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Healthy volume growth; rich valuations

* Pidilite Industries (PIDI) delivered 5% YoY (organic 7%) revenue growth in 2QFY25, affected by extended monsoons. Underlying Volume Growth (UVG) was healthy at 8% (>15% volume growth in tonnage). Consumer business witnessed volume growth of 6% and B2B business reported 21% volume growth. Price cuts continued to hurt value growth. The growth in rural markets continued to outpace the urban market growth, growing 2x during the quarter.

* GM expanded 300bp YoY/50bp QoQ to 54.4% (15-quarter high), owing to benign raw material prices. VAM dipped to ~USD980/t in 2QFY25 from USD1,000/t in 2QFY24. PIDI remains committed to stepping up investments in brand and customer engagement. EBITDA grew 13% (in line). EBITDA margin expanded 170bp YoY to 23.8%. The company has deferred adspends to 2HFY25. Therefore, margins are expected to moderate. We model ~23% margins for FY25 and FY26.

* PIDI continues to expand distribution, reaching ~15,000 stores under the 'Pidilite ki Duniya' program and a total of 0.6m outlets. 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 9% volume growth in FY25E and ~7%/13% revenue growth in FY25E/FY26E. ? Given rich valuations, we reiterate our Neutral rating on the stock with a TP of INR3,200 (60x Sep’26E EPS).

In-line performance; volume growth at 8%

*Subdued sales growth: Consol. sales grew at a slow pace of 5% YoY (4% in 1QFY25) to INR32.4b (est. INR32.9b), partially impacted by extended monsoon. Revenue on LFL basis (excluding Pidilite USA and Pulvitec Brazil in the previous year) grew 7%. The Underlying Volume Growth (UVG) remained strong at 8% growth (9.6% in 1QFY25). UVG was 6% for the C&B businesses and 21% for B2B businesses, led by the industrial and project verticals.

* Segmental performance: The Consumer & Bazaar (C&B) segment revenues rose 3% YoY to INR25.8b (est. INR26.1b), EBIT grew 11% YoY to INR7.7b (est. INR7.6b), and EBIT margins expanded 220bp YoY to 29.9%. B2B segment revenues grew 14% YoY to INR7.0b (est. INR6.5b), EBIT rose 52% to INR1.0b (est. INR0.7b), and EBIT margins expanded 370bp YoY to 14.8%.

* Margin expansion: Gross margins expanded ~300bp YoY to 54.4% (est. 53.3%) on benign RM prices. As a percentage of sales, employee expenses increased 170bp YoY to 13.5% and other expenses declined 30bp YoY to 17.1%. EBITDA margin expanded 170bp YoY to 23.8% (est. 23.2%).

* EBITDA up 13% YoY: With GM expansion, EBITDA grew 13% YoY to INR7.7b (est. INR7.6b). PBT grew 16% YoY to INR7.3b (est. INR7.2b). Adj. PAT increased 18% YoY to INR5.4b (est. INR5.3b).

* 1HFY25 sales/EBITDA/APAT grew 4%/14%/19% to INR 66.3b/INR15.8b/ INR11b. We model sales/EBITDA/APAT growth of 10%/12%/18% for 2HFY25.

Subsidiary companies

* International subsidiaries (excluding Pidilite USA and Pulvitec Brazil) for the quarter grew in double digits despite uncertain global economic conditions and political instability in some countries. EBITDA (excluding Pidilite USA and Pulvitec Brazil) also grew in double digits.

* Domestic B2B subsidiaries reported modest sales growth; sales of C&B subsidiaries were muted (down 9% YoY) due to demand headwinds. B2B sales up 7% YoY.

Highlights from the management commentary

* Industry demand was subdued, largely impacted by extended monsoon in several regions of the country. Management remains optimistic about demand recovery in 2HFY25, supported by increased government spending and rising construction activity, while keeping a cautious eye on geopolitical risks.

* The rural market continues to outperform the urban market, with rural growth clocking in at 2x the urban rate, driven by significant untapped penetration potential.

* VAM’s consumption costs stood at USD980/t in 2QFY25 vs. USD1,000/t in 2QFY24. Currently, it is USD800-900/t.

* The company may implement further price reductions if raw material prices decline.

* EBITDA margins for 1HFY25 were ~24% as the company deferred advertising and promotional spending to 2HFY25. Consequently, margins are expected to moderate in 2HFY25.

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 Sep’26E EPS).

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