Home >market >mark-to-market >Pidilite Q4 Result: Basking in GST glory, but input cost inflation a spoilsport

The Pidilite Industries Ltd stock touched a 52-week high of Rs1,195.40 on Wednesday after it reported March quarter earnings that beat analysts’ expectations.

For the third straight quarter, the adhesive and industrial chemical maker saw volumes in the consumer and bazaar segment—a key contributor to revenue—report double-digit growth. Volumes in the industrial business too grew in double digits during the March quarter.

In a post-earnings conference call with analysts, Pidilite Industries’ management said there has been a gradual improvement in demand conditions, but it will take a couple of quarters to call this a definitive trend. However, the company expects the goods and services tax (GST) to benefit those in the organized sector, particularly after the e-way bill implementation.

It should be noted that Pidilite Industries enjoys a dominant position in the adhesives market. While its share price performance is often compared to listed firms in the paints sector, it doesn’t have a direct competitor and that makes the company well poised to derive GST-led benefits.

In fact, according to Motilal Oswal Securities Ltd, Pidilite Industries offers investors the second biggest opportunity after Titan Industries Ltd on the so-called “unorganized to organized conversion" story. And this is something that is already showing promising signs—over the past couple of quarters, volumes have grown in double digits, with a potential for pickup in momentum going forward, the domestic brokerage firm said in a report dated 25 May.

Since GST implementation in July 2017, the Pidilite Industries stock has rallied around 47%, outperforming the Nifty 500 index, which surged 11% during the same period.

While the company is optimistic about demand, there are headwinds in the form of higher raw material prices.

Cost of vinyl acetate monomer (VAM), a key input material, has moved up from $975 per tonne in December 2017 to $1,100 per tonne in March 2018 and the current spot price stands at $1,300 per tonne, said the management. VAM accounts for 35-40% of Pidilite Industries’ total raw material cost together with packaging. The company is mitigating this impact via price hikes.

Pidilite Industries has undertaken 2-5% price hikes in a few rubber-based products during the March quarter as well as the current quarter. Another round of price increase may be in the offing unless raw material prices moderate, said the management.

Though the company foresees operating margin hovering in the 22-24% range going ahead, its focus remains on volume growth.

As for valuations, the Pidilite Industries’ stock is trading at a one-year forward price-to-earnings multiple of 54 times. Despite the many positives, this is expensive and considering the sharp run-up, the upside in the stock from current levels may be limited.

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