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Remarkable result amid the second COVID wave; demand prospects healthy

* PIDI reported a strong beat v/s our estimate in its 1QFY22 result, with sales down only 4% over 1QFY20 levels, despite the lockdowns caused by the second COVID wave. Demand rebound was strong in Jun’21 and continued to sustain in Jul’21 as well.

* While gross margin was adversely impacted in 1QFY22 due to sharply higher VAM costs (up 2x YoY), leading to a 440bp YoY contraction in gross margin, there has been some reduction in VAM costs since Apr’21. The management expects gross margin to improve in 2HFY22.

* While a strong beat on our 1QFY22 expectations and continued good commentary have led to a 10.3%/7.3% increase in our FY22E/FY23E EPS forecast, valuations are rich at 69.7x FY23E EPS. We maintain our Neutral rating.

Beat on all fronts

* Consolidated net sales grew 120.6% YoY to INR19.4b (est. INR13.2b). Compared to 1QFY20 (normal quarter), net sales declined by 4%. EBITDA/PBT/ adjusted PAT grew 423.7%/821.3%/1,303% YoY to INR3.5b/INR2.9b/INR2.2b. On a like-to-like basis, EBITDA/PBT/adjusted PAT grew 396%/745%/1,170%.

* Standalone sales volume and mix stood at 105% YoY, with 103%/113% growth in sales volume and mix in C&B/B2B.

* Overall gross margin contracted by 440bp YoY to 49.1%. As a percentage of sales, lower employee expenses (-1,010bp YoY to 14.5%) and other expenses (-470bp to 16.7%) led to a 1,040bp YoY expansion in EBITDA margin to 17.9% (est. 12.8%).

* Standalone revenue in the C&B segment grew 103.8% YoY to INR12.5b. Segmental EBIT rose 125% YoY to INR3.3b. Segmental EBIT margin expanded by 250bp YoY to 26.3%.

* Standalone revenue in the B2B segment grew 135.3% YoY to INR4b. Segmental margin expanded by 1,000bp YoY to 13.7%.

* In 1QFY22, imputed subsidiary revenue grew 194.7% YoY to INR3.1b. EBITDA stood at INR481m v/s a loss of INR290m YoY (includes Huntsman numbers and hence not comparable YoY).

Highlights from the management commentary

* The management is optimistic about demand going forward unless there is a third COVID wave. It sees additional pent up demand benefits in 2QFY22.

* Spiraling RM escalation has been mitigated to some extent by a 4-6% price increase covering 75% of material cost inflation. VAM consumption costs stood at USD1,610/mt in 1QFY22, nearly 2x that of 1QFY21. While costs remain elevated, they have fallen to USD1,400-1,500/mt at present from the USD2,000/mt levels seen in Apr’21. The management expects current levels to sustain in 2Q, before softening in 2HFY22.

* Capex will remain at the higher end of the usual 4-6% sales range.

Valuation and view

* Changes to our model and good commentary on sales growth have led to a 10.3%/7.3% increase in our FY22E/FY23E EPS forecasts.

* Over the next two quarters, PIDI faces an exceptionally high base in terms of EBITDA margin. This will be compounded by the gradual recovery in margin (VAM consumption costs were up 2x YoY in 1QFY22, despite some decline from its peak) in FY22.

* Topline growth in the past two quarters is a vindication of the latent growth opportunity in the Core, Pioneer, and Growth categories. Once material costs stabilize (their ongoing rise is not driven by structural factors), earnings growth could potentially be healthy post FY22.

* While the structural investment case remains intact, valuations are expensive at 69.7x FY23E EPS. We maintain our Neutral stance with a TP of INR2,150 per share (60x Sep‘23E EPS).

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