Sell Pidilite Industries Ltd For Target Rs.2,200 - Emkay Global
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Steady volumes; margin pressure continues
* PIDI delivered a healthy 24% sales growth in Q3, in line with estimates, driven by 9% growth in volumes. EBITDA/PAT declined 14%/19% and were below estimates by 8-12%.
* The Consumer & Bazaar segment grew by 20%, with 9% volume growth. The B2B segment grew by 35%. Management anticipates some demand impact in Q4 due to Covidrelated restrictions, but remains optimistic about demand recovery from Q1FY23.
* VAM prices were up 120%+ yoy to ~US$2,000/tonne in Q3, affecting gross margins (down 11ppts). Management stated that VAM prices have fallen from US$2,500/tonne to US$2,000/tonne in Jan and are expected to fall further by the year-end. The additional price hike effected in Jan should offset the inflationary pressure.
* We estimate a moderation in inflation and a recovery in margins in FY23-24E. However, current valuations, at 68x FY24E EPS, remain expensive. Maintain Sell with TP of Rs2,200, based on 58x Mar’24E EPS.
* Volume grows 9%; Consumer & Bazaar grows 20%: Sales grew by 24%, with similar growth in the domestic business, led by 9.4% growth in volumes. The Consumer & Bazaar segment grew by 20%, with 10% volume growth, while the B2B segment grew by 35%, with 13% volume growth. Growth in international subsidiaries was muted at 3% due to a 25% decline in Americas. Domestic subsidiaries saw strong growth, and revenues grew by 55%, partly aided by the PAPL acquisition in Q3FY21. Management commentary indicated some near-term demand impact on account of Covid-related restrictions, but it remains optimistic and expects demand recovery from Q1FY23.
* Margins under pressure from high VAM and crude prices; VAM prices expected to moderate: Gross margins fell by 11ppts due to the sharp increase in VAM prices (up 120% to ~US$2,000 /tonne from US$876/tonne in Q3FY21) and an increase in other crudebased inputs. In December, VAM prices were at a peak of ~US$2,500/tonne, but they have since fallen to US$2,000/tonne in Jan. Management expects VAM prices to moderate further by March. Overhead spending has seen a lower increase, restricting the decline in EBITDA margins, highlighting PIDI’s cost-saving efforts. Management highlighted a strong focus on all cost lines, leading to these savings.
* Other con-call highlights: PIDI effected an additional price increase in Jan. As per management, if VAM prices fall to US$1,500, it won’t need more hikes. PIDI has been stringent on all cost heads and has done zero-based budgeting across the board. Management is optimistic on the home improvement space, with renovations and home upgrades boosting demand.
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