Asian Paints rating – Reduce: Product mix is boosting volumes

APNT’s strong volume growth print is partly attributable to high-volume, low value/margin portfolio (putty, admixtures, tile adhesives, etc) that accounts for ~30% of volumes and is growing significantly faster than the rest of the portfolio. Per our estimates, underlying volume growth of the core decorative paints is 700-800 bps lower. As APNT continues to gain share in putty and construction chemicals, (i) its reported volume growth would mask underlying volume growth and premiumisation, and (ii) product mix change could weigh on margins.

Putty and construction chemicals are boosting company’s volume growth by about 700 bps
APNT’s strong domestic volume growth print (relative to other decorative paints, adhesives and FMCG companies) over the past 3-4 years is partly attributable to: Strong growth in putty. Per our estimate, (a) Putty accounts for ~27%/4% of domestic decorative paints volume/value (FY2022E) versus ~18%/3% in FY2018, (b) Putty has grown at 30%+ volume CAGR (FY2018-22E) and boosted reported volume CAGR by 300-400 bps, (c) APNT is closing the gap with putty market leaders Birla White (BW) and JK Cements and its putty sales (~Rs 10 bn in FY2022e) is now 20-25% short of BW and JK.

Strong growth in construction chemicals. Per our estimate, construction chemicals (waterproofing products: Damp Sheath and Damp Proof + commodity products: admixtures, tile adhesives, mortars, etc) now account for 7% of domestic decorative paints volume and value (FY2022E) versus 2-3% in FY2018. This portfolio has grown at 50%+ volume and value CAGR over the past 3-4 years and boosted APNT’s reported volume CAGR by 200-300 bps.

APNT’s 17.6% volume CAGR over FY2018-22E is about (i) 400 bps ahead of decorative paints industry, (ii) 800 bps ahead of PIDI, and (iii) 1,000-1,200 bps ahead of FMCG industry. APNT’s core domestic decorative paints segment (ex-Putty and construction chemicals) grew at about 11.5% CAGR over FY2018-22e per our estimate.

Changing product mix could have implications on medium term gross margin
With putty and commoditised construction chemicals growing significantly faster (share gains from unorganised and organised) than underlying decorative paints for APNT, we expect— (i) APNT to continue to outperform peers on volume growth for a foreseeable future, (ii) product mix change to continue to adversely impact realisations (adjusted for price hikes). These fast-growing products could also weigh on margins in the medium term if margin dilution from higher salience of these products is not entirely offset by premiumisation within emulsions.

Near term outlook for APNT— Our dealer checks indicate (i) deceleration in volume growth in Q4FY22 and (ii) increase in trade promotions by paints players (especially APNT) to push volumes. Given this, we expect APNT to register modest 2-3% volume growth (negative ex-putty, ex-CC) in Q4FY22 implying deceleration in 3-year volume CAGR to 15-16% from 20%. Increased trade schemes and incremental RM pressure (crude-led) could weigh on GM recovery in the short term.