Published on 25/09/2022 11:40:47 AM | Source: ICICI direct

Hold Pidilite Industries Ltd For Target Rs.2510 - ICICI Direct

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Strong volume growth on favourable base

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%)

Q1FY23 Results: Robust volume growth drives topline; margin pressure continues

* Consolidated revenue up 60% YoY to | 3101 crore on a favourable base and robust demand across product segments. Standalone revenues were up 62% YoY to | 2790 crore led by volume growth of 44%

* Higher raw material costs dragged gross margin down 741 bps YoY. However, improved operating leverage helped restrict EBITDA margin fall at 87 bps YoY to 17%

* PAT up 64% YoY to | 356 crore; tracking topline growth in Q1

What should investors do:Pidilite’s share price has grown by ~3.2x over the past five years (from ~| 821 in August 2017 to ~| 2510 levels in August 2022).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value Pidilite at | 2510, 71x 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 Asian Paints (APL) in our coverage universe. APL is India’s largest decorative paint company. It derives ~98% revenue from the paints business. Robust b/s with RoCE, RoE of 30%, 25%, respectively

* BUY with a target price of | 3700


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