Pidilite Q2 results: Demand scenario challenging; spike in input cost risk
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Despite the subdued demand environment and prolonged monsoon, adhesives and industrial chemical manufacturer Pidilite Industries Ltd posted an year-on-year (y-o-y) volume growth of 8.5% in the second quarter of fiscal year 2017. Consolidated net profit rose 13.1% to Rs231 crore, boosted by higher other income, and net sales rose 7.58% to Rs1,410.21 crore. A Bloomberg poll had put consolidated net profit and net sales at Rs223.70 crore and Rs1,520.10 crore, respectively.
The consumer and bazaar (C&B) segment’s volume grew 7.8% y-o-y, lower than anticipated. Historically, C&B has grown at nearly 15% and Pidilite is striving to achieve it, the management said in a post-earnings conference call. It isn’t surprising that the stock has fallen 5.45% in the last three trading sessions.
Industrial segment saw volumes grow 12.7% y-o-y. While C&B margins fell, industrial business saw improvement on that front courtesy lower input costs, superior product mix and higher sales of speciality products. Margins of the industrial segment were in the teens and will sustain, the management added.
Among acquisitions, the performance of Bluecoat, Falcofix and Percept remains on track, but waterproofing business Nina had a soft quarter due to heavy rains. International business was largely impacted by voluntary recall of products in the US. But that issue is now behind Pidilite and new products were dispatched towards the latter part of September.
Meanwhile, gross margins improved due to softer raw material costs, but consolidated Ebitda (earnings before interest, taxes, depreciation, and amortization) margin fell, hit by other expenses led by higher advertisement costs. A meaningful spike in crude oil price, which has a direct impact on prices of vinyl acetate monomer (VAM)—a key input material—could hurt margins and hence is a risk. For now, VAM prices are stable in the range of $750-800/tonne.
Revival in demand is foreseen in the second half of the year, buoyed by higher consumer spends due to the good monsoon. Pidilite’s current indirect tax rate is in the 23-25% range and it remains hopeful of some products being categorized under the 18% slab under the proposed goods and services tax.
Shares of Pidilite have outperformed the Sensex in the last one year and trade at one-year forward price-to-earnings multiple of 38.43 times. That is by no means cheap.