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Lockdowns and high input prices dent earnings

* PIDI posted a lower-than-expected performance in Q1FY22, with sales/EBITDA missing our estimates by 11%/23%. Sales grew 120% (-4% 2-year CAGR), with organic growth of 113%. EBITDA margins contracted 270bps qoq due to high input inflation.

* The overall commentary was fairly positive and highlighted recovery trends since Jun’21. The distribution expansion remains in focus. It highlighted expansion of the manufacturing set-up with 12 new facilities which is expected to strengthen its supply chain network.

* Margin pressure is likely to peak in Q2. The recent correction in VAM prices by 20-25% from the peak is likely to reduce cost inflation in H2. Price hikes and moderation in VAM prices may drive qoq improvement in H2, but very high comparables will limit earnings.

* Given the improving growth outlook amid a revival in real estate/construction activities, we value PIDI at 50x Sep’23E, in line with peers. However, we maintain Sell with a revised TP of Rs1,730 (from Rs1,360) as valuations at 69x FY23E remain unattractive.

Strong growth on low comparables; demand recovering since Jun’21: Consolidated sales rose 121% (113% excl. PAPL) on low comparables to Rs19.4bn (-4% 2-year CAGR). Consumer and Bazaar grew 112% and Industrial recorded strong 156% growth. Domestic volume increased by 105%. Overseas subsidiaries grew 80%, driven by a strong turnaround in Asia with 129% sales growth on a low base. The performance of domestic subsidiaries was strong, with 340% sales growth (excl. PAPL) on a low base, driven by 667% growth in Nina. However, the sequential performance was muted with a 33% sales decline (incl. PAPL) as the month of May’21 was impacted by Covid-related curbs. Management highlighted recovery trends since Jun’21 and remained fairly optimistic about the growth outlook, aided by pent-up demand and distribution gains. To improve the supply chain, it is expanding the manufacturing set-up by adding 12 new facilities that are expected to be completed by FY22.

Sharp rise in input prices; margin pressure to recede in H2: Gross margin contracted 440bps due to higher VAM prices (USD1,610/mt vs. USD1,200 in Q4FY21 and USD823 in Q1FY21). The EBITDA margin expanded by 1,040bps YoY (down 270bps QoQ), driven by lower employee costs at 14% of sales (vs. 25% last year) and lower other overhead spends. Management expects margin pressure to peak in Q2 and moderate in H2, with VAM prices falling to ~USD1,500 now. It has taken a 4-5% price hike and expects that a further moderation in VAM prices will help to recover margins in H2 to its target range (22-23%).

Margin pressure to limit upsides; maintain Sell: While the growth outlook remains healthy, margin pressure and high comparables are likely to restrict earnings growth in the near term. Given the improving growth outlook amid a revival in real estate/construction activities, we now value PIDI at 50x Sep’23, in line with peers. However, we maintain Sell with a revised TP of Rs1,730 (from Rs1,360) as valuations at 69x FY23E remain unattractive.

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