Margin boost from Input cost tailwinds
PIDI remains cautiously optimistic on the demand outlook as slowdown in construction activity has impacted construction chemicals business. 1Q20 overall growth was led by distribution expansion in rural areas, earlier pricing actions taken and softer input cost scenario. Strong 11.7% volume growth in low margin Industrial segment has led to increase in gross margins by only 30bps QoQ despite reduction in VAM prices by 10.9% in 1Q. We believe that continued decline in VAM prices in 2Q (currently USD870/ton v/s USD980/ton in 1Q) will likely aid margin expansion in the coming quarters. PIDI is well placed to capitalize on the growth opportunity in adhesives, sealants and waterproofing given strong brand like Fevicol and Dr. Fixit under its belt. PIDI is in the process of setting up more JV’s on the lines of NINA, Percept, ICA, CIPY etc. which will continue to improve growth prospects in long term.
We tweak our estimates for IndAS impact and estimate 19% PAT CAGR over FY19-21 on 13.8% increase in sales and 180bps margin expansion given benign input cost environment. We value the stock at 44x Sept21 EPS and arrive at SOTP based target price of Rs1301. Retain Accumulate.
* Concall Takeaways:
1) Management has guided for cautiously optimistic demand growth on general slowdown particularly more in construction activities
2) VAM prices continue to decline and are currently at 870 USD/MT versus average 1Q usage of 980 USD/MT
3) Reduced prices by ~2% by selective reduction in products that consumed VAM (woodwork; adhesives, etc.) in April and May. Trade promotions continue to pass on benefits of lower input costs
4) Nina and Percept is mainly focused in new construction related activities which is witnessing slowdown. PIDI plans to take the business to other than real estate segment
5) EBITDA in Bangladesh was lower due to expenses related to new plant (expected commissioning in 2Q20)
6) Advertisement and Promotions were Rs 750mn in 1Q
7) Capex for FY20 would be ~3% of sales
8) Tax rate in FY20 shall be 32-33%
* Domestic volumes up 6.3% on a high base: Net sales increased 10.6% to Rs 17.8bn, volumes up 6.3% on a high base of 17.9% in 1QFY19. Gross margins at 51.6% increased 110bps YoY and 30bps QoQ on softer input cost. EBIDTA increased 16.9% to Rs 4.2bn. Margins expanded 130bps on gross margin expansion. PBT from operations increased 16.4%. Adj. PAT increased 7.7% to Rs2.9bn as other income decreased by 39.6%. excluding higher income from transfer of intangibles to ICA Pidilite in 1Q19, Adj PAT grew by 15%.
* Consumer and Bazaar EBIT increased just 6.5% to Rs4.5bn as sales increased by 10% on 6.1% growth in sales volume and mix. Industrial Products sales increased 13.9%, and EBIT grew by 19.4% on a 12% growth in volume and mix. Subsidiaries Imputed sales increased by 5.3% to Rs2.4bn. EBIDTA increased 7% to Rs 258mn on 10bps margin expansion.
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