Demand to propel Pidilite's earnings growth; analysts positive on the stock

With a sturdy volume growth (13 per cent), Pidilite Industries (Pidilite) posted 14.7 per cent and 57.4 per cent year-on-year rise in net sales and net profit, respectively, in the March 2018 quarter (Q4). With positive business outlook in terms of volume growth and pricing power to protect its margin, analysts are positive on the stock. In fact, the stock surged about 25 per cent in the past three months, while the BSE FMCG index rose by 9.3 per cent.

Going ahead, the double-digit volume growth trajectory is expected to continue due to improvement in demand and the positive outlook given by the management, boosting overall earnings. 

Analysts also expect Pidilite’s sales growth in the near-term to be driven by volume. Also, the goods and services tax (GST) implementation should add to the volume further. “Shift from unorganised segment to organised will increase with the GST implementation, which will also aid volumes,” analysts at Edelweiss Research said in a report.

But there are a couple of headwinds. High raw material prices and weak rupee versus the dollar can dent the company’s operating profit margin. Prices of vinyl acetate ethylene (VAM), one of the key inputs of Pidilite, which is entirely imported are trending higher since the past few months. Current spot prices of VAM are above $1,350 per tonne as against $1,100 in Q4, as informed by the management. Some analysts are also sceptical of the company’s ability to pass on the entire pressure.  “We think price hikes are likely to be modest, given near-peak margins (FY18 at 24 per cent levels) and high competitive intensity from larger players (Astral, Asian Paints),” analysts at J P Morgan said in a report.

Yet, given the pricing power of Pidilite, the company is expected to pass on the costs to consumers. It has already undertaken price hike of 2-5 per cent in some select products.

Having said that, current rich valuation of the stock, 51 times of its FY19 earnings, may limit upside run in the near term. Any stock correction will be a buying opportunity for investors, say experts.