Margin gains ahead for Pidilite

Improving demand, expansion plans to drive growth

The Pidilite scrip has outperformed the Sensex in recent months and made a new high of Rs 637.55 on March 20. Resilient financial performance of its core business of adhesives and stable Ebitda (earnings before interest, tax, depreciation and amortisation) margin are some reasons for this rally. The company's plans to invest into and scale up high-growth segments such as waterproofing and other construction chemicals have added to the gains.

Pidilite announced acquisition of 70 per cent stake in Nina Waterproofing Systems on Monday. Although the acquisition cost is a paltry Rs 23 lakh, with additional investment of up to Rs 100 crore (in Nina) planned in a gradual manner it only indicates the company's increased focus on the high-potential waterproofing space. Waterproofing is a part of the construction chemicals segment, which forms about 16 per cent of Pidilite's overall revenues. The waterproofing segment could be an additional growth driver for Pidilite. "Pidilite's enhanced offerings in the construction chemical segment will revive growth and counter competition (especially from large paint companies) in this segment," analysts at JP Morgan wrote in a recent report on the company.

Meanwhile, in its core business, Pidilite has witnessed slowdown in volume growth to an estimated seven-eight per cent in the December 2014 quarter as against 10-13 per cent volume growth in the preceding four-five quarters. This is in sync with slowing economic growth, believe analysts, and hence not a major concern. Notably, Pidilite has maintained its market share in most segments and its flagship brand Fevicol continues to enjoy strong brand recall. Analysts at ICICI Direct believe volumes could remain strong going forward on the back of sustained demand from tier II and tier III cities and likely break-even of international subsidiaries. While demand trends should improve gradually over FY16, the Street remains positive on Pidilite's strategy of acquiring small companies in the adhesives, sealants as well as construction chemicals segments as it helps expand the portfolio and geography.

With crude oil prices again turning soft, it will boost margins. However, a delay in demand/volume recovery and/or in break-even of international subsidiaries, are key down-side risks and need to be monitored. Most analysts polled by Bloomberg are positive on the Pidilite scrip. However, their average target price of Rs 568 (six per cent lower than the current price) suggests the scrip is fairly valued.