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Higher input cost weighs on margin…

About the stock: Pidilite is a market leader in the adhesive and sealants business.

* The company’s consumer & bazaar (C&B) segment (adhesives & sealants, construction & paint chemical, art & craft materials) contributes 80% to topline while B2B segment (industrial adhesive, resins and pigments) contributes ~20% to topline

* Has 4700+ distributors, strong balance sheet (RoE, 20%, RoCE, 24%)

Q2FY22 Results: Revenue growth was ahead of our estimates while EBITDA margin was hit by higher input costs.

* Revenues were higher by 40% YoY to ~| 2626 crore (up 36% QoQ)

* Sharp fall in gross margin led to EBITDA margin decline of 634 bps YoY to 21%

* PAT increased ~5% YoY to | 376 crore

What should investors do? Pidilite’s share price has grown by ~4x over the past five years (from ~| 615 in November 2016 to ~| 2474 levels in November 2021).

* We maintain our HOLD rating on the stock

Target Price and Valuation: We value Pidilite at | 2640, 75x P/E of FY24E EPS

Key triggers for future price performance:

* The management is targeting the ‘core segment’ (i.e. adhesive, sealants) and ‘the growth’ segment to grow at 1-2x and 2-4x of GDP, respectively, in the long term

* Revival in the real estate business will be a key demand driver for C&B segment, going forward

* Addition of premium products in the portfolio such as Araldite, cost optimisation measures will help drive EBITDA margin of the company

Alternate Stock Idea: We like Asian Paints in our coverage.

* Asian Paints is the market leader in the decorative paint and expanding its product portfolios along with dealer expansion in tier II and tier III cities

* BUY with a target price of | 3425

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