Shares of Pidilite Industries Ltd have been resilient despite a sharply weaker rupee and rising crude oil prices. As much as 60% of the company’s raw material costs come from vinyl acetate monomer (VAM), a key raw material that is a derivative of crude oil. Since Pidilite meets its VAM requirement largely via imports, a rise in its landed cost due to a depreciating rupee should pose a risk to margins. The firm’s share price, however, hardly reflects these concerns, at least so far.
On a year-to-date basis, the Pidilite stock has gained 24%, much ahead of the Nifty 500’s 0.58% rise. During the same span, shares of leading paint makers gave lower returns. In the last month, Pidilite’s shares have seen a minuscule impact of the rupee’s accelerated fall, whereas paint makers slipped into the red (see chart).
It should be noted that Pidilite’s stock performance is often compared to listed paint makers, which are also exposed to rising input costs especially crude oil. In the past few quarters, Pidilite and Indian paint companies have raised prices to offset higher costs and protect margins.
Two factors seem to be keeping investor sentiment upbeat. Pidilite enjoys a leadership position in the adhesives market. Also, it is said to be gaining market share from unorganized companies post the implementation of the goods and services tax. For paint makers, since competitive intensity is high, resorting to price hikes could hurt near-term demand, especially in the decorative segment.
Meanwhile, in recent interactions with brokerage firms, Pidilite’s management has acknowledged that rising prices of VAM, packaging cost and depreciating rupee is a near-term concern. However, it expects that the price hike of around 3% would prevent any meaningful margin erosion.
“Input cost has shot up partially owing to shut down of (VAM) capacities and one-fourth of inputs come from China. The company aims to pass through 75% input cost inflation to end consumers and it will manage the rest by cutting costs. In the past few months, the company has taken a weighted average price hike of 1.5–2% in two tranches," Edelweiss Securities Ltd said in a 5 September report, citing the company’s management.
Edelweiss further said that while the company will prioritize volume growth over growing Ebitda margin, it is confident that margins will remain in the band of 20-23%. Ebitda stands for earnings before interest, tax, depreciation and amortization.
That said, the stock is trading at a rich one-year forward price-to-earnings multiple of 45 times and upside from current levels appears limited.