Lower input costs could help margin growth of Pidilite Industries

Volume expansion continues to be strong, aiding top line

Aided by the sixth consecutive quarter of year-on-year (YoY) double-digit volume growth, Pidilite Industries posted strong December quarter results. 

Growth was led by the consumer and bazaar segment, which grew by 13 per cent over the year-ago quarter. The segment, comprising adhesives, sealants, construction/paint chemicals, as well as art and craft products, contributes about 86 per cent of consolidated revenues. Price hikes and higher stocking of products by distributors also aided volume and revenue growth. 

The key worry for the company and the Street is the stress on gross margins. Profitability at the gross level was down about 600 basis points (bps) YoY to 47 per cent. This was due to a surge in input costs and the rupee depreciation. While a slight hike in prices helped partially offset raw material inflation, the increase came towards the end of the quarter and was not enough to overcome the cost surge. The pressure on gross margins also reflected on operating profit margins, which came down by 578 bps to 18.2 per cent. 

The main reason for the high raw material costs has been vinyl acetate monomer (VAM), which is a crude oil derivative and accounts for 35-40 per cent of its raw material costs. What aggravated the situation was the weak rupee, leading to the overall pressure on margins. Margins were under stress even on a sequential basis, both due to higher input costs and costlier inventory. 

However, costs are expected to ease, given the spot VAM prices are currently trading below the $1,000-per-tonne mark, as compared to over $1,300 per tonne in Q3. 

The management indicated that the overall impact of price hikes, softening prices, and a more stable rupee is expected to help margins revert to normal.  

While growth has been strong in the main segment (industrial segment volume/mix down 2 per cent YoY), the management was cautiously optimistic about trends in demand. Given its diverse presence across categories, the management has been taking hikes in specific segments rather than across the board depending on demand, raw material pressure, and margin targets.