Recovery hopes and further pricing action to support Pidilite stock

Strong performance in the March quarter, expectations of demand recovery, and market share improvement led to a 13 per cent gain for Pidilite Industries over the last month. Though raw material prices have seen a sharp upward trend and remain a key headwind for margins, the company may look at further hikes to offset the commodity pressures.

Robust demand from urban regions helped the company post a 45 per cent  YoY growth in the March quarter. Adjusting for the acquisition of Huntsman Advanced Materials (Araldite) in November last year, sales came in at 38 per cent. The company’s growth even on a two-year basis (comparison with Q4FY19, given the Covid-hit Q4FY20) has been among the highest in the consumption space.

Analysts at Edelweiss Research point out that the company reported a 30 per cent growth over that period led by rural and semi-urban areas. While it trails Asian Paints on the revenue growth front on a two-year basis, its operating profit growth at 53 per cent is the highest across consumer companies.

The street will keep an eye on demand especially in the rural segment after the strong showing in Q4 which saw a 40 per cent volume growth. Brokerages however believe that sales of Pidilite will be among the first to rebound. “It will be a frontrunner in sales recovery given its strong brand, robust balance sheet position, and nearly unmatchable supply chain network in the industry,” say analysts at ICICI Research.

Though the company has passed on three-fourths of the cost increase, given the pricing pressures it may have to take more hikes to maintain margins. Its March quarter margins stood at 20.6 per cent (FY21 at 23 per cent) while the company has maintained guidance of 22-24 per cent. Prices of vinyl acetate monomer, the key raw material, continue to hover at elevated levels and are likely to stay high as the recovery pushes up demand.

In addition to demand revival and share gains from the unorganised segment, the company’s expansion into wood finishes and waterproofing in the construction chemicals, as well as e-commerce channel, will add to incremental growth. The stock is trading at 58 times its FY23 earnings estimates; investors can consider it on dips.

Recovery hopes and further pricing action to support Pidilite stock

Further rise in raw material prices could impact near term margins