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Volume growth takes hit; margin pressure sustains…

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 the B2B segment (industrial adhesive, resins and pigments) contributes ~20% to topline

* Has 4800+ distributors, strong balance sheet (RoE, 19%, RoCE, 22%)

Q2FY23 Results: Pricing led revenue growth; margin pressure continues.

* Consolidated revenue up ~15% YoY to | 3011 led by better product mix and price hikes. Standalone revenues were up ~15% YoY to | 2715 crore led by price hikes

* Higher raw material costs dragged gross margin down 441 bps YoY. On similar lines, EBITDA margins declined 433 bps YoY to 16.6% due to higher input costs and lower gross margin

* PAT declined 10% YoY to | 337.7 crore due to lower EBITDA margin

What should investors do? Pidilite’s share price has grown by ~3.3x over the past five years (from ~| 814 in August 2017 to ~| 2649 levels in November 2022)

Target Price and Valuation: We value Pidilite at | 2965, 72x 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 (APL) in our coverage universe. APL is India’s largest decorative paint company. It derives ~98% revenue from the paints business. Robust b/s with RoCE, RoE of 30%, 25%, respectively

* BUY with a target price of | 3685

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