Stock is trading at 56 times one-year forward price-to-earnings ratio, as per Bank of America Merrill Lynch
In short, in the backdrop of the ongoing consumption slowdown, Pidilite’s valuations have to moderate for it to regain popularity among investors
For adhesives producer Pidilite Industries Ltd, maintaining a strong bond with investors is getting challenging.
This is despite the fact that the company reported decent June quarter earnings in an environment of moderating industry growth. Volumes in its key consumer and bazaar business grew 6% year-on-year. Thanks to easing input costs, operating margins too improved more than 100 basis points year-on-year to 22%. A basis point is one-hundredth of a percentage point.
In a post-earnings conference call, the management said that profitability outlook has improved further due to the continued downward trend in raw material prices. However, that hasn’t prompted analysts to change their stance on the Pidilite stock. Blame it instead on the company’s rich valuation.
Pidilite is trading at 56 times one-year forward price-to-earnings ratio, according to Bank of America Merrill Lynch. The stock seems to be pricing in overly-stretched expectations, leaving minimal room for error, the brokerage firm wrote in a note to clients, explaining its underperform rating on the stock.
“We like the story but await a better entry point given expensive valuations," Kotak Institutional Equities said in a report on 8 August. The broking house has raised FY20-22 earnings per share estimate by 2-4% on the back of lower input prices but maintains a reduce rating on the stock.
Similarly, Motilal Oswal Securities Ltd pointed out that while the estimated earnings growth rate is healthy at nearly 18% for the next two years, the return on capital employed in the early 20s is at a substantial discount to the consumer peer average of around 32%.
“Moreover, the challenging demand environment and the raw material cost dependence on crude price trends add an element of uncertainty to the earnings outlook," it said in a report on 7 August.
Although some brokerage firms remain upbeat on Pidilite, it is unlikely to see a run-away rally from its current level. For instance, Edelweiss Securities Ltd is working with a target price of ₹1,486, which is 9.5% upside from the current market price of ₹1,344.10. It should be noted that the stock hit a new 52-week high of ₹1,371 on the National Stock Exchange on 13 August.
In short, in the backdrop of the ongoing consumption slowdown, Pidilite’s valuations have to moderate for it to regain popularity among investors.