30 JAN 2020 Quarterly Update ASIAN PAINTS LTD HOLD FMCG (CONSUMER DISCRETIONARY) Target Price : Rs 1,890 Q3FY20: Unfavourable mix hurts realization… CMP : Rs 1,796 APNT delivered a weak performance for second quarter in a row especially on Upside : 5% revenue front as it report a 3% YoY growth in revenues despite ~10% volume Relative to Sector : Positive growth, mainly due to mix deterioration (higher focus on economy segment products and weak growth in premium products). However, its EBITDA MARKET DATA Margin came in higher by 90bps at 21.9% led by 190bps GM expansion owing to No. of Shares : 95.9 Cr benign RMs. FV (Rs) : 1 Market Cap (Rs Cr.) : 1,71,744 Management has cautioned about moderation in growth in near term as 52-week High / Low : Rs 1,862 / Rs 1,291 metros/tier-1 towns have slowed down significantly and weaker mix Avg. Daily vol. (6mth) : 5,887,732 shares (continued focus on economy segment) may remain a drag in near term. To Bloomberg Code : APNT IB Reuters Code : APNT.NS factor the near term growth pressure we revise our estimates leading to a BSE Code : 500820 change in our rating from BUY earlier to “HOLD” and TP of Rs. 1,890 (Rs. 1,976 NSE Code : ASIANPAINT earlier) as valuation appear expensive given the near term growth pressure. Key Highlights Q3FY20 unfavourable mix hurts standalone revenue: For second quarter in a row, Asian Paints (APNT) delivered weaker than expected growth. It reported 3%/8%/20% growth in Revenues/EBITDA/PAT for Q3FY20. Topline growth was weaker than expected despite low double digit volume growth on account of a sharp deterioration in product mix. APNT reported a 7% drop in realization owing to conscious strategy of focussing on economy segment (putty, primer and distemper) and slower growth in Metro/Tier 1 towns and cities. Underlying EBITDA came in 8% higher aided by healthy 190bps GM expansion marked by RM tailwinds and tight cost control (staff costs/ other expenses grew just 5% YoY in absolute terms). Resultantly, EBITDA Margins came in at 21.9% (90bps/300bps YoY/QoQ expansion noted). Recurring PAT grew 20% YoY at Rs. 780 crore driven by corporate tax cuts and 40% surge in Other Income. Subsidiaries’ performance (Industrial, International, Home Improvement) reported yet another weak quarter with flattish revenue growth indicating further demand deterioration. Growth was weak across divisions. Subsidiaries’ business reported an adjusted EBITDA growth of 13% YoY as underlying margins expanded by 90bps YoY to 8.4% aided by a healthy 270bps expansion in GMs. FINANCIAL SUMMARY (Consolidated) Y/E Sales EBITDA PAT EPS Change P/E RoE RoCE EV/EBITDA DPS March (Rs Cr) (Rs Cr) (Rs Cr) (Rs) (YoY %) (x) (%) (%) (x) (Rs) FY19 19,341 3,524 2,159 22.5 9.6 66.2 24.1 29.1 37.9 10.5 FY20E 21,275 4,334 2,894 30.0 33.3 59.6 27.7 29.6 39.4 13.7 FY21E 24,213 5,039 3,320 34.5 15.1 51.7 28.1 30.6 33.8 16.1 FY22E 27,386 5,839 3,938 40.8 18.1 43.8 29.4 31.4 29.2 18.9 Source: Company, Axis Securities, Consensus Estimates, CMP as on 29th Jan 2019 PRICE PERFORMANCE 160 120 80 Suvarna Joshi 40 Jul-18 Jan-19 Jul-19 Jan-20 [email protected] BSE Sensex Asian Paints 01 30 JAN 2020 Quarterly Update ASIAN PAINTS FMCG (CONSUMER DISCRETIONARY) Concall takeaways: Decorative Paints growth impacted due to 1) adverse macro economic conditions; 2) extended monsoon almost till early November; 3) high base of last year on account of preponement of Diwali in Q2FY20. Overall demand continues to remain weak and company is continue to focus on its strategy of growing at the bottom of the pyramid with large push on economy range of products. Domestic decorative paints volume growth: APNT reported low double digit volume growth despite challenging industry conditions. This was primarily aided by a large push to economy range of products that are growing faster than the premium product segment. Low double digit volume growth driven by: 1) higher sales of economy products (primer, putty); 2) higher revenues from low value paints than premium paints; 3) aggregate price reduction at portfolio level of >1% Realization impacted due to adverse mix: APNT’s price/mix for Q3FY20 was weaker and deteriorated sharply mainly due to a 1) sustained push on economy range products – APNT launched 2 new economy emulsion paints which were priced 20-25% lower than its own cheapest selling emulsion paint. In these 2 products the company has witnessed good traction across geographies. 2) slowdown in construction activity and weak sentiments in metros/Tier-1 towns affected overall pricing led growth. Smaller town growth ahead of urban: With a conscious strategy to push economy range of products that are in high demand compared to premium products, APNT indicated that smaller towns reported healthy growth for its business vis-à-vis urban centres. This is also attributed to the deterioration in product mix. Rural: Urban contribution is at 50% each by value. Gross Margin: We were surprised to note that despite the economy segment driving down realization, GMs for APNT expanded by 190bps YoY. Management highlighted that there is no difference in GMs of economy range of products with those of premium products. Thus the new products launched are not GM dilutive. Pricing action: In Q3FY20 also the company took small price cuts of -0.25% taking the total price reduction at the aggregate portfolio level to be >1% in its core decorative paints business. The reduction in prices was owing to benign RM environment. Volatility in crude and currency are the key monitorables as management indicated that some RMs have started to see some volatility. While current status doesn’t merit any pricing intervention, however, it will monitor the same and take adequate actions if required. Industrial Business: The automotive coatings JV (PPG-AP) continues to be severely affected due to sharp slowdown witnessed by the domestic automotive industry. The industrial coatings JV (AP-PPG) witnessed some demand improvement on a QoQ basis particularly supported by demand in its protective coatings segment. Lower material prices and contained growth in overhead costs helped improve profitability of both these JVs. International Business: Overall performance was affected by the slowdown APNT saw in Oman and Baharin as well as an extended monsoon in Sri Lanka. However, some improvement in Egypt and Bangladesh helped negate some of this impact during the quarter. Benign material cost supported the profitability of international operations. 02 30 JAN 2020 Quarterly Update ASIAN PAINTS FMCG (CONSUMER DISCRETIONARY) Dealer strategy: The Company does not extend any credit to its dealers. However, the dealers’ stickiness with the company is mainly due to the healthy RoI that APNT’s products are able to generate for the dealer and thus is not just dependent on margins offered. The management indicate that dealers usually rotate the stock 15-20 times in a year. In Q3FY20, discounts are likely to have marginally increased as highlighted by management. Capex: For FY20 capex is expected to be Rs. 700 crore for standalone business. Of this Rs. 200 crore has already been incurred in H1FY20 towards Vizag and Mysuru plants. Balance Rs. 500 crore shall be incurred over H2FY20. For FY21 only maintenance capex is expected to be incurred as indicated by management. Other takeaways: o Repainting demand is 70-75% of total paint sales. Projects account for 25-30% of paint revenues o 30% of total paint market in India is unorganized. While, most unorganized players operate in distemper category there are a few smaller/unorganized companies in low end emulsion paints o APNT has a distribution network of 140 depots, 2000 salesmen and c.70,000 shopkeepers o Effective tax rate for FY20 will be 25% Outlook: To factor in the near term pressure on revenue growth owing to management strategy of focusing on economy segment paints we believe the topline could be under pressure resulting in downward revision in our estimates for FY20E/21E. This leads us to also revise our rating to HOLD (earlier BUY) with a revised TP of Rs. 1,890 (earlier Rs. 1,976). However, from the longer term perspective we remain constructive on the growth prospects of the Indian Paints industry and Asian Paints the leader in the segment. Key risk to our call will be slower than expected consumption and macro-economic slowdown. 03 30 JAN 2020 Quarterly Update ASIAN PAINTS FMCG (CONSUMER DISCRETIONARY) Deco Paint – vols. grow healthy double digit yet again Benign RM environment leads to price cuts 25% 4.0% 20% 20% 2.9% 3.0% 2.7% 2.4% 15% 14% 2.0% 15% 13% 12% 12% 2.0% 1.7% 11% 1.4% 10% 10% 10% 10% 9% 10% 1.0% 6% 5% 3% 0.0% 2% -0.3% -0.4% -0.4% 0% -1.0% Source: Company, Axis Securities Benign Raw Material costs aids Gross Margin Despite inferior mix Op. Margin expands owing to tight expansion on YoY basis cost control 48% 47.1% 25% 22.8% 22.5% 21.9% 20.9% 21.0% 19.9% 46% 19.6% 20% 18.8% 18.7% 18.9% 19.0% 18.1% 44.4% 16.9% 43.7% 17.4% 16.4% 44% 43.8% 43.2% 43.5% 43.0% 42.8% 43.2% 15% 42.2% 42.4% 41.6% 42% 41.3% 41.1% 10% 39.8% 40% 5% 38% 0% 36% Source: Company, Axis Securities P/E Band 12month Forward P/E (x) 60 2200 50 1700 40 1200 30 700 20 200 Jul-17 Jan-15 Jan-20 Jul-17 Jun-15 Oct-13 Oct-18 Feb-17 Sep-16 Jan-20 Jan-15 Dec-17 Jun-15 Apr-16 Oct-13 Oct-18 Feb-17 Sep-16 Mar-14 Mar-19 Dec-17 Aug-14 Aug-19 Nov-15 Apr-16 May-13 May-18 Mar-14 Mar-19 Aug-14 Aug-19 Nov-15 May-18 PE Mean Mean+1Stdev Mean-1Stdev Price 30x 40x 50x 60x Source: Company, Axis Securities 04 30 JAN 2020 Quarterly Update ASIAN PAINTS FMCG (CONSUMER DISCRETIONARY) Results Update (Consolidated) Quarterly Performance % Change % Change (Rs.Cr.) Q3FY20 Q3FY19 Q2FY20 (YoY) (QoQ) Net Sales 5,420 5,263 3.0 5,051 7.3 43.0% 41.1% 42.4% GM% Expenditure Net Raw Material 3,089 3,101 -0.4 2,907 6.3 57.0% 58.9% 57.6% % of Sales Employee expenses 343 314 9.2 348 -1.3 6.3% 6.0% 6.9% % of Sales Other Exp 799 744 7.4 841 -5.0 14.7% 14.1% 16.7% % of Sales Total Expenditure 4,231 4,159 1.7 4,096 3.3 EBIDTA 1,189 1,104 7.7 955 24.6 21.9% 21.0% 18.9% EBITDA Margin (%) Oth.