Input cost uncertainty here to stay for the next 6 months – Pidilite Industries
Update on the Indian Equity Market:
On Monday, NIFTY having opened in the green, could not sustain the gains and closed at 16,214 (-0.32%). M&M (+4.1%), MARUTI (+4%), and HINDUNILVR (+2.3%) were the top gaining stocks, while, JSWSTEEL (-13.2%), TATASTEEL (-12.3%), and DIVISLAB (-9.6%) fell the most.
Within the indices, AUTO (+1.8%), IT (+1.0%), and CONSUMER DURABLES (+0.84%) were the only gainers while METAL (-8.1%), OIL&GAS (-1.6%), and PHARMA (-1.4%) were the top losers.
Excerpts of an interview with Mr. Bharat Puri, MD, Pidilite Industries (PIDILITIND) with BQ Prime on 19th May 2022:
- In FY22, Pidilite Industries has grown its revenue by 35% and the 20% volume growth was led by both the consumer as well as the B2B segments. The company had to take a 5-15% price rise throughout different categories of products.
- Higher input costs have been lowering the margins for the last 12 months. Although the management was expecting softening of input costs from the first quarter of FY23, the unprecedented Russia-Ukraine war will delay it for at least the next 6 months.
- Even though the company can pass on the higher costs, it will take calibrated pricing decisions while keeping costs tight. Previously, it only passed on about 75% to the extent of inflation and lowered its margins in the short run.
- There is a strain in demand from rural and semi-urban areas but hopefully, a good monsoon and the government’s front-loading on spending will help the second half. The real estate segment is seeing a revival with hotels and restaurants spending on renovation after the reopening of the economy. Hence revenue is not so much of an issue.
- The company has gained market share in the last 2-3 years as pandemic advantaged companies with flexible supply chains and having a presence in multiple locations. Also, the company has always focused on volume-led growth over margins as margins can always be regained.
- In the last 2 years, the Pidilite has put up 10 new facilities and made supply chains much more agile and resilient. Focusing on the next phase of growth, it has 12 more facilities under construction. It has invested heavily in going digital.
- Going forward, the company will focus on its core categories where it has a market-leading position while venturing into pioneering categories like tile adhesives, epoxy grouts, etc.
Asset Multiplier Comments
- We believe, Pidilite Industries, a market leader in the adhesive business will fare well against its peers in this high inflationary scenario. With manageable borrowings not denting the free cash flows, the company can further take a hit on the margins if required.
- Companies dealing in chemicals and allied businesses have been facing a difficult time with back-to-back events like Covid, rampant lockdowns in key raw material producer China, the Russia-Ukraine war, and rising oil prices. Times like these mostly result in the large becoming the larger.
Consensus Estimates: (Source: TIKR website)
- The closing price of PIDILITIND was ₹ 2,188/- as of 23-May-2022. It traded at 75x/58x the consensus earnings estimate of ₹ 29/38 for FY23E/FY24E respectively.
- The consensus target price of ₹ 2,250/- implies a P/E Multiple of 59x on the FY24E EPS estimate of ₹ 38/-.
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