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* In 4QFY23, PIDI reported in-line sales and gross margin, while EBITDA came in ~12% lower than our expectation due to increased marketing expenses. The rural and semi-urban markets grew faster than the urban market for the first time in the past few quarters.

* In the paints business, PIDI launched decorative paint, ‘Haisha’, after a careful survey and receiving input from dealers. It is currently launched in test markets (AP and Telengana) and the company will not rush to launch it nationally. PIDI will use the existing distribution network and facilities for ‘Haisha’ and it has adequate capacity to scale it if required.

* Although the sharp material cost reduction could lead to healthy earnings growth over FY23-FY25, expensive valuations lead us to reiterate our Neutral rating on the stock.

Sales and GM in line; EBITDA margin below estimate

* PIDI’s net sales grew 7.3% YoY to IN26.9b (in line) in 4QFY23.

* Consumer & Bazaar (C&B) segment’s revenue was up 10.4% YoY at INR21.1b, EBIT improved 9.2% YoY to INR4.6b, and EBIT margin remained flat at 21.6% during the quarter.

* B2B segment’s revenue remained flat at INR6.3b, EBIT rose 59.3% to INR707m, and EBIT margin expanded 430bp to 11.2%.

* Overall gross margin expanded 330bp YoY to 46.8% (est. 47.0%).

* As a percentage of sales, higher employee expenses (+70bp YoY to 11.8%) and other expenses (+150bp YoY to 17.9%) resulted in a 110bp expansion YoY in EBITDA margin to 17.1% (est. 19.5%).

* 4QFY23 EBITDA grew 14.5% YoY to INR4.6b (est. INR5.2b).

* PBT grew 15.7% YoY to INR3.9b (est. INR4.4b).

* PIDI’s adj. PAT increased 15.3% YoY to INR2.9b (est. INR3.2b) in 4QFY23.

* FY23 sales/EBITDA/adj. PAT rose 18.9%/7.4%/7.3% to INR118b/INR19.8b/ INR12.8b.

Highlights from the management commentary

* 4Q revenue growth was primarily driven by domestic demand.

* Demand uncertainty in the international market is due to fears of recession in the west and currency crises in some developed countries.

* VAM consumption costs in 4QFY23 fell to USD1,300/ton from USD2,000/ton in 3QFY23. The current ordering rate is ~USD1100/ton.

* Araldite – There was RTM change in the distribution of araldite wherein a layer of distribution has been removed. As a result, primary sales were affected in 4QFY23, while there was no impact on secondary sales.

* Management noted that PIDI is investing in five major areas: 1) route-tomarket, 2) increasing advertisement expense and sales promotion, 3) taking Digital initiatives by expanding e-commerce, 4) innovation, and 5) people.

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