Pidilite sails past a tough Q2 as demand revives
PremiumGoing forward, the Pidilite management remains cautiously optimistic on continuing robust demand conditions
There is some relief for investors of Pidilite Industries Ltd, which has been struggling with severe cost inflation for a while. In the September quarter, the company recorded robust sales growth. On a standalone basis, its revenue grew 36% year-on-year (y-o-y) with underlying sales volume and mix growth of 25%. This was driven by 25% growth in sales volume and mix of key consumer and bazaar (C&B) and 20% growth in sales volume and mix of business-to-business (B2B), the management said.
The business witnessed a much improved consumer demand due to accelerated vaccinations, reduced covid infections and increased mobility. Growth was broad based across segments in both urban and rural India, the management said. C&B reported growth across all categories such as adhesives, construction chemicals and the do-it-yourself portfolio. Domestic subsidiaries in C&B business returned to double-digit growth led by higher sales in premium products, the management said. Subsidiaries in B2B business have improved sequentially on account of a recovery in real estate and construction-related activities.
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As far as Pidilite’s global subsidiaries are concerned, they saw modest revenue growth in Asia due to lockdown restrictions in many countries. The Americas region reported a decline in business on a higher previous year’s base. Last year, sales were higher due to pent-up demand and benefits passed by the governments to consumers during covid, it added. Going forward, the Pidilite management remains cautiously optimistic on continuing robust demand conditions. Reacting to its earnings, shares of the company ended Thursday’s trading session 4.50% higher at ₹2,471 on the NSE.
While improving demand environment does provide comfort, the cost inflation battle is yet to be won. According to the management, the unprecedented increase and volatility in input costs has been a major challenge. Investors should note that as much as 60% of Pidilite’s raw material costs come from vinyl acetate monomer (VAM), a key raw material that is a derivative of crude oil, and Pidilite meets its VAM requirement largely via imports.
In a post-earnings conference call, the company’s management said VAM prices remained elevated and are currently at $2,400/metric tonne (mt). This compares with $930/mt in the previous fiscal and the moderated range of $1,600-1,750/mt seen during April-June 2021. Not just VAM, It is also witnessing significant increase in freight and other input material costs.
In this environment, moderated price hikes and a sharp focus on operational efficiencies have helped the company navigate the ongoing phase of uncertainty. The management said it plans to pass-on 70-75% of inflation through price increases, but has assured that the price hikes will be calibrated so that it does not hurt demand. Since input cost inflation is on the back of global supply chain disruptions, it would take another six months for the situation to ease, it added.
Ergo, margin recovery especially in the B2B segment will take a long time due to unabated commodity inflation. It should be noted that margins of Pidlite’s international subsidiaries were also impacted due to input cost inflation. Little wonder then that its consolidated gross margin contracted by 1,050 basis points y-o-y to 45.4% in the September quarter. One basis point is one hundredth of a percentage point. As for its operating margin, it shrunk by 630bps y-o-y to 20.9% in Q2FY22. The company aims to maintain its Ebitda margin in the 20-24% range via effective cost management. Ebitda is short for earnings before interest, tax, depreciation and amortization.
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Meanwhile, the Pidilite stock is trading at a one-year price-to-earnings multiple of around 90 times. Analysts said despite a revival in demand, the stock’s valuation is expensive, considering input cost inflation and rising competition, especially in the waterproofing segment. In the past one year, Pidilite shares have risen 57%, outperforming the benchmark index Nifty50, which gave 40% returns. Analysts said positives of consolidation-led market share gains from the unorganized sector are already factored into the stock, so further upside will depend on how soon the margin pressure eases.
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