For Fevicol maker Pidilite, its rich valuation could prove to be a sore spot

In the June quarter, or the first quarter of financial year 2024-25, Pidilite impressed investors with an underlying volume growth (UVG) of 9.6% year-on-year. While this is lower than the double-digit UVG of 15.2% seen in the preceding March quarter, it is still nothing to sneeze at.

Volumes in the consumer and bazaar and business-to-business segments rose 8% and 18%, respectively, in the first quarter.

For FY25, Pidilite’s management has maintained a double-digit UVG target and expects rural markets to see faster growth than urban areas.

In its core category, which includes adhesives Fevicol, Fevikwik, Fevistick, and M-Seal, Pidilite is aiming to grow at 1-2 times India’s GDP growth rate.

In its growth category, which includes its waterproofing solutions, Pidilite is aiming to grow at 2-4 times the GDP growth rate.

New businesses such as wood finish products and epoxy adhesives come under the company’s pioneer category.

(Raw) material gains

Benign raw material costs and operational efficiencies meant solid year-on-year margin expansion for Pidilite. In fact, both gross and Ebitda margins rose to multi-quarter highs of 53.8% and 23.9% in the first quarter.

For FY25, the Pidilite management has maintained its Ebitda margin guidance at 20-24%. Yes, there has been some adverse impact of price cuts taken last year. The value-volume gap is poised to narrow in the second half of FY25, provided raw material prices remain stable.

But Pidilite did not take any major pricing actions in the first quarter. Also, any incremental price cuts look unlikely given volatile geopolitical conditions. This should help bridge the value-volume gap.

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On the input cost front, the consumption cost of key chemical vinyl acetate monomer (VAM) stood at $1,022 per tonne in the first quarter, down from $1,137 per tonne in Q1FY24. VAM prices are volatile and hovering at $850-1,000 per tonne, the management said.

Nonetheless, gains from lower raw material costs have given Pidilite the room to increase its thrust on advertising and distribution efforts. Pidilite continues to expand distribution, reaching around 14,000 stores and nearly 10,000 villages under the 'Pidilite ki Duniya' program.

The management said that if it sees more gross margin gains, then it will aggressively invest in initiatives that will boost growth. Going ahead, the capital expenditure target would be 3-5% of sales.

On a high, but expensive valuation

The Street rewarded Pidilite for its decent Q1 performance, pushing the stock to a 52-week high of ₹3,278.95 on NSE last week. With that, investors in Pidilite are sitting on handsome gains of about 16% so far in 2024, beating the Nifty 50 index’s returns during this span.

Earnings growth estimates have been raised as well. “We upgrade our earnings per share (EPS) estimates by around 3-4% for FY25-27 factoring robust margins in Q1FY25,"IIFL Securities Ltd said about Pidilite stocks.

The research house expects Pidilite can deliver a 16% EPS compound annual growth rate over FY24-27, with no major competitive headwind, unlike the paints sector.

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However, a sore point for investors in the Pidilite stocks is that valuations remain expensive. The stock is trading at FY26 price-to-earnings multiple of 64 times, showed Bloomberg data.

To be sure, Pidilite is seen among the potential beneficiaries of the upcycle in real estate sales, but the impact on earnings is likely to come with a lag of a few years. Plus, other moats are priced-in to a large extent.

“Pidilite stands out for its market-leading position in the adhesives market, along with a strong brand and a solid balance sheet. However, we believe the current valuation limits the upside potential," Motilal Oswal Financial Services saidin a report last week.