Pidilite Industries Q3FY18: Strong Beat on Volumes; Maintain Buy | Indianotes.com
Beating our estimates on all operational parameters, Pidilite Industries has posted a stellar set of numbers for 3QFY18. Its consolidated reported revenues grew by 15.6% YoY to Rs15.4bn (vs. our estimate of Rs14.9bn), while net profit increased by 18% YoY to Rs2.4bn (vs. our estimate of Rs2.2bn). Volume grew by an impressive 22% YoY albeit on a lower base. Consolidated EBITDA grew by 29.2% YoY to Rs3.7bn.
We expect Pidilite’s revenue and earnings to clock 13.5% and 16.5% CAGR, respectively through FY17-20E. Dominant market leadership in adhesive segment, robust management bandwidth, strong brands, pricing power and large underpenetrated market will be the key drivers for Pidilite in coming years. Hence, we maintain our BUY recommendation on the stock with a revised Target Price of Rs997 (from Rs941 earlier).
Impressive Performance on C&B Business
Standalone revenue growth on a comparable basis stood at 20% on the back of 22% volume growth following lower base marked with 1.5% volume de-growth due to demonetisation i 3QFY17. The core Consumer & Bazaar business reported 18% YoY volume growth and 23% YoY revenue growth on comparable basis. Domestic waterproofing subsidiaries i.e. Nina and Percept reported 22% YoY and 24% YoY growth in revenue. The management remained cautiously optimistic regarding the demand scenario. However, revenue from ICA Pidilite declined by 27% YoY due to GST related classification dispute with the concerned authorities. Revenue from international business grew by 3% YoY to Rs1.3bn in constant currency terms, while its EBITDA grew by 20% YoY to Rs67mn.
Margins Recover on High Operating Leverage
Consolidated gross margins improved marginally by 20bps YoY to 53.4% compared to 60bps fall seen in 1HFY18. The company has taken selective price increases to counter higher input costs. Higher volume growth resulted in fall in fixed overheads i.e. employee cost (down 110bps YoY) and other expenses (down 120bps YoY). Resultant EBITDA margins rose by 250bps YoY to 24% leading to 29% YoY growth in absolute EBITDA to Rs3.7bn. Higher margins are also attributable to superior growth in C&B segment.
Outlook & Valuation
We expect Pidilite to report double digit volume growth in coming quarters. Trade stabilisation post GST roll-out, good monsoons aiding rural growth, huge underserved market and strong pricing power will be the key contributors to Pidilite’s growth, in our view. Based on expected consolidated EPS of Rs26.7, the stock currently trades at 32.9x FY20E earnings. Considering strong growth momentum coupled with reasonable valuations, we maintain our BUY recommendation on the stock with a revised Target Price of Rs997, which implies 14% upside from current levels.
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