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-      Pidilite (PIDI) delivered healthy 10% volume growth and in-line EBITDA in 3QFY24. The Consumer and B2B segments clocked robust double-digit volume growth. Rural and small-town markets outpaced urban markets. Value growth (4%) was impacted by price cuts.

-      GM expanded 1,100bp YoY/150bps QoQ to 53% owing to benign raw material prices. VAM continued to decline to ~USD900/t from USD2,000/t in 3QFY23.

-      PIDI remains committed to stepping up investments in brand and customer engagement. EBITDA margin expanded by 700bp YoY/150bp QoQ to 23.7% (est. 23.2%). We model 23% EBITDA margin for FY25/FY26.

-      The lending business pilot is underway and will be launched in a southern Indian city in Feb’24. A dedicated team is established to work on the program at arm's length. The INR1b commitment over two years remains unchanged, depending on the pilot's success.

-      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 at +23% is already at an all-time high. We do not model further expansion as growth drivers (consumer acquisition, distribution expansion and brand investments) will require high opex. Given rich valuations, we reiterate our Neutral rating on the stock.

Healthy volume growth; in-line EBITDA

-      Net sales grew 4.4% YoY to INR31.3b (est. INR32.3b), aided by with healthy volume growth in a challenging environment.

-      Growth was broad based as both segments reported double-digit UVG. The 3-year/4-year revenue CAGRs stood at 11%/13%.

-      Consumer & Bazaar (C&B) segment revenue rose 5% YoY to INR25.4b, EBIT grew 43% YoY to INR7.7b, and EBIT margin expanded 800bp YoY to 30.3%.

-      B2B segment revenue grew 6% YoY to INR6.4b, EBIT increased by 93% to INR757m, and EBIT margin expanded 530bp to 11.9%.

-      Gross margin expanded ~1,100bp YoY to 52.9% (est. 51.9%).

-      As a percentage of sales, employee expenses rose 160bp YoY to 11.3% and other expenses increased by 250bp YoY to 16.7%. EBITDA margin expanded by 720bp YoY to 23.7% (est. 23.2%). 

-      EBITDA grew 49.7% YoY to INR7.4b (est. INR7.5b). The 3-year/4-year CAGRs stood at 5.0%/12.5%.

-      PBT grew 64.7% YoY to INR6.9b (est. INR6.7b). The 3-year/4-year CAGRs stood at 5%/11%.

-      Adj. PAT increased by 66.8% YoY to INR5.1b (est. INR5.0b). The 3-year/4-year CAGRs stood at 5%/10%.

Highlights from the management commentary

-      Strong revenue growth was supported by a robust 10.4% volume increase as the C&B and B2B segments posted double-digit volume growth.

-      The four-year volume CAGR is 12-12.5%, primarily attributed to inorganic growth, with a significant contribution from the inclusion of Araldite.

-      VAM’s consumption costs stood at USD900/t vs. USD2,000/t in 3QFY23 and USD1,000/t in 2QFY24.

-      Both urban and rural markets expanded, with rural and small-town markets outperforming urban areas.

-      The paints business, as consistently stated, solely focuses on small towns and rural areas.

-      The waterproofing paint market is growing at a faster pace; therefore, the company will not lose market share due to the entry of new players.

-      PIDI has set up a lending business to provide small retail loans for its domain ecosystem's business growth. A separate experienced team will be assigned to this business. PIDI management would not be affected by this.

-      PIDI continues to focus on the expansion of its distribution network. It has expanded its network to 12,000 stores in 8,000+ villages under the ‘Pidilite ki Duniya’ program. It plans to add 1,000-1,500 stores every quarter.

Valuations and view

-      We broadly maintain our EPS estimates for FY24 and FY25.

-      The core categories enjoy GDP multiplier benefits. The advantages of penetration and distribution expansion can help PIDI deliver healthy volume growth in the medium term. Strong competitive positioning and execution superiority should help the company sustain the growth trends.

-      Operating margin at +23% is already at an all-time high. We do not model further expansion as growth drivers (consumer acquisition, distribution expansion and brand investments) will require high opex. We build in a CAGR of 13-14% in EBITDA and PAT during FY24-26E.

-      PIDI stands out for its market-leading position in the adhesives market 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 INR2,650 (premised on 55x Dec’25 EPS).