Margin delight for Pidilite investors


Adhesives maker Pidilite Industries Ltd continues to increase its grip on gross margins. In fact, at 49% in the June quarter (Q1FY24) consolidated gross margin hit an eight-quarter high and expanded sharply by over 700 basis points year-on-year. Easing raw material prices and operational efficiencies are reasons behind the ongoing gross margin improvement.

Key input chemical vinyl acetate monomer (VAM) prices softened in Q1 to $1,150/tonne from $2,250/tonne in the same period last year. Currently, VAM prices are trading in the range of $850-900/tonne, said the management in the earnings call. A part of the gains from gross margin expansion were reinvested in growth-related initiatives.

Graphic: Mint

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Graphic: Mint

“With VAM favourable at $850/tonne and lower crude oil prices, there is still scope for Pidilite’s gross margin to breach the 50% mark in the next two quarters,” said Amnish Aggarwal, head of research at Prabhudas Lilladher. The management expects VAM prices to return to $1,000/tonne over the next six months.

The domestic consumer & bazaar (C&B) segment saw volume grow around 12% year-on-year with double-digit growth in both rural and urban markets. Growth was broad-based across categories and geographies. Going ahead, the management is optimistic about the domestic demand outlook, backed by expectations of a good monsoon and increased momentum in construction activity in the country.

That said, the company eyes volume-led growth, although this may come at the cost of realisations. “A sore point is that realisations have been weak because the company has taken price cuts,” pointed out Aggarwal. In Q1, Pidilite’s consolidated revenue 3,275.1 crore marginally missed consensus estimate of 3,384 crore.

While domestic demand held up well, C&B product exports dipped due to subdued demand in the overseas market. The C&B segment is a major contributor to Pidilite’s revenues and the rest comes from B2B, which faced headwinds due to lower demand from business dependent on exports. Management expects demand scenario in international markets like Nepal, Sri Lanka, and Bangladesh to improve in the next few months.

With softening VAM prices the company’s earnings outlook is poised to improve. “Factoring in the margin expansion, we raise our FY24 and FY25 earnings per share estimates by 3% and 3.8%, respectively,” said a Motilal Oswal Financial Services Ltd report. VAM costs have fallen significantly, which should lead to healthy earnings growth despite relatively moderate sales growth prospects, it added. A fillip to earnings could aid investors sentiment. So far in 2023, Pidilite’s shares have been flat, underperforming the benchmark index Nifty50’s 7.3% returns. Apart from cost inflation pressures, lingering worries about rising competition in the under-penetrated waterproofing segment with the entry of Asian Paints Ltd, also seem to be bothering investors. The waterproofing portfolio contributed 15-18% to Q1 sales, the management said. “Although the management is not too worried about the rising competitive pressure in the waterproofing sector, with a large paint company continuing to expand footprint with relatively lower priced products, developments here are monitorable,” Aggarwal said.

Recall that Pidilite has also entered the interior paints segment with the launch of Haisha Paints. The company continues to focus on distribution under its Pidilite ki Duniya programme. Nevertheless, valuations remain rich. At FY25 price-to-earnings, the stock is trading at a multiple of nearly 59x, showed Bloomberg data. Pidilite does enjoy a strong brand portfolio and a wider distribution reach, but in the current scenario, valuation multiple is expensive and leaves little room for disappointment.

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