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Sales momentum healthy, margin to recover with a lag

* Sales growth was ahead of our estimate (three-year growth CAGR of 15% is healthy) and led to comfortable beat on our forecasts despite a higher than expected material cost impact.

*  The management indicated continued pressure on margin in 2Q (likely to be worse than 1Q), before recovering in 2HFY23 on lower crude-related RM costs going forward

* While the earnings outlook is healthy, valuations are rich at 64x FY24E EPS. We maintain our Neutral rating..

All-around beat in 1QFY23

* Net sales jumped 60.1% YoY to IN31b (est. INR25.6SWb). ? Overall gross margin contracted by 740bp YoY to 41.7% (est. 44%).   * As a percentage of sales, lower employee/other expenses (down 430bp/ 220bp YoY to 10.2%/14.4%) restricted EBITDA margin contraction to 90bp at 17.1% (est. 15.8%).

* EBITDA grew 52.3% YoY to INR5.3b (est. INR4b).

* PBT jumped 63.4% YoY to INR4.7b (est. INR3.4b). .

* Adjusted PAT increased 64.4% YoY to INR3.5b (est. INR2.5b) in 1QFY23.

* Segmental| Consumer and Bazaar (C&B): Revenue grew 63.9% YoY to INR24.4b, with EBIT up 44.5% to INR5.4b. Segmental EBIT margin, however, contracted by 290bp YoY to 22% in 1QFY23. B2B: Revenue rose 49.8% YoY to INR7.2b, with EBIT surging 78.1% YoY to INR748m. Segmental EBIT margin expanded by 170bp YoY to 10.4% in 1QFY23

Highlights from the management commentary.

* Prices of VAM continue to increase. Consumption cost in 1QFY23 stood at USD2,230/MT v/s USD1,680/MT in 1QFY22.

* A large part of the inputs purchased in 1Q will see the impact on profitability in 2QFY23. Hence, the cost of consumption can be USD2,300- 2,500/MT in 2QFY23.

*  An effective price increase of 14-18% has been taken in the past few quarters, with Fevicol seeing an increase at the higher end of that range.

* It continues to gain share in its core White Glue segment, despite competition from ASTRA and Paint companies. APNT is the only player to have attained some volumes here, and uncharacteristically its pricing of its White Glue product is much lower than its peers. * PIDI’s rural reach continues to increase. The management said that when rural incomes see a spurt, the extra income is usually is spent on gold or construction – the latter is a strong play for PIDI.

 Valuations and view

Beat on our 1Q estimates and expected decline in RM costs from 2HFY23 led to an 18%/11% increase in our FY23/FY24 EPS forecasts.

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