Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Poor margin growth weighs on Pidilite’s earnings estimates

To curb margin erosion, Pidilite recently took price hikes of around 3-5% in select categories

Adhesives maker Pidilite Industries Ltd’s volume growth in the consumer and bazaar segment was decent in the September quarter. However, the lack of adequate pricing growth has soured the Street’s sentiment towards the stock.

The maker of Fevicol is among the causalities of a depreciating rupee and simultaneously surging crude oil prices. The cost of key input material vinyl acetate monomer (VAM), a crude-based chemical, spiked by around 20% in the September quarter. Since most of its requirements are met through imports, a weakening rupee accelerated margin pressure.

To curb margin erosion, Pidilite recently took price hikes of around 3-5% in select categories. But that helped only partially. Its gross margin and operating margin narrowed by more than 350 basis points each in the September quarter. One basis point is 0.01%.

In a post-earnings conference call, the company’s management lowered its Ebitda margin forecast band for this fiscal year to 22-23% from 21-25% guided earlier. Ebitda stands for earnings before interest, tax, depreciation and amortization. Also, the management indicated that some correction in margins from FY2017-18 peak levels was expected and due.

Although spot VAM prices have now moderated to $1,200/MT from $1,325/MT in the September quarter and the company may take further price hikes, recovery in margins would be gradual and lower than estimated, analysts said.

Consequently, a slew of brokerages have trimmed earnings estimates and price target for the Pidilite stock.

Kotak Institutional Equities has cut its FY2019-21 estimated EPS by 7-8% on the back of slightly lower margin and has revised its target price to 915 from 960 earlier.

Prabhudas Lilladher Ltd and BOB Capital Markets Ltd too have trimmed the stock’s target price.

As for demand outlook, the management said that domestic demand momentum is stable and double-digit volume growth looks achievable.

Meanwhile, on a year-to-date basis, the stock has surged 11%, outperforming benchmark index Nifty500, which has posted negative returns.

Even though the company enjoys a dominant positioning in the adhesives business and is seen among the key beneficiaries of GST-led demand shift from unorganized to the organized segment, these positives are priced in.