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Input cost inflation impacts performance

Pidilite Industries (PIDI) reported sharp fall in EBITDA margin to 20.6% (I-Sec: 21.8%), down 790bps QoQ led by steep decline in gross margins by 390bps QoQ on the back of substantial increase in VAM and other input costs. However, standalone Consumer & Bazaar volume growth remained robust at 45.3% YoY led by strong growth across major categories. Consolidated revenue too was up 45.3% YoY at Rs22.4bn (I-Sec: Rs22.9bn). B2B segment continued to recover sequentially.

Araldite reported strong double-digit growth but margins were impacted due to higher input cost. We believe growth prospects remain robust on the back of market share gains, continuous innovation, increasing penetration in rural, DIY and E-commerce business. However, gross margins are likely to remain challenged in the near term despite the recent price increases which would largely cover up for 75% of the cost inflation. Downgrade to HOLD.

* Valuation and outlook:

Factoring in Q4FY21 performance, we cut our EBITDA margin assumption by 250bps/120bps for FY22E/FY23E, respectively leading to lower earnings by 9.2%/1.5% for FY22/FY23 respectively. We now expect PIDI to report revenue and adjusted PAT CAGRs of 18.5% and 26.5%, respectively, over FY21-FY23E. We, thus, downgrade the stock to HOLD from Add (earlier) with a revised target price of Rs1,787 (earlier: Rs1,815) based on 50x FY23E earnings. Key downside/Upside risk: Sustained higher RM prices/sharp decline in VAM prices in near term.

* Consolidated sales grew 45.3% YoY.

PIDI’s Q4FY21 standalone revenue grew 41.5% YoY, while consolidated sales grew 45.3% YoY to Rs22.4bn led by 45%/26% growth in its C&B/B2B segments respectively. International subsidiaries reported growth of 29.2% YoY led by strong growth traction in Americas. Domestic subs revenue (including revenue from PAPL acquisition to the tune of Rs1.1bn) grew 94.1% YoY; however, excluding PAPL, domestic subs revenue grew 23.5% YoY largely due to a muted 3% YoY growth in Nina Percept revenue.

* EBITDA margin surprises negatively led by higher input cost.

PIDI reported 460bps/390bps YoY/QoQ decline in its consolidated gross margin to 50.8% driven by higher input costs impacting its EBITDA margin to 20.6% down 790bps QoQ. VAM prices consumption average was at US$1200/t in Q4FY21 vs US$925/t YoY. Currently, VAM prices have, however, moved up sharply to US$2000/t which PIDI expects to come down to US$1200-1500/t in the next 4-6 months. Recent price (partial) hikes and superior mix in the near term would only be able to negate the cost inflation impact partially thereby keeping likely to impact its near-term gross margins. We, thus, estimate PIDI’s consolidated EBITDA margin to get impacted in near term but regain its momentum in FY23E.

* Reported PBT at Rs4.1bn, up 62.2% YoY:

PIDI has reported a consolidated PBT of Rs4.1bn (I-Sec: Rs4.4bn), up 62.2% YoY, due to lower than expected operational performance. Consolidated adjusted PAT was at Rs3.1bn, up 62.6% YoY. We expect the company to report 26.5% PAT CAGR over FY21-FY23E.

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