Pidilite Industries: Margin-improving levers spur market sentiment

Decline in cost of key raw material, favourable Rs-$ rate and price hikes of products set to enhance profitability

Pidilite Industries, the maker of popular adhesive brands such as Fevicol, Fevikwik, Dr Fixit and M-Seal, is again finding favour among investors after under performing leading indices in the past couple of months. 

On Wednesday, the stock rose over four per cent to close at Rs 1,176.6 on the BSE.

Despite a double-digit volume growth of 11 per cent in the December 2018 quarter (Q3), a sharp margin contraction had kept investors sceptical about the company’s operating efficiency. 

Though the margin pressure was clearly visible in case of other non-food consumer companies, they had managed to ease the impact through cost efficiency. 

However, now things have turned in favour of the company. This is because of two reasons: Firstly, lower prices of key raw material —vinyl acetate monomer (VAM) — which is mainly imported and accounts for around 60 per cent of Pidilite’s raw material cost. From the end of December 2018, VAM prices have fallen by about seven per cent to $1,058 per tonne. Secondly, the rupee has remained firm around Rs 70 a dollar from the Rs 72 levels in mid-December.

These, along with price hikes, are likely to boost the company’s gross and earnings before interest, tax, depreciation and amortisation (EBITDA) margins from the ongoing quarter, said an analyst with a domestic brokerage. 

The company had taken average price hikes of around 1.5-2 per cent at the end of Q3 in select products, which should reflect in the March-2019 quarter performance. In Q3, amid high VAM prices, EBITDA margin had contracted sharply by 578 basis points year-on-year to 18.2 per cent. But now, the benign input environment should help Pidilite achieve its EBITDA margin levels of 22-23 per cent. 

“If we start going above that (upper band of margins), we would certainly like to invest to accelerate sales growth,” Apurva Parekh, executive director of Pidilite, had pointed during an analysts’ call in January.

Improving consumer sentiment along with expected revival in housing demand after the sharp reduction in goods and services tax (GST) on under-construction affordable housing projects is another revenue booster for Pidilite.

While the valuations of above 51 times FY20 estimated earnings have reached the upper band of many analysts’ expectations, fundamentals are improving. 

Any sharp correction in the share price would be a good buying opportunity for long-term investors.