PL Stock Report: Asian Paints (APNT IN) - Q2FY24 Result Update – 3Q positive, but a trading bet in near term - Accumulate

Asian Paints (APNT IN) - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs2,960 | TP: Rs3,387

Q2FY24 Result Update – 3Q positive, but a trading bet in near term

Quick Pointers:

•  Decorative volumes up 6%; Urban grew ahead of rural, 3Q outlook positive
• Industrial paints on strong wicket, IBD outlook mixed due to currency issues

We cut FY24/25 EPS estimates by 3.1/4% following lower than expected volume growth and profitability in 2Q24. APNT has given optimistic outlook for 2H24 given rebound in demand in sept and expected pick up in festival season. Overall volume growth of 6% has been below our estimates given tepid rural demand and delayed festival season. We expect double digit volume growth in 2H while most gains from RM deflation have been mostly realized. IBD margins remain under pressure with uncertain currency outlook. Home décor is showing mixed growth due to high base in kitchen and bath segments while “Beautiful Homes” continues to scale up.

APNT’s growth levers are intact given 1) market share gains in decorative paints 2) sustained increase in distribution (addition of 2.5k retail touch points in 2Q24 to 160k) 3) high growth in waterproofing/wood finishes/ projects business and 4) scalability plans in home décor from 4-5% to 8-10% of sales by FY26 (both organic and inorganic). We believe Grasim’s entry and diversification/ backward integration in White Cement and VAM can drag profit growth post FY24. We cut DCF based target price to Rs3387 (Rs3571 earlier). Retain Accumulate with moderate return expectations in near term.

Decorative volume growth of 10%; Consol Revenues grew 0.2% YoY to Rs84.8bn (PLe: Rs91.3bn). Decorative volume grew 6%; while Industrial Coatings business registered 1.1% growth Gross margins expanded by 764bps YoY to 43.4% (up 40bps QoQ) EBITDA grew by 39.8% YoY to Rs17.2bn (PLe:Rs19.2bn) Margins expanded by 573bps YoY to 20.2% (PLe:21.0%), (23.1% in 1Q). Adj. PAT grew by 53.3% YoY to Rs12.3bn (PLe:Rs13.2bn). Standalone Revenues flat YoY to Rs73.4bn; Gross margins expanded by 823bps YoY to 44.1%; EBITDA margins expanded by 639bps YoY to 21.6%; Adj. PAT grew by 52% YoY to Rs11.6bn. Imputed Sub Sales grew by 2.1% YoY; EBITDA grew by 17.2% YoY;

Concall Takeaways: 1) 2Q24 had 6% volume growth led by extreme weather condition and weak consumer sentiment, though September saw robust demand 2) Urban market has grown ahead of rural market 3) Demand outlook remain positive in 3Q/4Q led by festive and wedding season 4) RM basket saw 4% QoQ deflation and near term outlook remains uncertain 5) Economy & Premium Range Products are growing faster in comparison to Luxury Market. 6) Projects business doing well on account of construction activity & govt spending 7) New innovations contribute to 11% of overall revenue 8) Capacity expansion and capex target remain intact. 9) Industrial Business witnessed double digit growth led by strong demand from automobile & Infra spends by Govt 10) IBD performed lower than expectations due to currency devaluation & macro-economic challenges in key Asian markets (mainly Nepal & Bangladesh), Growth was supported by Middle East, however Egypt continue to underperform.