Dwindling fortunes: Is Pidilite losing its grip over investors?

The adhesives manufacturer’s Q3 results failed to meet analysts’ expectations on crucial parameters. A disappointing factor was the 14.3% year-on-year (y-o-y) drop in consolidated reported profit after tax to ₹308 crore. This comes at a time when revenue rose 5.1% to nearly ₹3,000 crore. Revenue growth was led by pricing, given that volume growth in its key consumer and bazaar segment was flat at around 1% y-o-y. The performance of its B2B segment was not encouraging either.

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Consequently, the Pidilite stock was down 2.8% at the close of Wednesday’s trading session . Demand conditions in rural and semi urban areas remained under strain. In an earnings call, the management said, demand in tier-4 and tier-5 cities were subdued, but in tier-2 and tier-3 the demand was fairly reasonable due to increased construction activity. Going ahead, the management is optimistic about the demand outlook in these regions improving.

But more than demand trends, the margin trajectory has been key for Pidilite investors, thanks to the steep cost inflation. In Q3, earnings before interest, tax, depreciation and amortization (Ebitda) margin contracted by 272 basis points (bps) y-o-y to 16.5% and was flat sequentially. One basis point is 0.01%.

In its first-cut earnings analysis note, ICICI Direct Research highlighted that Pidilite’s Q3 Ebitda margin is still lower than its pre-covid range of 20-21%.

Gross margin was up slightly on a sequential basis, but was down year-on-year. Margin was impacted by high-cost inventory, which expected to be exhausted within a couple of months.

Consumption cost of input chemical vinyl acetate monomer (VAM) fell to $1200 per tonne in Q3 from around $2500 per tonne in Q2, the management said. The contribution of VAM to the firm’s raw material basket was at 20-25%. Further, prices of non-VAM inputs are softening. The management expects the benefit of easing VAM prices to start reflecting on the company’s margin Q4 onward. That said, they refrained from giving a timeline on when operating margins could bounce back to the 20% levels.

On international operations, Pidilite units saw moderate sales growth in Q3 and Ebitda remained under pressure due to high input costs and the adverse impact of currency depreciation.

That’s not all. Competition in the under-penetrated waterproofing segment is heating up with the entry of Asian Paints Ltd and investors need to be watchful. The management expects increased competition from the unorganized sector. Note, Pidilite is increasing its rural footprint with initiatives such as Pidilite Ki Duniya. However, it would take some time for these measures to yield meaningful results on the company’s volume growth.

For now, a turnaround in margin is an important upside trigger for the stock. In the last one year, shares of Pidilite have declined by nearly 11%, massively underperforming the benchmark index Nifty 50 which rose 3.55%. Despite this, on FY24 price-to-earnings, the stock is trading at a multiple of 58.7x, Bloomberg data showed.

“The stock was already trading at an expensive valuation; on top of that, Q3 earnings were muted. We are cautious about the demand trends in rural areas and slower-than-expected pace of revival in operating margin. We expect the company’s FY24 consensus earnings estimates to see a moderate cut,” said an analyst requesting anonymity.