Asian Paints (APNT) reported above expected revenue while higher than expected input cost inflation led to in-line PAT. Overall both decorative and industrial coatings witnessed strong demand resiliency. Pent-up demand during the month of Apr'21 and June'21 helped revenue/volume to stay higher than pre-covid levels.
Positively, recovery in tier 1-2 cities has been better than smaller cities. Business recovery in international market continues to remain strong in Asia and Middle East while Africa business was impacted by rising inflation. Positively, APNT will push waterproofing products across international market to drive topline growth. Input cost inflation continues to remain benign. Management don’t expect quick relief in short-term.
Commenting on the result review, the broking firm IDBI Capital said, We have factored the same in our estimates. However, strong revenue growth momentum should drive operating leverage benefits. We upgrade our EPS estimates by 2-4% during FY22-23E. Due to rally in stop price; our rating stands at SELL.
Following are the key highlights and investment rationale:
Strong revenue growth driven by pent-up demand during Apr'21 and Jun'21
Standalone revenue grew 96% YoY led by 106% YoY volume growth in domestic decorative coatings. Revenue from Economy and Luxury range products grew at higher rate. Home improvement business grew 133%YoY driven by c. 152%YoY and 114%YoY revenue growth in Kitchen and in Bath business respectively. In Industrial coatings; revenue from PPG-AP grew 207%YoY due to low base while revenue from AP PPG grew 162%YoY driven by robust performance in industrial liquid paint segment and strong project orders in protective coatings. Revenue from international business grew +50%YoY driven by strong double digit volume growth in Asia, Middle East and Africa.
Input cost impacts gross margins; operating leverage protects EBITDA margin
Gross Margin contracted by 613bp (2nd consecutive quarter of contraction) driven by higher input cost inflation (at +13-15% YoY) while the company has taken c. 3% price hike during 1QFY22. Contraction in EBITDA Margin has been lower at 21bp YoY (to 16.4%) driven by operating leverage benefits.
Upgrade our estimates; SELL due to expensive valuation
We upgrade our revenue and EPS growth estimates by 2-4% during FY22-23E as per revised business outlook. Gross margin is likely to be impacted due to raw material but operational efficiencies to protect operating margin. Due to rally in the stock price our rating stands at SELL with a TP of Rs 2,776 (60x FY23E EPS).
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