Pidilite Industries - Pricing power reinforced despite lower volume growth - Prabhudas Lilladher

We met the management of PIDI to take stock of demand scenario and impact on margins due to recent INR depreciation. Demand conditions remains soft across both Adhesives and construction chemicals. PIDI has taken 3-5% price increase across key brands like "Fevicol" and "Dr Fixit", however some impact on margins can't be ruled out in the transition period. Finalisation of any strategic partner/sale of stranded Synthetic elastomer project would be a positive trigger, in our view. We estimate 15.5% PAT growth in FY14 and 19.5% PAT CAGR over FY13-15. PIDI trades at 20xFY15 EPS of Rs12.6. Retain 'Accumulate' (target price of Rs 282 , 11% upside).

- Demand conditions sluggish: Consumer and Bazaar segment (78% of sales) demand scenario remains like 1QFY14 (volume growth 7-8%), even in Industrial products (22% of sales) while domestic demand remains under pressure, exports (25% of industrial products) are benefitting from Rupee depreciation.

- Prices hiked to negate impact of currency on raw material: PIDI has increased Fevicol prices by 3% in September; construction chemicals have seen 4-5% increase in July-August. Input costs have increased due to INR depreciation even as USD rates of VAM (Vinyl Acetate Monomer) are flat. Although PIDI has carry over input cost inventory from 1Q, small impact on margins can't be ruled out.

- Innovations and recent acquisition to aid combat competition: PIDI has launched lower priced variants in water proofing segment to match the products of Asian Paints and Berger Paints. PIDI has retained "Falcofix" as a fighter brand (acquisition of 'Suprashav') to compete at the lower end of the market; PIDI is positive on growth prospects of this brand.

- International business: South & South Asia continues to perform well, while Middle East & Africa are affected due to political turmoil in Egypt. New CEO has been appointed for American region; Sargent Art business continues to perform well and is growing steadily.

Source : Equity Bulls

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