Amid macro headwinds, Pidilite's strong Q1 show sticks well with investors

Net profit surged by 22%, driven by 10% rise in revenue and 119 basis point jump in operating profit margin to 22%

In a market where sentiment has been weak due to rising global concerns like trade and currency wars and domestic worries such as slowing economic and earnings growth, Pidilite has been a standout.

While the stock has been on a gradual uptrend for the past few years, Pidilite’s better-than-expected earnings in the June quarter (Q1) excited the Street. The stock hit an all-time high at Rs 1,324.30 on Tuesday on the BSE, before closing the day with nearly 3 per cent gains, compared to the Sensex’s rise of just 0.8 per cent. The leader in adhesives and maker of top brands such as Fevicol, Fevikwik, Fevistik, M-Seal and Dr. Fixit clocked 10 per cent year-on-year (YoY) growth in consolidated net sales to Rs 2,016.8 crore. Its net profit surged 22.3 per cent to Rs 294.4 crore in Q1. According to the Bloomberg Consensus, analysts had pegged these figures at Rs 2,012.5 crore and Rs 280.5 crore, respectively.

A clear positive was the sharp improvement in operating profitability, which came after five consecutive quarters of a YoY decline. The company’s Ebitda (earnings before interest, tax, depreciation and amortisation) margin jumped 119 basis points YoY to 22 per cent, the highest since the December 2017 quarter.

Strong gross profit margin, coupled with small price hikes and benign input costs, drove the Ebitda margin. Prices of vinyl acetate monomer, a key input for the company, declined 12-13 per cent YoY, while crude oil prices remained supportive. The gross profit margin expanded 86 basis points YoY to 51.4 per cent. Ebitda margins also received support from improved operating efficiency. For instance, other operating expenses as a percentage of operating revenue drifted down by 112 basis points YoY to 17.3 per cent, more than negating the downward margin pressure from higher employee costs (up 79 basis point YoY).

After witnessing volume pressure in the March quarter due to the price hikes, Q1’s volume growth indicates that Pidilite’s pricing power is back. While the 6 per cent volume growth in Q1FY20 may look benign, given that the June quarter is normally a strong period for Pidilite, investors should note that it comes on the back of a high base in the year-ago quarter when volumes had soared by 18 per cent. This time, volume growth was driven by its industrial product segment, which saw a 12 per cent increase in volumes. Its key consumer bazaar business witnessed a 6 per cent rise in off-take. Expansion of rural distribution network aided Pidilite’s volumes during the quarter. 

According to an analyst at a domestic broking house, who is also positive on the stock, double-digit top line growth, along with Ebitda margin levels of 22 per cent, show the capability of Pidilite to continue delivering good performance.

Bharat Puri, managing director of Pidilite, is cautiously optimistic of delivering consistent, profitable volume-led growth in the medium term.

However, as the case with many consumer stocks, valuation of Pidilite is pricey, leaving very little room for any performance miss, says another analyst. At 49 times FY21 estimated earnings, the stock trades at 25 per cent premium to its historical one-year forward price-earnings ratio. Thus, long-term investors are recommended to await some correction in the stock.