Asian Paints (APNT) reported below expected results. While revenue growth continues to maintain strong momentum (came better than expected), steep inflation in input cost (worst in last 40 years; as per management) significantly impacted gross and operating profits. APNT has taken 4% price hike in 2QFY22 to mitigate inflation. However, more aggressive price hikes are likely to be taken in next 2-3 months to reduce the overall impact, stated IDBI Capital Equity Research.

Management is confident of achieving 18-20% EBITDA margin in medium to long-term. Adjacency businesses; water-proofing, kitchen and bath and Home Décor businesses are tracking well. In international market; revenue growth in Africa and Middle East was sluggish due to challenges related to COVID and forex availability.

"Overall, inflation is likely to persist and would be the primary challenge to address. As per revised outlook on inflation; we have trimmed our EPS estimate for FY22E by 9%. We have introduced FY24E in our estimates. We value APNT at 65x FY24EPS. Our revised TP stands at Rs 3,488. We upgrade our rating to BUY," the broking firm added.

Key highlights and investment rationale

Strong volume growth drives topline

Standalone revenue grew 36% YoY driven by 35% value and 34% YoY volume growth in India decorative coatings business. Volume growth in Tier 1 and 2 markets remained strong despite COVID related restrictions in certain regions and prolonged monsoon. APNT added 16 new Color Idea stores during 2QFY22. Revenue from international business grew 6%YoY to Rs 7 billion; South Asian Market recorded good growth while Africa and Middle East were sluggish due to challenged related to COVID and forex availability. In industrial coating; revenue from PPG AP grew 33%YoY while from AP PPG grew 55%YoY.

Steep inflation in input cost puts heavy dent on operating profit

Gross margin contracted 966bp YoY to 35% due to steep inflation (15% RMC inflation in 1QFY22 and 6% in 2QFY22). As a consequence; EBITDA declined 28%YoY while EBITDA margin contracted 1090bp YoY to 12.3%. Adjusted PAT declined 29%YoY to Rs 6 billion.  

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