Accumulate Pidilite; target of Rs 770: Prabhudas Lilladher

Prabhudas Lilladher's research report on Pidilite

PIDI 2Q numbers show the impact of continued slowdown in demand and prolonged monsoons. Consumer and Bazaar Volume growth of 7.8% has been resilient; however the recovery might be delayed due to recent ban on Rs 500/1000 notes. All the major acquisitions of past like Bluecoat, Falcofix, Woodcoat and Nina have added new brands and product range to the company. Medium term outlook looks good given expected upsurge in demand and benefits of GST in lower taxes and logistics and distribution costs. IBD has seen pressure on margins due to one-offs in Bangladesh and North America and rising overheads in the Middle East; rising scale will increase profitability in SAARC and Middle East after a while.

PIDI’s margin outlook seems robust in the near term as the VAM prices are ruling between USD 750‐800; margins could start softening once the crude prices cross US$50‐$60. We are factoring in 50bps expansion in gross margins and 120bps expansion in EBITDA margins in FY17 and 180bps decline in gross margins and 140bps decline in EBITDA margins in FY18. We estimate 21.5% PAT growth in FY17 and 13.1% PAT growth in FY18. We expect premium valuations to sustain, given strong brands and long‐term growth potential. Retain ‘Accumulate’ with target price of Rs 749 on SOTP.