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Demand visibility improves across segments

Pidilite Industries (PIDI) has reported a strong beat in Q3FY21 with consolidated revenue up 19.3% YoY at Rs23bn (I-Sec: Rs22bn). This was driven by 22%/12% YoY standalone volume and mix growth in consumer & bazaar (C&B) / B2B segment, respectively. EBITDA margin too rose sharply to 27.9% (I-Sec: 25.1%), up 390bps/60bps YoY/QoQ, led by lower input costs and savings in A&P spends. Robust growth was registered across all verticals driven by sustained growth momentum in rural areas and strong recovery in metros. Management remained optimistic on growth prospects across all product segments. Despite the recent increase in its input cost and higher A&P spends, we expect its EBITDA margin to remain firm in 24-26% range driven by its likely product mix improvement, cost optimisation and its ability to take partial price increases going forward. Upgrade to ADD.

* Valuation and outlook: Factoring in Q3FY21 performance, we increase our earnings estimates by 12.5%/5.3%/3.6% for FY21E/FY22E/FY23E, respectively. We now expect PIDI to report revenue and adjusted PAT CAGRs of 11.2% and 16.8%, respectively, over FY20-FY23E. We, thus, upgrade the stock to ADD from Hold (earlier) with a revised target price of Rs1,815 (earlier: Rs1,620) based on 50x FY23E earnings. Key downside risks: Further increase in VAM prices and higher competitive intensity in construction chemicals segment.

* Consolidated sales grew 19.3% YoY. PIDI’s Q3FY21 standalone revenue grew 17.9% YoY, while consolidated sales grew 19.5% YoY to Rs23bn led by double-digit growth in both its C&B and B2B segments. International subsidiaries, too, reported an impressive 21.3% YoY growth led by strong growth traction in Americas, Bangladesh and Sri Lanka. Domestic subs revenue (including revenue from PAPL acquisition to the tune of Rs591mn) grew 32.1% YoY; however, excluding PAPL, domestic subs revenue declined 1.6% YoY due to 22% YoY decline in Nina Percept revenue. With Covid-19 impact receding at a faster pace in India, we expect PIDI’s consolidated revenue to grow at 11.2% CAGR over FY20-FY23E.

* EBITDA margin surprises positively led by softer input cost and lower A&P spends. PIDI has reported 390bps YoY expansion in its consolidated EBITDA margin to 27.9% (I-Sec: 25.1%) driven by softer input costs and lower A&P spends. VAM prices consumption average was at US$875/t in Q3FY21 vs US$940/t YoY. Currently, VAM prices have, however, moved up sharply to US$1300/t which along with the gradually rising A&P spends would impact EBITDA margin in the near term. However, likely price (partial) hikes and superior mix in the near term may restrict the fall in EBITDA margin going forward. We, thus, estimate PIDI’s consolidated EBITDA margin to remain firm at 25.2%/25.7% in FY22E/FY23E, respectively.

* Reported PBT at Rs6bn, up 32.4% YoY: PIDI has reported a consolidated PBT of Rs6bn (I-Sec: Rs4.9bn), up 32.4% YoY, due to strong beat in its operational performance. Consolidated adjusted PAT was at Rs4.4bn, up 29.3% YoY. We expect the company to report 16.8% PAT CAGR over FY20-FY23E

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