Asian Paints’ (APL’s) Q4FY20 consolidated revenue and Ebitda decline of 7.6% and 2.7% y-o-y, respectively, came in line with our estimates, while PAT dip of 1.2% y-o-y belied it. Loss of sales in March dented domestic volumes—down ~1.0% y-o-y on a base of 10.5%. Divergence in value and volume growth persisted due to higher sales of lower-end products, leading to 8.4% y-o-y standalone value dip.
Fortunately, benign raw material cost led to 428bps y-o-y gross margin expansion, a trend likely to continue. Lack of operating leverage, however, led to Ebitda margin expanding merely 93bps y-o-y. As normalcy returns, we believe APL’s operational ability and market leadership will help it regain volumes. Benign raw material prices should continue to aid margins. Maintain Buy.
Covid-19 mars volumes; benign input cost spurs margin: Standalone sales dipped 8.4% y-o-y, impacted by lockdown at a time when APL was already seeing deceleration in previous quarters (Q3FY20: 2.7% y-o-y, Q2FY20: 9.3% y-o-y, Q1FY20: 18.2% y-o-y). The automotive coatings JV (PPG-AP) and industrial coatings JV (AP-PPG) continued to be impacted by the downturn in the auto industry and the overall slowdown in the economy. International business did well supported by growth in Ethiopia, Egypt, UAE and Nepal. However, key units of Sri Lanka and Bangladesh were impacted due to lockdowns.
Both the segments in the Home Improvement category continued to be impacted by the slowdown in the real estate construction space. Complete shutdown of business in the last few days of March further added to the pressure on these businesses—EssEss’s revenue dipped 13.9% y-o-y and Sleek’s 13.7% y-o-y.
Conference call takeaways: Rural – Urban mix pre COVID-19 was 50:50. Production level is at 60-70% of pre COVID-19 level. In terms of migrants, seeing many painters returning. Also at manufacturing plants, workers have started coming back.
Outlook: Shining bright— We expect decorative volumes to sustain, riding potential demand shift from the unorganised segment (~30%). This, coupled with APL’s capability to hike prices, should help maintain margin. We maintain ‘BUY/SO’ with TP of Rs 1,910. At CMP, the stock is trading at 52.9x FY22e EPS.
