IGI Logo

Sustained robust volume growth; rich valuations

* Pidilite (PIDI) delivered 8% YoY revenue growth in 4QFY24, with healthy 15% volume growth. Consumer business saw volume growth of 13% and B2B business reported 25% volume growth. Price cuts continued to impact value growth. Urban and rural markets witnessed double-digit growth, with rural growth outpacing urban growth.

* GM expanded by 660bp YoY/50bp QoQ to 53.4%, owing to benign raw material prices. VAM dipped to ~USD925/t from USD1,300/t in 4QFY23.

* PIDI remains committed to stepping up investments in brand and customer engagement. Overhead expenses were higher than our expectation (A&P spending up 70%). As a result, EBITDA margin saw a limited expansion of 280bp YoY and declined 400bp QoQ to 19.9% (est. 23.5%).

* The management maintains its EBITDA margin guidance in the range of 20- 24% for the medium term. The company also aims to grow faster than the market (8-9% volume growth). We believe overhead expenses will remain high as PIDI aims to boost penetration (rural reach), consumer acquisition and new launches. We model 22-22.5% EBITDA margin in FY25/FY26.

* Given rich valuations (66x/57x on FY25E/FY26E EPS), we reiterate our Neutral rating on the stock with a TP of INR2,800 (55x FY26E EPS).

Double-digit volume growth; miss on EBITDA margin

* Volume growth remains strong: Net sales grew 8% YoY to INR29.0b (est. INR28.2b), with healthy volume growth across categories and geographies, along with mix improvement. Underlying volume growth remained strong at 15% (10% in 3QFY24), with 13% growth in C&B businesses and 25% growth in B2B businesses.

* Segmental performance: Consumer & Bazaar (C&B) revenue grew 6% YoY to INR22.5b, EBIT increased 20% YoY to INR5.4b and EBIT margins rose 270bp YoY to 24.2%. B2B segment revenue grew 12% YoY to INR7.1b, EBIT increased 18% to INR835m and EBIT margins expanded 60bp to 11.8%.

* EBITDA up 26% YoY: Gross margins expanded ~660bp YoY to 53.4% (est. 52.7%). As a percentage of sales, higher employee expenses (+110bp YoY to 12.9%) and other expenses (+280bp YoY to 20.7%). Higher overhead expenses limited EBITDA margin expansion to 280bp YoY (down ~400bp QoQ) to 19.9% (est. 23.5). EBITDA grew 26% YoY to INR5.8b (est. INR6.6b). PBT grew 27% YoY to INR5.0b (est. INR6.0b). Adj. PAT increased 32% YoY to INR3.8b (est. INR4.5b).

* FY24 performance: Net sales/EBITDA/APAT grew 5%/36%/42% to INR123.8b/INR27.1b/INR18.2b.

Highlights from the management commentary

* Strong revenue growth was supported by a robust 15% volume increase, as the C&B and B2B segments posted 13%/25% growth.

* The two-year volume CAGR is 14%/ 16% for the C&B and B2B segments, with an overall CAGR of 15%. The four-year volume CAGR is 13%.

* Both urban and rural markets saw double-digit growth, with rural growth outpacing urban growth.

* VAM’s consumption costs stood at USD925/t vs. USD1,300/t in 4QFY23.

* EBITDA margin would be in the range of 20-24% in the medium term.

* For PIDI, pioneer categories accounted for 45% of the business, while the remaining 55% was attributed to core categories.

* Near-term softness in demand can be attributed largely to ongoing elections, particularly affecting sectors like building materials due to a shortage of labor.

Valuations and view

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

* PIDI’s core categories still enjoy GDP multiplier; 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 15%/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 INR2,800 (premised on 55x FY26E EPS).

Please refer disclaimer at Report
SEBI Registration number is INH000000933