Pidilite sticks: Fevicol maker on a high, but sharp margin gains unlikely

High stock valuation is another hurdle for the manufacturer of adhesives and construction chemicals

The stock of Pidilite Industries, which makes adhesives and construction chemicals, hit record levels last week and has gained about 14 per cent since February. Healthy volumes in the October-December quarter of FY24 (Q3 FY24), high margins and improved distribution have improved sentiment for the stock. New products and business-to-business (B2B) demand will help the company’s sales, analysts say.

Pidilite, which makes Fevicol, Dr Fixit, Fevikwik and M-Seal adhesives, had a strong operational performance but revenue growth was muted in Q3 FY24. Sales grew just 4.4 per cent but volumes were healthy at 10 per cent.

The muted value growth was on account of a cut in prices. While the rural and small towns outperformed the urban markets, volumes were supported by double-digit growth in key segments of consumer and bazaar as well as B2B.

The company continues to increase its presence by expanding its distribution network. While it has a presence in 12,000 stores in mor than 8,000 villages, Pidilite plans to add 1,000 to 1,500 every quarter.

Demand for its products could be a trigger for the stock. Nuvama Research said tile adhesives will help Pidilite in achieving high single-digit/lower double-digit volume growth. Pidilite and Asian Paints can coexist in waterproofing as the market is large and underpenetrated, said the brokerage. Nuvama has advised investors in paint stocks to shift to Pidilite as it believes that the company will not be impacted by Grasim's entry in the sector.

In Q3 FY24, Pidilite's gross margins increased 1,100 basis points over the year-ago quarter and 150 basis points sequentially on the back of lower raw material costs. Vinyl acetate monomer, a key raw material cost, stood at $900 per tonne compared to $2,000 per tonne in the year-ago quarter and $1,000 per tonne in Q2 FY24. Operating profit margin expansion was limited to 720 basis points year-on-year (YoY) to 23.7 per cent due to employee costs and other expenses as a percentage of sales.

Further margin gains are unlikely. While VAM prices are still 9.5 per cent lower YoY, they have firmed up a bit over Q2 FY24. Analysts led by Naveen Trivedi of Motilal Oswal Research said that operating margin at over 23 per cent is already at a record high. They have not considered further expansion as growth drivers (consumer acquisition, distribution expansion, investment in brand) requires high operating expenditure. The brokerage has built an annual growth of 13-14 per cent in operating and net profit during FY24-26. While it is positive about the company given its leadership in the adhesives market and a solid balance sheet, it argues that current valuation limits the upside potential. Consequently, it has a neutral rating on Pidilite stock.

JP Morgan Research has maintained its overweight rating on Pidilite, citing the company’s ability to meet B2B/infrastructure and real estate demand and better positioning than competitors.