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Remarkable sales performance; severe pressure on margin ahead

* PIDI delivered a strong topline performance in 4QFY21. Even if we were to exclude the addition of the first full quarter of the Huntsman business (4.5% of sales in 4QFY21), which was acquired in Nov’20, sales grew by 37.6% YoY.

* Vinyl acetate monomer (VAM) prices have doubled in Apr-May’21 from consumption cost of USD970/mt in 3QFY21. The management guided that despite price increases and cost savings, margin will be impacted over the next 2-3 quarters until material cost stabilize some time in 2HFY22.

* On demand trends, management indicated that unlike the impact seen during the first COVID wave in 1QFY21, rural and small towns in India have also been affected in the ongoing second wave. It said that the B2B business (~15% of sales) has not been affected so far.

* We expect the company to bounce back strongly post the lifting of lockdowns and perform similar to what they did last year after a 56.5% decline in sales in 1QFY21. Full year sales for the Huntsman business and its higher operating margin (12-13 percentage points higher than PIDI’s business) would limit sales and margin impact in FY22 to some extent. The structural story remains attractive, but valuations at 66x FY23E EPS are expensive. Maintain Neutral.

Strong growth on all fronts; addition of Hunstman means performance v/s estimates are not comparable

* Consolidated net sales grew 44.7% YoY to INR22.4b in 4QFY21. EBITDA/PBT/adjusted PAT grew 53.1%/62.2%/63.6% YoY to INR4.6b/INR4.1b/INR3.1b.

* Standalone sales volume and mix growth stood at 39.7% YoY, with 45.3%/25.9% sales volume and mix growth in the C&B/B2B segment.

* Overall gross margin fell 460bp YoY to 50.8%. As a percentage of sales, lower employee expenses (down 200bp YoY to 11.8%) and lesser other expenses (down 360bp to 18.4%) led to 110bp EBITDA margin expansion to 20.6%.

* Revenue for the standalone Consumer and Bazaar (C&B) segment rose 46% YoY to INR14.5b. Segment EBIT grew 51.4% YoY to INR4.3b. Segmental EBIT margin expanded 110bp YoY to 29.6%.

* Standalone Business-to-Business (B2B) segment grew 26.3% YoY to INR4.2b. Segmental margin declined 780bp YoY to 14.4%.

* Performance of subsidiaries in 4QFY21: Revenue from overseas subsidiaries grew 29.2% YoY to INR1.8b. EBITDA came in at INR126m v/s a loss of INR2m YoY. Revenue from domestic subsidiaries grew 94.1% YoY to INR3b and EBITDA grew 512.1% to INR424m. Excluding Pidilite Adhesives Pvt (Huntsman acquisition), revenue from domestic subsidiaries grew 23.5% YoY to INR1.9b, while EBITDA grew 16.4% YoY to INR81m.

* PIDI’s board of directors has recommended a dividend of INR8.5/share.

Highlights from the management commentary

* VAM costs have doubled over the last few months to USD2,000/mt at present, which is a steep rise even over 3Q/4QFY21 average consumption cost of USD970/USD1,200 per mt.

* While PIDI took a round of price increases in Mar’21 and another one in May’21 to offset the 75% cost increase, it expects margin to be under pressure over the next few quarters, despite pricing and cost actions.

* Despite the COVID-19 outbreak, PIDI continues to invest for long-term growth. It embarked on seven brownfield projects and one greenfield project in India during FY21. It will continue to have an annual capex of INR3-3.5b, with 8-9 smaller greenfield projects coming up.

Valuation and view

* Despite the addition of the Huntsman business (4.5% of sales in 4QFY21 with 12- 13% higher operating margin) to our FY22E forecasts, our FY22E/FY23E EPS has been cut by 4.7%/3%. The management is continuing on its high capex path with a long-term growth opportunity in mind, which will result in higher than expected depreciation compared to our earlier forecasts.

* Topline growth in 4QFY21 is a vindication of the latent growth opportunity in the core, pioneer, and growth categories. Once the near-term lockdown inflicted restrictions are lifted and material cost stabilize (their ongoing rise is not driven by structural factors), earnings growth could potentially be healthy post FY22.

* PIDI has been the most consistent and is among the highest wealth creators over a long period (wealth creation note). Transformative changes are underway in the business as highlighted in our CEO track note, leading to continued strong topline growth in the medium term.

* While the structural investment case remains intact, valuations are very expensive at 66x FY23E EPS. We maintain our Neutral stance with a TP of INR1,700 per share (60x FY23E EPS).

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