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Margins under severe pressure

Pidilite Industries (PIDI) posted Q3FY22 consolidated revenue (up 24% YoY) and EBITDA (down 14.3% YoY) ahead of our estimates. On a twoyear basis, consolidated revenue and EBITDA were up 48% and 18.5%, respectively. Overall volume and mix grew 9.4% YoY. Consumer and bazaar sales grew 22.5% YoY (volume and mix up 9% YoY), led by growth across all categories. B2B segment grew 30.2% YoY, led by 13% volume growth. Gross and EBITDA margin saw 1117bps YoY and 861bps YoY compression due to heavy inflation.

Overall, Covid’s disruption and inflation pressure in the near-term are headwinds. However the long-term structural story of PIDI remains intact. Retain ‘BUY’ with a TP of INR2,980.

Robust all-round growth; margin under pressure

What we like: Revenue and EBITDA came in ahead of our estimates. On a two-year basis, consolidated revenue and EBITDA were up 48% and 18.5%, respectively. Consumer and B2B segments recorded sales growth of 22.5% and 30.2% YoY, respectively. Consumer and B2B segment recorded robust volume growth of 9% and 13% YoY, despite high base. ICA Pidilite and CIPY sales grew YoY by 36.7% and 28.5%, respectively. PAPL reported its highest quarterly revenue since acquisition.

What we did not like: The quarter saw unprecedented inflation, which led to gross and EBITDA margin witnessing 1117bps YoY and 861bps YoY compression, respectively. Nina Percept sales grew merely 2.6% YoY. PAPL margins are down 1152bps YoY and 278bps QoQ.

Q3FY22 conference call: Key takeaways

VAM Q3FY21 prices were around USD1000/MT, December VAM prices were USD2500/MT. Spot prices are USD2000/MT. By March next year, company will have 60-70% capacity utilisation and runway for growth for two years. Company expects raw materials to start cooling off by the end of Q4FY22 or start of FY23.

Outlook and valuation: Structurally strong; maintain ‘BUY’

Uptick in demand in FY23, entry into adjacent categories and demand shift from the unorganised to the organised players are likely to boost PIDI’s revenue. Rolling forward valuation to June 2023 we revise up the TP to INR2980 (from INR2,820) and maintain ‘BUY/SO’. The stock is trading at 64.4x FY23E EPS.

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