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In-line performance; margin outlook improves

* Pidilite Industries (PIDI)’s 1QFY24 performance was in line, due to healthy volume expansion. The domestic C&B business clocked a sharp volume growth of 12% YoY. Meanwhile, the B2B segment posted a single-digit decline mainly due to lower exports and weaker demand from export-focused sectors.

* Its key RM, vinyl acetate monomer (VAM), continued to decline materially to ~USD1,150/t from USD2,250/t in 1QFY23. Consequently, the GP margin expanded 730bp YoY/220bp QoQ in 1QFY24. However, the company’s A&P spends rose to 3.6% of sales (from 2.1% in 1QFY23). As a result, EBITDA margin expanded to 450bp YoY to 21.6% in 1QFY24.

* Management indicated a double-digit growth in both urban and rural markets. Rural market has outpaced urban consistently. Although the sharp reduction in raw material cost could lead to healthy earnings growth over FY23-FY25, expensive valuations compel us to reiterate our Neutral rating on the stock

Sales lower than estimated, performance in line

* PIDI’s net sales grew 5.6% YoY to INR32.8b (vs. est. INR34.6b). The threeyear/four-year sales CAGR stood at 55.0%/12.9%.

* Consumer & Bazaar (C&B) segment’s revenue rose 9.2% YoY to INR26.6b with segmental EBIT increasing 32.3% YoY to INR7.1b. Segmental EBIT margin improved 460bp YoY to 26.6% in 1QFY24.

* B2B segment revenue declined 6.1% YoY to INR6.8b with segmental EBIT increasing 22.5% YoY to INR917m. Segmental EBIT margin expanded 320bp to 13.5%.

* Overall gross margin expanded 730bp YoY to 49.0% (est. 48.6%).

* As a percentage of sales, higher employee expenses (+70bp YoY to 10.9%) and other expenses (+210bp YoY to 16.6%) implied 450bp YoY expansion in EBITDA margin to 21.6% (est. 20.2%) in 1QFY24.

* EBITDA grew 33.5% YoY to INR7.1b (est. INR7.0b). The three-year/four-year CAGR stood at 120.0%/12.3%.

* PBT jumped 37.3% YoY to INR6.5b (est. INR6.3b). The three-year/four-year CAGR stood at 174.5%/10.1%.

* Adj. PAT increased 34% YoY to INR4.7b (est. INR4.7b). The three-year/ fouryear CAGR stood at 213.9%/12.7%.

Highlights from the management commentary

* PIDI’s 1QFY24 revenue growth was mainly driven by volume growth in domestic C&B business.

* The underlying volume growth was 8% YoY, adjusting for the product mix and price changes. However, actual volume growth was 19% YoY.

* PIDI achieve overall growth of 1.5x-2.0x of GDP. Its core categories grew 1.5x of GDP and new categories surged 2-3x of GDP.

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