In 2QFY21, APNT reported consol. net sales growth of 5.9% YoY to INR53.5b (v/s est. INR52b) with volume growth of 11% (v/s est. 8%) in the Domestic Decorative paints business.
Asian Paints (APNT) witnessed consistent MoM demand improvement in 2QFY21. This augurs well for growth in 2HFY21 unless a second wave of Covid plays spoilsport. With stable material cost as well as currency, elevated margins also appear likely to sustain over the next few quarters. However, valuations of 58.4x FY22E EPS appear to be fully capturing the growth revival. This is despite assuming 20% PBT growth and 21.5% PAT growth in FY22E, nearly 3x the PBT CAGR over FY16-FY21E. Maintain Neutral.
In 2QFY21, APNT reported consol. net sales growth of 5.9% YoY to INR53.5b (v/s est. INR52b) with volume growth of 11% (v/s est. 8%) in the Domestic Decorative paints business. Gross margin was up 200bp YoY to 44.4%. This, as % of sales, along with high employee costs (+20bp YoY) and low other expenses (-300bp YoY) meant that EBITDA margin expanded by 470bp YoY to 23.6% (v/s est. 21.6%). EBITDA grew 32.5% YoY to INR12.7b (v/s est. INR11.2b). PBT grew 35.5% YoY to INR11.3b (v/s est. INR9.7b). Adj. PAT was flat YoY at INR8.5b (v/s est. INR7.2b) on account of low taxes
in the base quarter. 1HFY21 sales/EBITDA/PAT declined by 18.5%/17.2%/29.5% YoY. As of Sep’20, inventory and payables were both down ~5% YoY, while receivables were up 6.4% YoY. 1HFY21 CFO was down 3.8% YoY, while FCF was up 1.8% YoY due to significantly lower capex during the period. The company has declared an interim dividend of INR3.35 per share (1HFY20: INR3.35; FY20: INR12).
Pent-up demand supported 2QFY21 sales across industries. Festival demand is leading the recovery; however, management is unsure whether demand will continue to be as good (post the festive season). Demand in metros while still weak (70-80% of pre-COVID level) is better than 1QFY21. Even within metros, Mumbai, Bengaluru and Chennai are more sluggish whereas Delhi and Kolkata are doing better. Both material cost and currency remain stable as of now, but they need to be watched.
Changes to our model have led to 9%/5.7% increase in FY21/FY22E EPS estimates owing to improving commentary on top line growth and stable margins. APNT has creditably posted much faster recovery compared to most discretionary peers, which should ensure premium valuations.
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