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Pidilite Industries Ltd>
  • CMP : 3,144.5 Chg : 12.0 (0.38%)
  • Target : 0.0 (-100.0%)
  • Target Period : 12-18 Month

26 Jan 2023

Lower volume offtake hits overall performance…

About The Stock

Pidilite is a market leader in the adhesive and sealants business.

  • The company’s consumer & bazaar (C&B) segment (adhesives & sealants, construction & paint chemical, art & craft materials) contributes 80% to topline while the B2B segment (industrial adhesive, resins and pigments) contributes ~20% to topline
  • Has 4898+ distributors, strong balance sheet (RoE, 19%, RoCE, 22%)
Q3FY23 Results

Lower demand and use of high cost inventories dragged overall Q3 performance.

  • Consolidated revenue marginally up by 5% YoY to ~₹ 2998 crore due to lower rural demand and higher base of Q3FY22 (volume: +1%)
  • Lower volume offtake and use of high cost inventories dragged gross margin down by 175 bps YoY. EBITDA margins declined 272 bps YoY to 16.5% due to lower gross margin and higher fixed costs
  • PAT declined 14% YoY to ₹ 308 crore due to lower EBITDA margin
What should Investors do?

Pidilite’s share price has grown by ~2.6x over the past five years (from ~₹ 863 in January 2018 to ~₹ 2315 levels in January 2023).

  • We maintain our HOLD rating on the stock
Target Price and Valuation

We roll over our valuation on FY25E and value the stock at 62x P/E of FY25E EPS with a revised target price of ₹ 2535

Key Triggers for future price performance
  • The management is targeting the ‘core segment’ (i.e. adhesive, sealants) and ‘the growth’ segment to grow at 1-2x and 2-4x of GDP, respectively, in the long term
  • Revival in the real estate business will be a key demand driver for C&B segment, going forward
  • Addition of premium products in the portfolio such as Araldite, cost optimisation measures will help drive EBITDA margin of the company
Alternate Stock Idea

We like Supreme Industries in our coverage.

  • Supreme is market leader in plastic piping segment with ~15% market share. Robust b/s with average RoE, RoCE of 25%, 26%, respectively
  • BUY with a target price of ₹ 2880

Key Financial Summary

(| Crore) FY20 FY21 FY22 5 Year CAGR (FY17-22) FY23E FY24E FY25E 3 Yr CAGR (22-25E)
Net sales 7,294.5 7,292.7 9,921.0 12.1 11,874.1 13,474.3 15,107.9 15.0
EBITDA 1,576.0 1,680.6 1,847.3 8.0 2,033.4 2,660.2 3,029.2 17.9
EBITDA Margin(%) 21.6 23.0 18.6 - 17.1 19.7 20.1 -
Net Profit 1,122.1 1,126.1 1,206.8 6.9 1,328.9 1,796.7 2,063.9 19.6
EPS (|) 22.1 22.2 23.8 - 26.2 35.4 40.6 -
P/E(x) 104.8 104.4 97.4 - 88.5 65.4 57.0 -
Price /book (x) 25.4 20.4 17.9 - 16.6 14.8 13.4 -
Mcap /sales (x) 16.1 16.1 11.8 - 9.9 8.7 7.8 -
RoE (%) 25.2 19.6 18.4 - 18.8 22.6 23.4 -
RoCE (%) 30.0 23.3 21.7 - 22.5 27.3 28.5 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q3FY23 Results: High base, lower rural demand drags volume offtake

  • The company reported a muted consolidated revenue growth of 5% to
    | ~2998 crore (in line with I-direct estimate: | 2964 crore) mainly due to muted volume offtake (up ~1% YoY) in the C&B segment. The lower volume offtake is attributable to higher base and lower rural demand amid high inflations. The B2B segment revenue declined 3% due to lower demand of raw materials used in export related items. On a three year CAGR basis, revenue grew at a CAGR of 16% led by ~10% volume CAGR
  • Standalone sales (~90% of total revenue) increased ~7% YoY to | 2709 crore, largely driven by higher realisation. The volume offtake was impacted by lower rural demand a higher base (channel inventory build-up before the price hikes). On the segment front, C&B segment revenue increased ~7% YoY to | 2211 crore led by higher realisations. Volume growth was ~1% YoY. B2B segment revenues declined 6% YoY to | 552 crore
  • Consolidated gross margin fell 175 bps YoY (up 85 bps QoQ) mainly due to use of high cost inventories. EBITDA margin declined 272 bps YoY to 16.5% dragged by subdued gross margins and higher fixed costs
  • PAT declined ~14% to | 308 crore tracking lower EBITDA margin

Q3FY23 Earnings Conference Call highlights:

  • Demand outlook:
    •               According to the management, rural demand recovery has started from December 2022 onwards with easing of inflationary pressure and pick-up in construction activities. Uptick in real estate industry will help fast recovery in the demand from Tier I and II cities
    • The company has reiterated double digit volume growth in the medium to long term. The ‘Core’ category (includes Fevicol, FeviKwik, m-seal, fevicryl, contributes ~70% to overall revenue) growth guidance at 1-1.5x GDP, ‘Growth’ category (includes Dr Fixit, Roff, Nina, contributes ~20% to overall revenue) to 2-5x GDP growth, ‘Pioneer’ category (CIPY, Jowat, ICA Pidilite) | 100 crore in the next three years
    • The company generates ~65% of its total revenue from repair and maintenance segments while rest is derived from new construction. Water proofing, tile adhesive (Pioneer category) growing faster than other product categories
    • Over the next five years, the company plans to increase the revenue contribution of ‘Growth and Pioneer’ to 50%
    • The company added ~2100 new villages (with population ranging between 5000 and 10000) to expand its retail distribution network ‘Pidilite ki Duniya’. As of now there are ~ 7000 ‘Pidilite ki Duniya’ in the rural regions with population ranging between 10,000 to 50,000
  • Margin outlook:
    • Consumption rate in Q3 for VAM was US$2000/t vs. Q2FY23 US$2500/t and Q3FY23 US$2000/t, current rate US$1200/t
    • VAM contributes ~25% of total raw material costs. While VAM prices declined sharply, other raw material prices are yet to come to pre-Covid level. Currency headwinds are there. The company guided EBITDA margin of above 20% possible from Q1FY24E onwards
    • The company has guided to launch one major and two minor innovative products in every quarter for the next 12-18 months



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