Pidilite gets set to take on rivals
Pidilite Industries Ltd’s stock hit a new 52-week high of ₹3,009.95 on Tuesday. Despite concerns of competition from paint companies and unorganized manufacturers, some favourable factors could help Pidilite retain its edge and keep investors glued to the stock. However, sky-high valuations could be a sticking point.
The ongoing upcycle in residential real estate sales should benefit the company’s core adhesives portfolio. The impact on earnings comes with a couple of years lag, but Pidilite is already pushing the pedal on capex to capitalize on this. Pidilite’s cumulative capex (as per its cash flow statement) over FY20-23 stands at ₹1,700 crore, more than 2x that for FY16-19, according to Kotak Institutional Equities. Pidilite has planned several greenfield and brownfield expansions for its next phase of growth. Of these, 15 were completed as of February.
Investments in manufacturing facilities, including those for joint ventures Litokol, Tenax and GrupoPuma, indicate a pickup in demand for these products, said the Kotak report, dated 18
March. Pidilite aims at steady-state underlying volume growth of 1-1.5x of GDP, led by rising construction activity, government capex and deeper distribution among other supporting factors. Growth and pioneering segments (waterproofing and tile adhesives and other emerging products) are expected
The price of Pidilite's key input chemical vinyl acetate monomer is seeing an uptick, but remains lower year-on-year 1,051 to see better traction and a rising share in the product mix, aiding margin prospects. Pidilite’s overall volume growth in the December quarter (Q3FY24) was 10.4% year-on-year, with the consumer & bazaar, and B2B segments clocking double-digit growth.
To protect its turf, Pidilite cut prices cut by 6% in Q3. “This will lead to revenue optically looking muted but it is a strategic step, given sharp margin improvement,” Nuvama Research wrote in a recent note. The price cuts come at a time when gross margins are at a multiquarter high, offering some cushion to the company to boost its market share.
The cost of key input chemical vinyl acetate monomer (VAM) has started to inch up from recent lows but is still down year-on-year. This is allowing Pidilite to invest in advertising and promotion spends, which doubled in
9MFY24 from a year ago, management said in the latest earnings call. Distribution strength is key for success in this business, now that decorative-paints leader Asian Paints is also in the home-décor business. In Q3FY24, Pidilite expanded its network to 12,000 stores in more than 8,000 villages under the ‘Pidilite ki Duniya’ programme. It plans to add 1,000-1,500 stores every quarter. In the decorative paints business, the management has also reiterated that it is focusing on small towns, rural areas and select geographies for now. It rem-ains to be seen if Pidilite becomes aggressive in this segment. Much depe-nds on the pricing of newer companies.
Meanwhile, there were some jitters among investors when Pidilite recently announced its entry into the non-banking finance sector. To allay concerns, it has launched a pilot project in a southern Indian city. The previously committed capex of ₹100 crore will be spent over two years, depending on the pilot's success. Against this backdrop, Pidilite’s valuations appear pricey. On FY25 price-to-earnings, the stock is trading at a multiple of 70 times, showed Bloomberg data, far higher than Asian Paints’s 47 times. Pidilite does not have a direct, listed competitor, but it is often compared to paint companies owing to the discretionary nature of the business. Robust execution capabilities, strong brand recall and a solid balance sheet continue to be Pidilite’s moats, but these appear to be factored into the price. So far in CY24, Pidilite’s shares have risen by nearly 11% versus the Nifty 50’s mere 1.2% gain.
THE ongoing upcycle in residential sales should benefit the company’s adhesives portfolio
PIDILITE aims at steady-state underlying volume growth of 1-1.5x of GDP