Pidilite needs a quicker recovery to strengthen its bond with investors

MUMBAI: The June quarter earnings of Fevicol-maker Pidilite Industries Ltd were disappointing on many fronts. Key contributor to the company’s revenues -- the consumer and bazaar (C&B) segment -- saw volumes decline around 59%. This fall was higher than what was being anticipated. Secondly, in spite of lower raw material cost, gross margins declined by 190 basis points sequentially, to 53.5%. One basis point is one hundredth of a percentage point.

In a post earnings conference call, the company’s management said that business gradually improved in July with more than 90% of retail outlets open. The recovery was driven by C&B segment notwithstanding the localized lockdown in a few states, the management said. Further, benefits of easing raw material costs are expected to reflect in the September quarter earnings.

But analysts are wary about Pidilite’s lagging recovery compared to other discretionary companies such as paint manufacturers.

“Revenues in April were near zero for almost all home improvement companies including Pidilite, due to the covid lockdown. However, the 1Q decline for paint companies was ~45% compared to ~55% for Pidilite. This implies that the post lockdown recovery in May/June for Pidilite would have been ~70% of normal sales, while that for paints companies would have been ~85% of normal sales. The recovery is thus much slower for Pidilite compared to peers in the larger home improvement segment like paints,” analysts at Credit Suisse said in a note on 6 August.

As per the management, while its topline performance was weaker than paint companies', the gap may narrow in September quarter.

Analysts at Emkay Global further pointed out, that in addition, concerns about growth remain due to intense competition in construction chemicals, slow demand recovery due to stress/delay in new construction, and rich valuations at 50 times FY22E EPS. EPS is short for earnings per share.

Pidilite is one of the most expensive stocks in consumer discretionary space. Its valuation multiple is much higher than key paint manufacturers Asian Paints Ltd and Berger Paints India Ltd.

In the current backdrop where outlook for discretionary spends is muted, these valuations are rich. Of course, the company’s strong brand image and market leadership position in the adhesives sector cannot be overlooked. But for such a high premium to justify, not only earnings have to improve especially now that the company is starting to face increased competition from new entrants in the adhesives sector, analysts said.

The management acknowledged that paint companies have gained traction in some areas of waterproofing. That said, the management indicated that overall construction chemicals market is very large with different type of end users and Pidilite is watchful of competition.