Sachin Pal Moneycontrol Research
Pidilite Industries, popularly known through its brand Fevicol, reported a mixed set of earnings in Q1 FY19. The company delivered another quarter of double-digit volume growth which resulted in robust topline growth. Profits, however, remained flat on account of a decline in gross margin, increase in interest costs and higher tax outgo.
Consolidated net sales increased 20 percent year-on-year (YoY) to Rs 1,834 crore. Operating profit increased 19 percent to Rs 382 crore from Rs 321 crore in Q1 FY18. Margin dipped on account of increasing raw material cost, partially offset by lower employee expenses. Bottomline increased by just 6 percent to Rs 240 crore on account of a sharp jump in finance costs, along with lower other income.
The company witnessed double-digit volume growth of around 18 percent in the domestic consumer business and gained market share in few product categories. Reported volume growth came in higher as Pidilite reported a minor volume contraction in Q1 FY18 on account of rollout of the Goods & Services Tax. Volumes in the domestic industrial business grew around 7 percent, amid increased competitive intensity.
Overall, the demand environment seems to be on an uptrend as the company has delivered its fourth successive quarter of strong volume growth and has gained some market share from both the organised and unorganised segments.
Adjusted for GST, consumer and bazaar products segment grew 23 percent and industrial products rose 11 percent. The growth in profit was driven by the consumer facing business as the industrial business remained fairly stagnant.
Prices of vinyl acetate monomer (VAM), a key raw material for Pidilite, have seen a sharp increase from $800/tonne last year to $1200/tonne in the quarter gone by. This has resulted in a gross margin contraction of 250 bps YoY. Price have increased further since last quarter and are hovering around $1,320/tonne at present. Accordingly, the company has undertaken some price hikes (3-4 percent) on selective products to mitigate rising input costs.
Outlook and recommendation The management is targeting volume growth of 14-15 percent in the consumer segment. The same for the industrial business is expected to be lower due to increased competitive intensity and a slowdown in the construction sector.
On the margin front, it expects some rationalisation from last year (FY18 EBITDA margin: 22.1 percent) due to increase in VAM prices. Over the medium term, it has guided at an operating margin of 21-22 percent.
Pidilite trades at rich valuations on account of its strong market leadership position and high brand recall. Volume uptick in the past few quarters suggest that the management has been a key beneficiary of the GST rollout as the sector has seen a minor shift from unorganised to organised trade. The stock has risen by over 20 percent on year-to-date basis and is trading near record highs.
The stock is currently valued at around 47 times FY20e earnings. We maintain a cautious view on the stock as current valuations offer limited upside and considering the fact that the company could see some margin pressure in coming quarters.
For more research articles, visit our Moneycontrol Research page
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
