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Pidilite Industries Ltd>
  • CMP : 2,622.5 Chg : -18.15 (-0.69%)
  • Target : 2,000.0 (-4.76%)
  • Target Period : 12-18 Month

20 May 2022

Margin pressure continues…

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 4800+ distributors, strong balance sheet (RoE, 19%, RoCE, 22%)
Q4FY22 Results

EBITDA margin pressure continues due to delay in price hike. Lower volume offtake is attributable to supply disruption

  • Revenues were up 12% YoY to ~₹ 2851 crore led by ~15% price hike. The volume offtake was impacted by lower rural demand and supply disruption in January 2022. EBITDA margin down 461 bps YoY to 16%, led by 730 bps YoY fall in gross margin
  • PAT declined ~17% YoY to ₹ 254 crore
What should Investors do?

Pidilite’s share price has grown by ~2.8x over the past five years (from ~₹ 761 in May 2017 to ~₹ 2100 levels in May 2022).

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

We value Pidilite at ₹ 2000, 62x P/E of FY24E EPS

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 universe.

  • Supreme is market leader in plastic piping segment with ~14% market share. Robust b/s with average RoE, RoCE of 24%, 27%, respectively
  • BUY with a target price of ₹ 2320

Key Financial Summary

(Rs# Crore) FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net sales 7,078.0 7,294.5 7,292.7 9,921.0 12.1 10,874.2 12,126.1 10.6
EBITDA 1,368.2 1,576.0 1,680.6 1,847.3 8.0 1,975.1 2,426.4 14.6
EBITDA Margin(%) 19.3 21.6 23.0 18.6 - 18.2 20.0 -
Net Profit 928.4 1,122.1 1,126.1 1,206.8 6.9 1,318.5 1,634.4 16.4
EPS (|) 18.3 22.1 22.2 23.8 - 26.0 32.2 -
P/E(x) 114.9 95.0 94.7 88.4 - 80.9 65.2 -
Price /book (x) 25.7 23.9 19.1 16.7 - 15.4 14.0 -
Mcap /sales (x) 15.1 14.6 14.6 10.7 - 9.8 8.8 -
RoE (%) 22.6 26.1 20.2 18.8 - 19.1 21.4 -
RoCE (%) 29.5 31.0 23.8 22.2 - 22.6 25.6 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY22 Results:

  • Consolidated sales increased 12% YoY to | 2507 crore led by price hike of ~15%. The volume growth impacted by lower demand in the rural regions and supply disruption due to pandemic (in January 2022)
  • Standalone sales (~85% of total revenue) increased ~12% supported by price hike. On the segment front, C&B segment and B2B segment revenues were up by 10% and 24% YoY to | 1599 crore and | 523 crore, respectively
  • The company has taken price hike of ~15% in the selected product categories. Hence, consolidated gross margins fell 730 bps YoY (flat QoQ). However, savings in other costs restricted the overall fall in EBITDA margin to 461 bps YoY at 16%. The management believes higher raw material prices will start subsiding from H2FY23 onwards supported by improved supply condition
  • Net profit declined ~17% to | 254 crore

Q4FY22 Earnings Conference Call highlights:

  • Demand outlook:
    •               Demand in Q4 was subdued due to a few challenges such as local stoppages, Omicron, supply chain challenges and shop closures. The management expects demand pick up in FY23 led by good monsoon, revival in the real estate industry and higher government capex
    • The        Company is aggressively focusing on innovation and the management expects one-third of the company’s growth to be led by new products. According to the management, the company will launch new products every quarter for FY23
    •               The company has gained nominal market share in the waterproofing segment and also gained nominal market share across regions. It remains the market leader
    • The        Management expects its core business to grow at 1-2x of GDP, growth business at 2-4x of GDP and higher revenue is expected in the pioneer business in the next two years
  • Margin outlook:
    •               The margins remained impacted adversely by unprecedented inflation in key raw materials as well as increased improved cost
    •               Prices of key raw material, VAM continued to rise in Q4 due to force majeure of two major supplier plants. Spot price of VAM is at US$2500/tonne from average consumption cost of US$2420/tonne vs. US$1180 in Q4FY21 and US$1986/tonne in Q3FY22
    •               The company has taken 5-15% price hikes so far and is closely watching the industry trends to take further price hikes which will help mitigate the higher input costs
    • The management gave margin guidance of 20-24%
    •               According to the management, margin pressure is the highest on its core portfolio and lower on its growth and pioneer segment
  • Others:
    •               The margins remained impacted adversely by unprecedented inflation in key raw materials as well as increased input cost
    •               Prices of key raw material, VAM continued to rise in Q4 due to force majeure of two major supplier plants. Spot price of VAM is at US$2500/tonne from average consumption cost of US$2420/tonne vs US$1180 in Q4FY21 and US$1986/tonne in Q3FY22
    •               The company has taken 5-15% price hikes so far and is closely watching the industry trends to take further price hikes, which will help mitigate the higher input costs
    •               The management gave margin guidance of 20-24%
    •               According to the management, margin pressure is the highest on its core portfolio and lower on its growth and pioneer segment
Variance Analysis
  Q4FY22 Q4FY22E Q4FY21 YoY (%) Q3FY22 QoQ (%)   Comments
Revenue 2507.1 2437.2 2235.5 12.1 2850.7 -12.1   Strong revenue growth led by price hike (of ~15%), while the volume offtake were impacted by pandemic led disruption in Q4FY22
Other Income 11.1 4.4 17.3 -35.9 5.2 114.9    
                 
Raw Material Exp 1416.3 1301.9 1099.6 28.8 1608.3 -11.9   Higher raw mateial prices (Avg consumption cost of VAM increased by ~105% YoY to US$2420/t) led decline in gross margins by ~730 bps YoY 
Employee Exp 278.6 278.9 262.7 6.1 280.0 -0.5    
Admin & Other exp 411.1 393.7 412.4 -0.3 413.4 -0.5   Various cost optimisation measures help savings in the other exp
                 
 Total Expenditure  2106.0 1974.5 1774.7 18.7 2301.7 -8.5    
                 
EBITDA 401.1 462.7 460.8 -13.0 549.0 -26.9    
EBITDA Margin (%) 16.0 19.0 20.6 -461 bps 19.3 -326 bps   Lower gross margin was partially offset by savings in other cost, As a result EBITDA margin fall was limited to 461 bps YoY
Depreciation 62.2 61.0 57.2 8.7 60.5 2.9    
Interest 9.4 8.0 7.4 25.7 10.8 -13.0    
Exceptional items 0.0 0.0 3.6   0.0 NM    
PBT 340.7 398.1 409.9 -16.9 483.0 -29.5    
Total Tax 91.5 105.1 103.8 -11.8 127.5 -28.2    
PAT 254.4 298.3 307.4 -17.3 359.2 -29.2   Bottomline decline was attributable to decline in EBITDA and lower other income
                 
Key Metrics                
Consumer & Bazaar 1,913.2 1,901.5 1,730.3 10.6 2,264.5 -15.5   On standalone basis, C&B segment revenue increased by 10% YoY led by by price hike (of ~15%)
B2B 645.3 549.7 535.0 20.6 618.6 4.3   B2B segment also witnessed price led growth during Q4
Others 18.8 27.7 17.4 7.9 20.5 -8.3    

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