Pidilite Industries - Cautiously optimistic on recovery ahead - ICICI Securities

Pidilite Industries (PIDI) reported a dismal Q1FY21 with consolidated revenues down 56.5% YoY due to 59% YoY volume and mix decline in consumer & bazaar (C&B) segment and 54% YoY decline under the same parameter in industrial products. Despite higher gross margin expansion of 210bps YoY, EBITDA margin fell to 7.6% largely due to operating deleverage. The silver lining for the quarter however was: a) strong double-digit growth in PIDI's 'Emerging India' (rural and small towns accounting for 30% of its overall sales in FY20) business, and b) double-digit growth in construction chemical and DIY product segments post Jun'20. Amid uncertainty and slower recovery in the PVA and industrial product segments, PIDI seems cautiously optimistic on the recovery path ahead. We however expect sharp recovery in EBITDA margin on the back of recent cost rationalisation and further growth in gross margin in the near term. Retain HOLD.

- Valuation and outlook: Factoring-in the Q1FY21 performance, we cut our revenue and earnings estimates by 12.5%/3.9% and 25.5%/3.4% for FY21E/FY22E respectively. We now expect PIDI to report revenue and PAT CAGRs of 2.3% and 10% respectively over FY20-FY22E. We revise our target price to Rs1,330 (earlier: Rs1,325) based on 50x FY22E earnings and maintain our HOLD rating on the stock. Key downside risks: increase in VAM prices, higher competitive intensity in construction chemicals segment, and sustained slowdown in consumption.

- Consolidated sales declined 56.5% YoY. PIDI's Q1FY21 standalone revenues declined 56.6% YoY while its consolidated sales fell 56.5% YoY to Rs8.78bn with international subsidiaries outperforming its domestic ones. While Apr'20 was a near-washout, May'20 saw partial recovery (50% outlets open) while Jun'20 saw 80% of the outlets in operation. Recovery in Jul'20 has accelerated with the company achieving >90% sales compared to Jul'19. PIDI, which derives ~30% of its sales from semi-urban/rural areas, has already seen swift recovery and is hopeful it speeding up with urban areas likely opening up over the next couple of months. We expect PIDI's consolidated revenues to grow at 2.3% CAGR over FY20-FY22E.

- Gross margin surprises positively led by softening input costs. PIDI reported 210bps YoY expansion in its consolidated gross margin to 53.5% as a result of moderation in input costs QoQ. However, due to operating deleverage, its EBITDA margin came in at a paltry 7.6%. VAM prices remain benign (US$650-700) although they may not be sustainable at these levels as per the management. Company expects softer input prices to start reflecting from H2FY21 onward. We expect the benefits of cost rationalisation and lower input costs to drive EBITDA margin higher to 21.8% and 24.5% in FY21E and FY22E respectively.

- Reported PBT at Rs312mn, down 93% YoY: PIDI reported a consolidated PBT of Rs312mn, down 93% YoY, due to the dismal operational performance in the wake of current pandemic. Consolidated PAT came in at Rs268mn, down 91% YoY. We expect the company to report 10% CAGR over FY20-FY22E.

Shares of PIDILITE INDUSTRIES LTD. was last trading in BSE at Rs.1380 as compared to the previous close of Rs. 1398.95. The total number of shares traded during the day was 52644 in over 5432 trades.

The stock hit an intraday high of Rs. 1410 and intraday low of 1377.7. The net turnover during the day was Rs. 73420676.

Source : Equity Bulls

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