Published on 20/11/2019 11:37:06 AM | Source: Motilal Oswal Ltd

Neutral Pidilite Industries Ltd For Target Rs. 1354 - Motilal oswal

Weak demand, liquidity concerns cast a pall on near-term growth

* Consolidated net sales grew 2.8% YoY to INR18.1b (v/s est. INR20.2b). EBITDA stood flat YoY at INR3.7b (v/s est. INR4.6b). PBT grew 5% YoY to INR3.8b (v/s est. INR4.5b). Adj. PAT grew 48.2% YoY to INR3.5b (v/s est. INR3.1b).

* Consolidated C&B segment revenues grew 1.6% YoY to INR15.4b, (1% decline in volumes)

with Segmental EBIT margin expanding 110bp YoY to 25.3%. Industrial segment grew 14.3% to INR2.9b and margins expanded 150bp YoY.

* Gross margins expanded 400bp YoY to 53.4%. Higher other expenses (+310bp YoY), attributed to higher ad-spends and higher employee costs (+140bp YoY), meant that EBITDA margin contracted by 50bp YoY to 20.4% (v/s est. 22.8%).

* 1HFY20 consol. revenue/EBITDA/PAT grew 6.5%/8.5%/35.1% YoY.

* Subsidiary performance: 2QFY20 revenue from overseas subsidiaries grew 13.7% YoY to INR1.5b; and margins expanded 300bp to 4.9%. Revenue of domestic subsidiaries declined 17.3% to INR1.4b. EBITDA dropped 31.2% YoY to INR91m; margins were down 100bp YoY.

* Concall highlights: (1) Challenging demand environment, floods and liquidity crunch affected sales for the quarter; (2) VAM costs - USD890 current cost v/s USD901 consumption cost in 2QFY20; therefore largely flattish sequentially. Have around 45 days inventory in VAM; (3) Ad-spends were 4.8% of sales for the quarter. Normal run-rate on ad-spends is usually 3.8-4.0% of sales.


* Valuation and view:

Due to significant miss on 2QFY20 expectations and uncertainty of recovery, we have reduced our EPS forecasts by 7.7%/2.7% for FY20/FY21. There has been a sharp rally in the stock over the past three years as a result of which stock price CAGR has been in mid-20s despite earnings compounding at only 5.5% CAGR over FY16-19. While PBT forecasts are healthy at ~16.5% CAGR for the next two years (led by subdued material costs), ROCE in the mid-20s level is at a substantial discount to consumer peer average of ~32%. Valuations are expensive at 49.3x FY21 EPS. Maintain Neutral.


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