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Buoyant volume growth; rich valuations

* Pidilite Industries (PIDI) reported consolidated revenue growth of 8% YoY in 3QFY25, with underlying volume growth of 10% (est. 9%). The consumer business witnessed value and volume growth of 5% and 7% YoY, reflecting a similar trend in 9MFY25. B2B business reported 19% and 22% value and volume growth. The impact of price cuts is diminishing, with the value and volume gap narrowing to 200bp vs. >400bp in 1HFY25.

* Demand has shown some softness, particularly in the urban market. Rural growth continues to outperform urban growth. We model a 9% volume growth in FY25E and ~7%/13% revenue growth in FY25E/FY26E.

* GM expanded 140bp YoY and remained flat QoQ at 54.3%, driven by benign raw material prices. VAM dipped to ~USD884/t in 3QFY25 from USD902/t in 3QFY24 and is anticipated to remain stable in the near term. PIDI remains focused on reinvesting in branding and customer acquisition. EBITDA margin was flat YoY at 23.7%. EBITDA grew 7%.

* Consolidated EBIT growth for the consumer business stood at 2% YoY (12% in 1HFY25) and B2B business EBIT growth stood at 78% (34% in 1HFY25).

* PIDI’s volume growth trajectory is inspiring, particularly in the current challenging environment. Operating margins are at elevated levels (>23% EBITDA margin), and it will be crucial to monitor whether the company can sustain such high levels. Given rich valuations, we reiterate our Neutral rating on the stock with a TP of INR3,200 (60x Dec’26E EPS).

Volume-led growth sustains; miss on EBITDA

* Strong volume growth sustains: Consolidated sales grew 8% YoY to INR33.7b (est. INR33.8b). Underlying volume growth remained strong at 9.7% (9.0% est., 8.0% in 2QFY25). UVG was 7.3% for the Consumer & Bazaar (C&B) business and 21.7% for the B2B business.

* Slow C&B EBIT growth: The C&B segment’s revenue was up 5% YoY to INR26.7b (est. INR26.7b), with segmental EBIT growing 2% YoY to INR7.9b (est. INR7.7b). Segmental EBIT margin contracted 90bp YoY to 29.4% during the quarter.

* B2B outperformance continues: B2B segment’s revenue rose 19% YoY to INR7.6b (est. INR6.6b), with segmental EBIT increasing 76% to INR1.3b (est. INR0.8b). Segmental EBIT margin expanded 580bp YoY to 17.6%.

* Flat EBITDA margin: Gross margin expanded ~140bp YoY to 54.3% (in line) fueled by moderate RM prices. Employee expenses were up 16% YoY and other expenses rose 11% YoY. EBITDA margin was flat YoY at 23.7% (est. 24.6%). EBITDA grew 8% YoY to INR8.0b (est. INR8.3b). PBT grew 9% YoY to INR7.5b (est. INR7.9b). Adj. PAT increased 9% YoY to INR5.6b (est. INR5.9b).

* Subsidiary performance: Domestic subsidiaries delivered double-digit revenue growth with improvement in EBITDA margin. Owing to global economic uncertainty, inflation, and political instability in some countries, the company’s international subsidiaries (excluding Pidilite USA and Pulvitec Brazil) reported modest sales growth.

Highlights from the management commentary

* The company is witnessing some softness in both urban and rural markets at the macro level; however, rural growth continues to outperform urban growth. The Pidilite core category is under strain due to the subdued demand environment. Management remains cautious about demand recovery in the near term as there is no significant increase in consumer disposable income.

* Around 70% of revenue is derived from the repair and renovation segment, while the remaining 30% comes from new construction. Both new and regular construction activities are witnessing a slight slowdown across geographies.

* Input costs are expected to remain stable over the next two months. However, given the uncertain geopolitical conditions, fluctuations are anticipated in the medium team.

* Management is open to exploring opportunities in the EV and semiconductor sectors, given their high growth potential.

Valuations and view

* We broadly maintain our EPS estimates for FY25 and FY26.

* PIDI’s core categories still enjoy GDP multiplier; the advantage of penetration and distribution can help PIDI deliver healthy volume-led growth in the medium term. EBITDA margin is already at an elevated level (22% in FY24). We do not model much expansion as growth drivers (consumer acquisition, distribution expansion, and brand investments) will require high opex. We build in a CAGR of 14%/17% in EBITDA/PAT during FY24-26E.

* PIDI stands out for its market-leading position in the adhesives market, along with a strong brand and a solid balance sheet. However, we believe the current valuation limits the upside potential. We reiterate our Neutral rating on the stock with a TP of INR3,200 (premised on 60x Dec’26E EPS).

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