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Sustains healthy volume growth; but rich valuations

* Pidilite (PIDI) delivered 4% YoY (organic 6%) revenue growth in 1QFY25, affected by election-related restrictions and heatwaves. Underlying volume growth (UVG) was healthy at 9.6% (~19% volume growth in tonnage). Consumer business saw volume growth of 8% and B2B business reported 18% volume growth. Price cuts continued to hurt value growth. The growth in rural markets continued to outpace urban market growth.

* GM expanded by 480bp YoY/40bp QoQ to 53.8% (14-quarter high), owing to benign raw material prices. VAM dipped to ~USD1,022/t from USD1,137/t in 1QFY24. PIDI remains committed to stepping up investments in brand and customer engagement. EBITDA grew by 15% (in line). EBITDA margin expanded by 240bp YoY to 23.9%.

* PIDI continues to expand distribution, reaching ~14,000 stores and ~10,000 villages under the 'Pidilite ki Duniya' program. The management maintains double-digit UVG guidance for FY25 and anticipates the gap between volume and value growth to narrow down in 2HFY25. We model 15% volume growth in FY25E and ~10%/13% revenue growth in FY25E/FY26E.

* Given rich valuations, we reiterate our Neutral rating on the stock with a TP of INR2,950 (55x Jun’26E EPS).

Healthy volume growth; in-line EBITDA

* Subdued sales growth: Consol. sales grew at slow pace of 4% YoY (8% in 4QFY24) to INR34.0b (est. INR35.0b). Growth was affected by electionrelated restrictions and the impact of heatwaves on construction activities. Revenue on LFL basis (excluding Pidilite USA and Pulvitec Brazil in previous year) grew by 6% YoY. Volume growth remained strong at 9.6% (15% in 4QFY24), with 8% growth in C&B and 18% growth in B2B businesses.

* Segmental performance: Consumer & Bazaar (C&B) segment revenue rose 3% YoY to INR27.4b (est. INR26.6b), EBIT increased 14% YoY to INR8.0b (est. INR7.1b), and EBIT margins expanded 270bp YoY to 29.3%. B2B segment revenue was up 7% YoY at INR7.3b (est. INR6.8b), EBIT increased 20% to INR1.1b (est. INR0.9b), and EBIT margins expanded 170bp YoY to 15.2%.

* Margin expansion: Gross margins expanded ~480bp YoY to 53.8% (est. 52.8%) on moderate RM prices. As a percentage of sales, employee expenses increased 140bp YoY to 12.3% and other expenses rose 100bp YoY to 17.6%. EBITDA margin expanded 240bp YoY to 23.9% (est. 23.2%).

* Double- digit growth (%) - EBITDA grew 15% YoY to INR8.1b (est. INR8.1b). PBT rose 19% YoY to INR7.7b (est. INR7.5b). Adj. PAT increased 21% YoY to INR5.7b (est. INR5.7b).

Subsidiary companies

* Revenue from international subsidiaries (excluding Pidilite USA and Pulvitec Brazil) grew by 9% YoY, with EBITDA margins up 190bp YoY.

* Revenue from domestic subsidiaries remained flat, with healthy EBITDA margins.

Highlights from the management commentary

* The management remains optimistic about demand, expecting a boost from a healthy monsoon season and the upcoming festive season.

* PIDI aims to achieve growth of 1-2x of GDP in its core category and 2-4x in its growth category.

* The current ratio of core vs. new category products is 55:45, compared to 80:20 about 7-8 years ago.

* The company implemented mid-single-digit price cuts in FY24 but has not made significant cuts in 1QFY25. Further price cuts may be considered if raw material prices decline.

* There is double-digit growth in rural markets, with the B2C category performing well. In the rural market, 90% of revenue growth is coming from same-store sales.

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%/18% 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 INR2,950 (premised on 55x Jun’26E EPS).

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