Don’t read too much into Pidilite Industries’s deal-making spree
In a bid to expand its presence in other areas, adhesives manufacturer Pidilite Industries Ltd inked a pact with German industrial adhesives supplier Jowat SE last week.
As part of this collaboration, Pidilite Industries will exclusively handle sales and distribution of the entire range of Jowat adhesives in India and neighbouring countries including Sri Lanka, Bangladesh and Nepal.
A month ago, the company announced the acquisition of a majority stake in CIPY Polyurethanes Pvt. Ltd, which is engaged in the resin flooring and floor coating business. The Pidilite Industries stock saw an uptick in response to these announcements.
Analysts point out that although these deals are positive for market sentiment, incremental revenue is unlikely to trickle in, in the near term, and even when it does, the impact on overall revenue won’t be significant, so investors should not get carried away by these announcements.
The industrial adhesives and floor coating industries do not have a very a large market in India and the industrial products segment has been a laggard for some time now given the absence of a meaningful pick-up in private capex.
For Pidilite Industries, the industrial products segment contributes around 15% to its overall sales, but the lion’s share comes from the consumer and bazaar segment that comprises flagship products such as Fevicol and M-Seal.
This simply means volume growth in the consumer and bazaar segment along with movement in vinyl acetate monomer (VAM) prices, a key input, remains the key drivers for the stock.
In the December quarter, the consumer and bazaar segment saw double-digit volume growth for the second consecutive quarter. Despite this, the company’s management in a post-earnings conference call said it is too early to call out a demand recovery, and remains cautiously optimistic on growth.
Volumes in the industrial segment also grew in double digits, largely helped by a favourable base, thanks to demonetisation.
The company hiked prices by 5-10% for solvent and rubber-based adhesives in the December quarter to offset input cost inflation.
The management is willing to raise prices further, should raw material prices remain elevated.
Meanwhile, as the chart shows, the stock has gained marginally but remains in positive territory, outperforming the benchmark index Sensex that began its southward journey on 29 January.
But at the current market price, the stock discounts all near-term positives, limiting any sharp upside.
Indeed, the stock already trades at an expensive price-to-earnings multiple of 42, which needs to correct.