Pidilite Industries: Investors advised to look at the stock on dips

Recovery in domestic growth and lower input costs should aid margin improvement

Pidilite Industries’ Rs 2,100-crore acquisition of US-based Huntsman Corporation’s group entities in India is a positive for the adhesives manufacturing company, as it cements its leadership in the Indian adhesives and sealants market.

As part of the acquisition, Pidilite will be able to manufacture and market Huntsman’s iconic brands — Araldite, Araldite Karpenter, and Araseal. Given that the brands had sales of Rs 400 crore in 2019, the acquisition is valued at 5.25x its sales.

Analysts at Dalal & Broacha Research believe the deal will be complementary to Pidilite’s business, given the nationwide retail presence of Huntsman’s products.

This will expand Pidilite’s portfolio, which comprises brands such as Fevicol, Fevistik, and Fevikwik. Fevicol and M-Seal dominate the adhesives and sealants market in the country, with a domestic share of 70 per cent each.

The Huntsman deal weakens the potential threat from Asian Paints and Astral Poly Technik, which have diversified into construction chemicals.

Analysts at Motilal Oswal Research believe the new entrants could have used the acquired assets as their umbrella brand and expanded their portfolio.

The Huntsman investment is one of the five the company struck this year. Among the other inorganic forays, the company bought 2 per cent stake in online furniture retailer Pepperfry for Rs 70 crore and acquired 70 per cent stake in Tenax India, which manufactures adhesives, coatings, surface treatment chemicals, and abrasives for Rs 80 crore.  

Given the deal size and cash on books, which is around Rs 1,900 crore, the company may have to take some debt. This could help improve the return ratios, given the low yields from the current investments.

In the near term, the Street will focus on trends in demand recovery and margin movement. After a 57 per cent dip in sales in the April-June quarter, the company is expected to post a slight increase in sales in the July-September quarter. The recovery is led by the rural segment and maintenance-driven products. Gross profit margins are also expected to see some improvement on the back of soft input costs.

While there are multiple positives for Pidilite from the acquisitions and growth prospects, valuations at 62x its 2021-22 earnings capture these gains. Investors can look at the stock on dips.