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Margin outlook better for H2FY23 on lower raw material cost

Pidilite Industries (PIDI) reported Q2FY23 consolidated revenue growth of 14.7% YoY, in line with estimates (3-year CAGR of 18.6%), on a high base, with consumer & bazaar (C&B) segment revenue growing 14.1% YoY and business to business (B2B) segment revenue growing 17.2% YoY. Operating margin declined 433bps YoY (-47bps QoQ) to 16.6% due to higher raw material cost (gross margin down 441bps/71bps YoY/QoQ), resulting in EBITDA/PAT decline of 9%/11.3% YoY, respectively. Going ahead, margins are likely to improve on falling raw material prices of key commodities like VAM which will result in margin improvement from Q3 but more so from Q4 (post high-cost inventory is absorbed). Management stated demand conditions remain subdued due to inflationary impact on consumption, but is optimistic of future growth led by increased construction activity and good monsoons. We largely maintain estimates and HOLD rating on the stock with a rolled over Sept’23E target price of Rs2,655 (earlier: Rs2,504).

* Revenue growth of 14.7% YoY with all segments growing: PIDI reported consolidated revenue growth of 14.7% YoY (-2.9% QoQ; 3-year CAGR of 18.6%) driven by product mix and price hikes undertaken. Overseas subsidiaries reported 15.1% YoY constant currency revenue growth (regionally Asia grew 38% YoY, Middle East and Africa 20.3% YoY and the Americas -7.3% YoY) and 19.6% YoY growth in domestic subsidiaries. C&B segment reported a revenue growth of 14.1% YoY (flat QoQ) while B2B segment reported revenue growth of 17.2% YoY (-13.6% QoQ). Standalone revenue increased 14.9% YoY (3-year CAGR of 20%) with C&B volume growth of ~1% YoY due to high base. Management stated demand was subdued across product categories with urban demand being better than rural markets in Q2FY23. The company expects demand to be better in H2FY23 aided by good monsoon and improved construction activity. Management re-iterated its medium-term plan to grow volumes in double digit.

* Operating margin impacted by RM cost inflation: Operating margin for Q2FY23 stood at 16.6%, a decline of 433bps YoY (-47bps QoQ) due to higher raw material cost (gross margin declined 441bps/71bps YoY/QoQ), resulting in EBIDTA/PAT decline of 9%/11.3% YoY. VAM prices have softened to US$1,200-1,400MT (vs US$2491/ton consumption cost in Q2) which will benefit margins from Q3FY23 and more so from Q4 (as high-cost inventory will be absorbed by Q3). Management indicated it may be in its guided range of 20-24% margin by Q4FY23.

* Valuation and View: PIDI’s operating performance in Q2FY23 was broadly in line with estimates and with declining raw material price trend margin outlook has improved. We like the company for its franchise, strong growth prospects, innovative product portfolio, brand recall, market leadership in many categories and robust balance sheet. Maintain HOLD rating on the stock with a rolled over Sept’23E target price of Rs2,655.

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