IGI Logo

Sales beat impressive; pressure on margins to escalate

* While Pidilite Industries (PIDI)’s EBITDA and PAT were in-line, healthy sales momentum (two-year CAGR of ~21% in 2QFY22) led to a significant sales beat, even as material cost pressures remained high. VAM costs have nearly tripled in recent months over 1HFY21 levels after a relative drop over Jun–Jul’21.

* Good volume momentum and price increases (already healthy in the double digits, with more likely to come) would keep the sales momentum intact, even as margins continue to be under pressure. Three factors highlight that PIDI has been able to manage steep cost inflation better v/s paint companies (which also have a similarly large proportion of crude-related RMs): a) its nearmonopoly in Adhesives, b) the absence of mix deterioration, and c) material costs peaking earlier compared with paint companies.

* PIDI has admittedly navigated the twin challenges of the second COVID wave and steep RM inflation reasonably well in the first half. However, the base for sales as well as EBITDA is extremely challenging for 2HFY22. In addition, material costs are increasing sharply. The valuation of 82x FY23E EPS is rich and leaves no room for an upside. We maintain Neutral.

Sales beat; profits in-line

Consolidated net sales grew 39.7% YoY to INR26.3b (est. INR24.1b). EBITDA grew 7.2% YoY to INR5.5b (in-line). PBT grew 2.7% YoY to INR4.9b (in-line). Adj. PAT grew 5.4% YoY to INR3.7b (in-line).

* On a like-to-like basis (excluding PAPL) net sales / EBITDA / PBT / PAT came in at +33%/-2%/-7%/-4% YoY.

* Standalone sales volumes and mix growth stood at 25% YoY, with 25%/20% growth in sales volumes and the mix in Consumer & Bazaar (C&B) / B2B.

* Consolidated gross margins contracted 1050bp YoY to 45.4% on sharp escalation and volatility in input costs.

* As a percentage of sales, lower employee expenses (-250bp YoY to 10.4%) and other expenses (-170bp YoY to 14.1%) led to consolidated EBITDA margin contraction of 630bp YoY to 20.9% (est. 23.2%).

* Compared with 2QFY20, sales / EBITDA / adj. PAT grew 45%/49%/8%.

* 1HFY22 sales / EBITDA / adj. PAT grew 65.4%/55%/59%.

Segmental: a) C&B segment revenues were up 39.5% YoY to INR21.3b, with segmental EBIT growing 9.5% YoY to INR5.8b. Segmental EBIT margins declined 750bp YoY to 27.4%. b) B2B segment revenues grew 41.2% YoY to INR5.3b, with segmental EBIT declining 9.4% YoY to INR263m.

* Subsidiaries’ performances: Revenue from overseas subsidiaries grew 2.7% YoY to INR1.8b in 2QFY22. EBITDA declined 59.7% YoY to INR145m during the quarter. Revenue from domestic subsidiaries grew 148.5% YoY to INR3.1b, and EBITDA grew 682% YoY to INR557m in 2QFY22. Excluding PAPL (the Huntsman acquisition), revenue from domestic subsidiaries grew 38.2% YoY to INR1.7b and EBITDA grew 17.6% YoY to INR84m during the quarter.

Highlights from management commentary

* Avg. VAM prices came in at USD2,071 per tonne in 2QFY22 (v/s USD840 in 2QFY21 and USD1,610 in 1QFY22). Current VAM prices stand at USD2300–2400.

* Organized real estate has picked up in the last 3–6 months. PIDI generally benefits more from new constructions than paint players.

* PIDI is gaining market share in this high-inflation environment as smaller players find it difficult to manage WC with limited pricing power.

Valuation and view

* Despite the beat on sales and good momentum expected going ahead, continued RM pressure has led to a ~15%/6% reduction in FY22/FY23 EPS.

* Importantly, over the next three quarters, PIDI faces an exceptionally high base in terms of sales growth, and the base on 3QFY22 margins is also exceptionally high.

* Topline growth in the past four quarters is a vindication of the latent growth opportunity in the Core, Pioneer, and Growth categories. Once material costs stabilize (unclear for now), earnings growth could potentially be healthy post FY22.

* While the structural investment case remains intact, valuations are expensive at 81.7x FY23E EPS. We maintain our Neutral stance, with TP of INR2,340 per share (65x Dec’23 EPS).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer