Home >Markets >Mark To Market >Rising competition, slowing growth to test Pidilite’s bond with investors

For shareholders of adhesive-maker Pidilite Industries Ltd, the past couple of weeks have been eventful. In end-October, the firm announced the acquisition of Huntsman Corp.’s do-it-yourself consumer adhesives business for approximately 2,100 crore. The acquired company manufactures and sells adhesives, sealants and other products under brands, such as Araldite and Araseal, in India.

This was followed by Pidilite’s strong September quarter results. Earnings recovery was aided by faster-than-expected demand growth in rural and semi-urban areas. Its key revenue generator—what it calls the consumer bazaar segment—posted volume growth of 7.4% year-on-year (y-o-y) in Q2. Gross margins and operating margins expanded to 56% and 27% y-o-y, respectively. The sharp improvement in margins was driven by lower input prices and cost rationalization measures.

While volumes and profits are rising, investors should also note that competition is rising in Pidilite’s key product categories. New entrants, including established paint makers, are diversifying into segments such as waterproofing and construction chemicals.

Impressive margins
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Impressive margins

Analysts at Spark Capital Advisors India Pvt. Ltd said Pidilite’s organic growth (adjusting for all acquisitions) over the past four years on a CAGR basis has been in low-single digits. CAGR is short for compound annual growth rate. This clearly highlights the growing competitive intensity in the category and also perhaps the slowing category growth. “The acquisition of Huntsman advanced material solutions is also clearly an effort in the same direction to consolidate its market share in the adhesives & sealants category and ‘acquire’ growth at all costs," the report said.

Of course, challenging Pidilite’s strong brand recall and large dealer distribution network will be a tough nut to crack for competitors. But analysts said one should not underestimate the strong reach of large paint firms, especially in rural areas.

As far as the earnings outlook is concerned, the management expects demand recovery to continue going ahead. However, with hardening prices of key raw materials, margins are unlikely to sustain at higher levels.

The management said vinyl acetate monomer prices have risen after Q2. It also indicated an increase in ad spends to push new launches. So, operating margin would be back to the earlier range of 21-24% going ahead, the management said, lower than the 27% margin achieved in Q2.

“The B2C nature of the business and continued wariness among urban consumers means that earnings CAGR over FY20-22E could remain muted. We expect sales/ PAT CAGR at 6.4%/4.8% over this period, continuing the trend of over the last four years," Motilal Oswal Securities Ltd analysts said.

These concerns, along with the stock’s rich valuation multiple, could weigh on its bond with investors. Shares of Pidilite trade at a one-year forward price-to-earnings multiple of 78 times, shows Bloomberg data. This is much higher than Berger Paints’ PE multiple of 72 times. Berger is the most expensive stock among listed paint firms. Analysts said with positives priced in, upside in the Pidilite stock is capped due to expensive valuations.

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