(Mint)
(Mint)

Pidilite needs a margin revival to strengthen its bond with investors

  • In the December quarter, the adhesive maker’s gross margin contracted by 620 basis points year-on-year to a 15-quarter low of 47.2%
  • For earnings estimates to revive sharply, not only does volume growth have to sustain, but even margins need to revive.

The one-year forward consensus earnings per share estimate for Pidilite Industries Ltd continues to head southward. Blame the sharp contraction in gross margin for it. In the December quarter, the adhesive maker’s gross margin contracted by 620 basis points year-on-year to a 15-quarter low of 47.2%. Consequently, operating margin shrank more than 500 basis points on a year-on-year basis. A hundred basis points equals 1%.

Given the elevated cost of vinyl acetate monomer (VAM) and a weaker rupee, erosion in margins was on the cards. However, the steep fall in margins in spite of taking a nearly 2% price hike in the December quarter was disappointing.

In this backdrop, it is surprising that the company’s share price has been flat since the results were announced last week.

Thankfully, VAM prices have begun to ease and the rupee is now stable. That, along with the price hikes, should aid Pidilite’s margin growth going ahead. However, operating margin is unlikely to surpass the peak of 21.9% and 22.4% seen in fiscal years 2016 and 2017, respectively, said its management.

Considering the company’s dominant position in the adhesives market, Pidilite should also opt for frequent and aggressive price hikes like paint companies, say analysts. The fact that it hasn’t been able to suggests a lack of pricing power, which is disconcerting for investors.

The management, however, seems to be more focused on volume growth. Pidilite reported impressive double-digit volume growth for the sixth quarter in a row in its key segment. Also, the company witnessed market share gains during the quarter from both organized and unorganized firms. Its management is cautiously optimistic about sustaining its current double-digit growth momentum.

It should be noted that Pidilite is seen as one of the key beneficiaries of a demand shift led by the goods and services tax. However, at an expensive one-year forward price-to-earnings multiple of 48 times, these positives are priced in the stock.

For earnings estimates to revive sharply, not only does volume growth have to sustain, but even margins need to revive.

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