Faster business recovery reviving investor trust in Pidilite Industries

Pidilite Industries’ June quarter (Q1) results, announced on Thursday after market hours, was not only its worst in many years, but also weaker than the Street’s expectations. Yet, the stock gained 3.4 per cent on Friday when the BSE Sensex closed flat. The management commentary highlighting faster-than-expected business recovery from the Covid-19 shock revived investor sentiment towards the stock, which has underperformed the market in recent times. In the past three months, Pidilite’s stock has risen 2 per cent against the 21 per cent of the BSE Sensex.

After almost zero business in April and some recovery in May, June was a month of significant recovery for Pidilite. Notably, business recovery further accelerated in July with over 90 per cent of its retail outlets now open. This is mainly for its consumer and bazaar segment, which accounts for 80 per cent of overall business. While the recovery was led by rural India and small towns, which have relatively lower revenue share, the management also said that areas where lockdowns are being lifted are witnessing faster-than-expected recovery. This offers comfort as cities contribute 65-70 per cent of revenue and many of them are getting unlocked.

 

 

Kaustubh Pawaskar, analyst at Sharekhan, believes Pidilite has all the moat to see good recovery as the economy is unlocked, though there would be some impact of local lockdowns. He also believes that the current situation gives Pidilite a good opportunity to expand, given its leadership position in the adhesive and construction chemical space, along with robust balance sheet. However, how much of the recent recovery is pent-up demand would be known in 1-2 months, according to Pidilite, which investors should be cognizant of.

Nevertheless, benign raw material prices should aid volume recovery further as the management indicated that it would pass some of these gains on to consumers.

In Q1, despite lower input prices and cost control, Pidilite’s pre-tax profit plunged by 92.8 per cent year-on-year (YoY) to Rs 31.7 crore, over 50 per cent lower than the consensus estimate of Rs 67.6 crore. 

This was because of weaker operating leverage led by 56.5 per cent YoY fall in top line to Rs 877.8 crore amid 58.3 per cent fall in domestic volumes. The reported revenue was lower than analysts’ expectations of Rs 952.2 crore.