Asian Paints rating – Buy: Stellar performance by decorative business

Asian Paints’ (APL’s) Q4FY21 consolidated revenue (up 43.5% y-o-y) beat our expectations, whereas Ebitda (up 53.4% y-o-y) and PAT (up 81.1% y-o-y) came below our estimates. The Decorative business clocked multi-quarter high volume growth (48% y-o-y on soft base of ~1% y-o-y) led by a strong performance in the premium and luxury portfolios. Inflation in raw material prices led to gross margin compression of 266bps y-o-y, though on a softer base. Meanwhile, cost optimisation and improvements in sourcing lifted Ebitda margin by 128bps YoY.

Overall, we believe APL’s operational prowess and market leadership will help it continue to drive volume growth. Maintain Buy with revised TP of Rs 3,185.

Premium and luxury portfolios drive volumes: Standalone sales grew 46.2% y-o-y, continuing its impressive run. The domestic decorative business delivered a stellar performance, registering 48% y-o-y volume growth. The home improvement business also clocked record sales aided by the home décor business (EssEss’s revenue up 83.9% y-y and Sleek’s 78.1% y-o-y). The Industrial coatings business delivered a solid performance in protective coatings and re-finish segments supported by the uptick in industrial activity. The international business continued to record exceptional double-digit volume growth, led by good growth in Asia and the Middle East. All in all, with the demand momentum sustaining, we expect APL’s strong double-digit volume growth in decorative business to sustain.

Q4FY21 conference call: Key takeaways: The company has taken a price hike of 2.8% effective May 1st. Tier 1 and 2 cities saw a pick-up in demand from Q3-end onwards. Tier 3 and other areas continued their strong momentum. The company is focusing on improving volumes and developing the kitchen and bath business to complement its home décor business in the short run and to gradually improve profitability over medium term.

Outlook: Shining bright – We expect double-digit growth in decorative volumes to sustain, riding potential demand shift from unorganised segment (~30%). This coupled with APL’s ability to raise prices should help it maintain margin. Considering top-line outperformance, we are raising the TP to Rs 3,185 (from Rs 3,140); retain ‘BUY/SO’ (54.2x FY23E EPS).