments in Kitchen and bath business 4) new unit in Indonesia. We believe margin expansion potential seems limited, although higher expenses on promotions and advertising provide levers to manage margins once crude moves up. We estimate 15% PAT CAGR over FY16‐18 factoring in flat margins and higher volume growth of 14% and 15% in FY17 and FY18. Maintain “Accumulate”.
- Analyst Meet Highlights: 1) Demand saw smart recovery in 2HFY16 due to festivals; however monsoons and impact of OROP and pay commission hold key to improvement in FY17 2) Rural demand continues to grow faster than Urban, however south is growing at slower rate 3)Demand continues to remain strong at the lower end of the segment and APNT has taken 2% price cut mainly in the lower segment 4) APNT has launched some niche adhesives on differentiated platform in a co‐branding agreement with Henkel 5)APNT is experimenting with a new format under AP homes (multi brand home decor store), it intends to provide a one stop shop for Home decor to its customers and the same time promote its range of paints and other home decor items 6) Employee cost in Q4 was higher as APNT offered incentives linked to sales and it also introduced performance pay incentive for higher management 7)Other expenses increased in 4Q due to higher rebates on institutional sales due to rising competition 8)Capex for Fy16 was RS 3.5bn and FY17 guidance is Rs7bn 10) Outlook is uncertain in Ethiopia and Egypt due to scarcity of foreign currency 11) APNT received subsidy of Rs1.34b from Khandala unit in FY16 (Rs1.09b in FY15).
Q4FY16 consolidated sales increased 12.3% to Rs39.7bn as domestic decorative paints volume grew by ~13%. Improved demand conditions in Industrial paints and powder coatings and good demand buoyancy in Auto OEM business was witnessed during Q4FY16. On the International front growth in Middle East and Bangladesh enabled good performance. Ethiopian Unit posted satisfactory performance. Gross margin grew 390bps to 49% (190bps QoQ); EBITDA margins expanded 190bps due to 120bps higher other expenses and 80bps higher employee cost. EBITDA increased by 25.7% to Rs7.03bn; other income declined 18.4%. Adj.PAT increased 19% to Rs4.08bn as tax rate increased by 240bps
Standalone: Adj.PAT up 17.9% as gross margin expands 410bps
Sales grew 11.5% to Rs32.19bn. Gross margins increased by 410bps to 50.1% as input costs benefits were realised in Q4. EBITDA margin expanded by 200bps as 170bps increase in other expenses and 50 higher employee costs curtailed margin expansion. EBITDA increased by 23.9% to Rs6.2bn. Adj.PAT increased by 17.9% to Rs3.87bn as tax rate increased by 200bps.
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