Pidilite’s high valuation may prove sticky for investors

Focus on increasing share of premium products is a positive

The Pidilite Industries (Pidilite) stock has gained over 9 per cent since the company posted its June quarter results on August 6, outperforming a 2.2-per cent rise in the Sensex over this period. While benign input costs (mainly of vinyl acetate monomer), led by rangebound crude oil prices and business recovery in recent months have helped, strong growth visibility over the medium to long term has also been supportive. Analysts, however, find valuations uncomfortable at current levels.

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. Analysts at Kotak Institutional Equities say: “We like Pidilite for its dominant positioning in a high-growth segment, as well as its track record of expanding product portfolios and developing end-markets; we await a better entry price.” The domestic brokerage has a ‘reduce’ rating on the stock because of high valuations.

At around 62x its 1-year forward estimated earnings, the stock is currently trading at a 36-per cent premium to its 5year mean valuation. Even for FY22’S estimated earnings, the price-to-earnings ratio stands at about 54 times.

Nonetheless, the successful premiumisation journey of the company’s Fevicol brand and its focus on growth and pioneer categories indicate solid earnings potential over the medium to long term. In fact, revenue share of premium products within the Fevicol portfolio (around 36 per cent of the firm’s standalone business in FY20) has improved considerably to 65 per cent in FY20, from 45 per cent in FY15. Analysts expect the company to extend the premiumisation strategy to its other portfolio as well.

Pidilite’s acquisition/tieups in the past few years in pioneer categories such as Nina Waterproofing and ICA Pidilite (wood coating) would revitalise its medium-term sales and earnings growth, analysts at Motilal Oswal Securities believe, who have a ‘neutral’ rating on the stock amidst higher valuation.

What would further support the company’s prospects is its distribution expansion, mainly in rural areas, and its plans to focus on high-growth emerging markets.

It would be interesting to see how the company benefits from these opportunities. For now, long-term investors are recommended to await better entry into the stock.