Earnings should rebound in rest of FY18: Decorative business experienced healthyperformance in Q1 though volume growth (mid-single digits) was affected by GST relateddisruption. Q1 Gross margins fell due to increase in key inputs (TiO2, monomers andsolvents). We expect margins to rebound in H2 FY18 as 1) cost pressure is easing insome of the monomers and solvents 2) 1 May 2017 price hike of 2.7% in decorativebusiness was only partially effective in Q1 and will have its full effect from Q2 onwards 3)Berger Paints is likely to hike prices if commodity pressure continues. Overall, volumegrowth pick-up (led by stabilisation post GST and good monsoon) coupled with marginrebound is likely to aid earnings growth.    Key highlights from the Q1 conference call: 1) Decorative business was led by betterperformance in Tier 1 and Tier3 Cities. Revenue growth was relatively stronger inadvertised products (i.e. emulsions) which suggest premiumisation remains apace, 2)Distribution network expansion continues to remain strong as the company is increasingthe number of dealerships +10% a year. Increase in the dealership network remains keydriver for volume growth in decorative business. 3) Growth in General Industrial and Autobusiness was subdued while the protective and infrastructure coating segment (c9% ofdomestic business) experienced improved performance. 4) International businessperformance was led by Nepal subsidiary (BJN Nepal), which registered strong growth inboth top line and profitabilityResilient Q1 top line growth despite a tough environment: Both consolidated/standalone revenue grew by c9% y-o-y while consolidated /standalone EBITDA fellc5% as it was pulled down by lower gross margin due to input cost pressure.    Consolidated EBITDA margin fell 208bp to 13.6%. Depreciation rose due tocapitalisation of the Assam and Jejuri plants. Consolidated/standalone PAT fell by6%/8% respectively.    Valuation: At a FY19e PE of c40x, which may appear optically expensive, the stockappears to be pricing in long-term annualised earnings growth expectations of 14% forthe 15-year period after FY20. We think this is reasonable for a major company in asector ready to deliver double-digit volume CAGR in the near to medium term. Weexpect 18% earnings CAGR for FY17-22e. We maintain our target price of INR285 andreiterate Buy.

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