Pidilite valuations glued to volume recovery, analysts see uptick in demand

While there are growth levers, near-term volumes have remained under pressure

Despite subdued volume growth of 2.5 per cent in the March 2019 quarter (fourth quarter, or Q4) versus double-digit growth in the past, the stock of Pidilite Industries gained 12 per cent since May 14, when the Q4 numbers were announced.

Sturdy profitability outlook helped the stock. Pidilite owns popular adhesive brands such as Fevicol, Fevikwik, Dr. Fixit, among others. Recovery in volume growth is key for the stock, given its pricey valuation of 55-56x its 2019-20 (FY20) estimated earnings, which is at the higher end of the consumer pack.

The muted volume offtake in Q4 had hit its segments. While its key segment — consumer & bazaar (84 per cent of revenues in 2018-19, or FY19) — clocked 3.6 per cent volume growth, volumes from the industrial segment were down 1 per cent.

The upward revision in pricing at the end of December 2018 weighed on the volumes of consumer & bazaar portfolio. However, given the current slowdown in consumer demand, near-term volume growth seems challenging for Pidilite.

In fact, analysts at JPMorgan have reduced Pidilite’s earnings estimates by 2-3 per cent for FY20 and 2020-21, amid lower top line growth. Analysts, however, believe that the long-term growth potential of the company remains intact.

The dominant position in the adhesive market, strong distribution reach with over 3 million outlets, and expected market share shift away from the unorganised players due to lower goods and services tax should aid volumes. Also, if the company passes on benefits of lower input prices, it would push up volumes in the near term. Some also expect demand to improve as the election-related uncertainty is over and there is an expectation of a likely normal monsoon.

At the end of May 2019, prices of key raw materials — vinyl acetate monomer — were down 23 per cent year-on-year and 2 per cent sequentially. This, along with a stable rupee, is expected to improve operating margins. Analysts expect 150-200-basis point expansion in earnings before interest, tax, depreciation, and amortisation margin of Pidilite in FY20, from 19.3 per cent in FY19.

Overall, any sharp fall in the stock would be a good buying opportunity for long-term investors.