Buy Asian Paints for Target Price of Rs 3,707: Powerful execution is driving volume and profits: Centrum

APNT’s Q1FY23 print was in‐line with our estimates. Consolidated revenue/EBITDA/PAT grew 54.1%/70.3%/85.9% driven by robust volume growth of 37% in domestic decorative segment (4‐year CAGR value and volume 20% each). The management alluded the growth was fueled by (1) faster growth in T1/T2 markets, (2) project/institutional business, (3) premium luxury emulsions, and (4) increase in distribution foot print. International business grew 15.7%, while industrial business PPG‐AP/ AP‐PPG grew 63.1%/56.1% each. Gross margin slipped to 37.7% (‐100bp QoQ). The management said it witnessed sequential inflation of 6% and effected 2.5% price increases till date. EBITDA margin at 18.1% (+172bp YoY). The management maintained positive outlook, expecting double digit volume growth driven by pent‐up demand, yet confirmed that commodity inflation to remain elevated, though expect gross margins to remain in 38‐40% band. With improved margin trajectory we have increased earnings by ~5‐ 8% and retained BUY, with a revised DCF‐based TP of Rs3,707 (implied 69.7x FY24E EPS).

Healthy growth ‐ T1/T2 towns led by PreLux segment while T3/T4 by economy range

Consolidated revenue grew 54.1% to Rs86.0bn, driven by domestic decorative segment volume growth of 37% despite high base (+106%). Management alluded the growth was fueled by (1) faster growth in T1/T2 markets than T3/T4, (2) project/ institutional business (now 20%), (3) consumer upgrade to premium and luxury emulsions (improved mix), (4) network expansion (150k dealers), (5) market share gains, and (6) exponential growth in waterproofing/ wood finishes segment. Home improvement business grew 92% led by projects, while Home Décor Play (31 stores) now offer complete range of home solution products. Industrial business PPG‐AP grew 63.1% and AP‐PPG 56.1%, led by powder and protective coatings. The international business at Rs7.1bn grew 15.7%, despite challenging environment faced in Sri Lanka, Ethiopia and Egypt (5% of revenues). With acquisition of ‘White Teak’ and ‘Weatherseal’, APNT embark on the journey of building new business around ‘making homes beautiful’, and moving from share of surface to share of space, aspiring revenue contributing of 8‐10% in next three years.

Management remains confident to deliver gross margin in 38‐40% band

Despite sharp price increases (~27% YTD Q4), APNT saw lower gross margin at 37.7% (‐100bp QoQ). Management stated it witnessed sequential inflation of 6% and executed ~2.5% price increases till date. EBITDA grew 70.0% to Rs15.6bn; EBITDA margin risen to 18.1% (+172bp) YoY. Management alluded, it is conscious about not to pass on full inflationary costs but remained confident of taking calibrated price increases. APNT expects to maintain its gross margin in 38‐40% band. Management said, scale up in Home improvement to cut losses while favourable product mix and cost efficiencies to drive profitability for international business.

Investment thesis, valuation and risks

We expect APNT to emerge as a strong player, moving from share of surface to share of space inside home in line with its core strategy: (1) upgrade volumes through innovations in economy/luxury emulsions, (2) develop project business, (3) expand waterproofing business, (4) grow rural reach, and (5) gain volume market share, yet maintain margins. We believe it is a structural growth story, capturing demand across segments and town class. Considering improved margin trajectory, we have increased earnings for FY23E/FY24E by 7.5%/4.6% and retain our BUY rating, with a revised DCF‐based TP of Rs3,707 (implied 69.7x FY24E EPS). Key risks to our call include weak demand conditions, rise in crude oil prices, and currency depreciation