Pidilite's new moves come with old triggers

The NBFC business is not directly related to Pidilite’s mainstay business. (Photo: AFP)
The NBFC business is not directly related to Pidilite’s mainstay business. (Photo: AFP)

Summary

  • Pidilite intends to set up a lending business with the acquisition of promoter group company Pargro Investments Pvt. Ltd.

Adhesives maker Pidilite Industries Ltd has caught investors by surprise with its decision to enter the non-banking financial companies (NBFC) sector. Pidilite intends to set up a lending business with the acquisition of promoter group company Pargro Investments Pvt. Ltd. The aim is to provide small-ticket loans to Pidilite’s channel partners/ecosystem (dealers, masons, and contractors). The Pidilite management feels channel partners do not have easy access to short-term loans at reasonable interest rates. So, this move could help address the issue. Also, Pidilite will get access to data and deepen connections with intermediaries, which has been its key approach for decades, pointed out Nuvama Research in a report.

 

(Graphics: Mint)
View Full Image
(Graphics: Mint)

But the stock’s muted reaction indicates that investors are edgy. Unlike the paints business, which is an adjacent product category, and will help Pidilite become a home décor solutions provider, the NBFC business is not directly related to Pidilite’s mainstay business. Pidilite recently launched Haisha Paints. Pidilite boasts of a strong brand recall value and solid distribution network, which are among the key factors to succeed in the paints sector. Still, analysts were wary. Competition in the decorative paints business has heated up with the entry of newer companies with deep pockets such as Grasim Industries, so gaining market share could be a tussle. The Pidilite management is not going full throttle, at least for now, on its NBFC business investment. “We believe that quantum is too small for such a large company—an 100 crore exposure over two years implies less than 2% of Ebitda," added the Nuvama report. So, the financial impact is likely to be negligible. The NBFC business will be run by a completely separate and well-experienced team without any Pidilite executives, the management clarified allaying concerns that Pidilite may not have enough expertise to manage the NBFC business.

Meanwhile, margins and volume growth trajectory of its core business remain the crucial monitorables. In the September quarter (Q2FY24) underlying volume growth in its key Consumer & Bazaar segment stood at 8.4% year-on-year (y-o-y) with rural demand outpacing urban. However, consolidated revenue growth was muted at 2% y-o-y to 3,076 crore. Subdued performance of the export-focused B2B segment and price reductions were the dampeners.

To pass on the benefit of easing input prices, the company took price cuts during the quarter, which weighed on realizations. “We cut our FY24/25 earnings per share estimates by -2.5%/-3.1% as 8% price cut since March 23 (5% in Q2FY24) will impact realizations even as demand and margin outlook remains robust," said a Prabhudas Lilladher report.

On the bright side, lower vinyl acetate monomer (VAM) prices pushed gross margins to a multi-quarter high of 51.3% in Q2FY24. VAM prices were at $1,000/tonne in Q2FY24 versus $2,500 last year. That said, VAM prices are near bottom and the management expects prices to inch up, given global uncertainties and geopolitical tensions.

Profitability outlook would also hinge on the pace of investments in advertisements and distribution. Here, the company plans to be aggressive to beat competition. These efforts bode well for Pidilite’s long-term growth, but so far in this calendar year, the stock performance has been disappointing, falling 3.5%, lagging Nifty50. This comes on the back of concerns that the benefits of soft raw material prices are set to wane, also, the company may choose to sacrifice on realisation growth for volumes. Plus, valuation is not cheap. The stock is trading at one-year forward price-to-earnings of 57x, showed Bloomberg data.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie