Subdued raw material prices a boon for Pidilite Industries; stock up 2.9%

The stock of Pidilite Industries (Pidilite) hit an all-time high of Rs 1,644.75 in intra-day trade on Thursday, before closing 2.9 per cent higher at Rs 1,629.35.
 
The recent announcement of a 70 per cent acquisition in Tenax India would be beneficial for Pidilite, given it expands the company’s adhesives portfolio in the marble and stone industry.
 
Tenax India Stone is an Indian distributor of Tenax SPA Italy’s marble and stone adhesive/chemical products.
 
But more importantly, benign raw material prices have been the stock’s key driver, considering the tepid volume growth clocked by Pidilite in the last two quarters. The stock has surged 24 per cent in the last three months, against a 5.7 per cent decline in the Sensex.
 
This is in line with the fall in Brent crude oil from $65-70 a barrel to $50-55. However, for the stock to gain more, volume improvement is imperative.
 
According to Hitesh Taunk, analyst at ICICI Securities: “Expected margin gains from benign input costs have already been factored in.”

Pidilite is the market leader in India’s adhesives market and owns popular brands such as Fevicol, Dr. Fixit, M-Seal, and Fevikwik, among others.
 
The price of Pidilite’s key raw material, vinyl acetate monomer (VAM) — a crude oil derivative — has declined 18-19 per cent year-on-year (YoY) during January-February.
 
The soft trend in crude oil prices because of the coronavirus outbreak indicate that VAM prices are likely to remain benign for some time.
 
This should continue to boost Pidilite’s operating profit margin, given that VAM forms 35-40 per cent of its overall raw material costs.
 
In the December 2019 quarter (Q3) too, a 656-basis-point YoY expansion in gross profit margin had helped Ebitda margins expand 558 bps YoY to 24 per cent, the highest in eight quarters.
 
On the other hand, Pidilite’s volume growth remained moderate at just 3 per cent in Q3, and the trend is unlikely to improve sharply in the wake of subdued demand conditions.
 
Further, Pidilite may not take any price cut to push volumes as the management, during the Q3 earnings call, had highlighted that significant pricing actions to push volumes will not aid top-line growth, given the weak consumption environment.
 
Taunk believes that weak volume growth in the near term will weigh on Pidilite’s valuations. At 57x its FY21 estimated earnings, Pidilite currently trades at a 31 per cent premium to its 5-year historical average valuations.
 
Therefore, investors should await an improvement in the volume growth trajectory before considering the stock.