Demand rise and market share gain boost Pidilite's growth

Pidilite, India’s fourth-largest consumer company by market capitalisation, was among the standout performers in the September quarter. While the company beat Street estimates in Q2 comfortably, even on a two-year basis, it posted the fastest growth across consumer majors on the revenue and the operating profit metrics. 

Aided by a rebound in construction activity, higher pent-up demand, and market share gains, the company posted a 40 per cent YoY growth in revenues at Rs2,626 crore. This was over 12 per cent higher than consensus estimates. After adjusting for the acquisition of Huntsman Advanced Materials (Araldite brand), organic growth came in at 33 per cent. The company highlighted that there has been broad-based demand recovery led by higher mobility and an uptick in real estate and construction activity.

In addition to increased distribution in smaller towns (30 per cent of revenue) which is driving growth, Pidilite is gaining share amid rising input costs. The company’s managing director, Bharat Puri, highlighted in the Q2 investor call that the firm has consistently gained share through the Covid period in most of its core segments, as well as growth categories from unorganised, small, and regional players. In an inflationary environment, the working capital situation of smaller players has worsened, making it difficult for them to match the supply chain and pricing advantage of Pidilite, say analysts.

Volume growth that came in at 25 per cent for the domestic business, coupled with price increases and expected uptick in demand, should keep revenue growth momentum strong.

Even as growth trends are strong, the owner of brands -- such as Fevicol, Dr Fixit and Fevikwik — is facing rising raw material pressures. The gross margin contracted over 1,000 basis points to 45.4 per cent as the prices of vinyl acetate monomer or VAM, a key input, rose 1.5 times over the past year. However, lower employee costs and other expenses as a proportion of sales helped it restrict the operating profit margin contraction to 630 basis points to about 21 per cent. The average price of VAM at $2,071 per tonne in Q2 has risen by another 24 per cent since then. The company expects cost inflation to moderate by the end of the current financial year and it can sustain the margin in the 20-24 per cent band. The company is looking at offsetting 70 per cent of cost inflation through price hikes, which coupled with cost savings, are expected to help it maintain the margin.                                                

Analysts led by Krishnan Sambamoorthy of Motilal Oswal Research highlight three factors that have enabled Pidilite to manage steep cost inflation better than paint companies, even as both sectors have a cost base linked to crude oil prices. This is on account of a near-monopoly in the adhesives segment, the absence of mix deterioration, and material costs peaking earlier when compared with paint companies. 

While there can be near-term pressure, Kotak Institutional Equities expects a full recovery in profitability and some upside risk in the medium term as the company enjoys unparalleled pricing power, thanks to its dominant leadership in most categories. 

The Street expects Pidilite to be a key beneficiary of the revival in real estate. This is expected to boost the consumer and bazaar segment that accounts for 81 per cent of revenues. The gradual uptick in private/government capex should aid growth of the business-to-business segment (industrial adhesives, resins).
 

These expectations are reflected in the valuations of 70 times its FY23 earnings estimates. Investors can consider the stock, which has gained over 66 per cent in the past year against the BSE FMCG index’s gains of 25 per cent, on dips.