Long-duration elections in the past have led to temporary logistics disruptions, and the present extreme heat conditions across the country could hamper demand, the management said.
This, coupled with a mixed set of fourth-quarter numbers, soured investors’ sentiment towards the stock of the adhesives and sealants maker, dragging its shares down by 4.5% on Wednesday. Among Pidilite’s popular brands are brands include Fevicol, M-Seal and Dr. Fixit.
Pidilite’s March-quarter’s revenue missed analysts’ expectations, with year-on-year growth of around 8% lagging its double-digit volume growth. Pidilite did not take any price cuts in the fourth quarter, but it did pass on the benefits of lower input costs to consumers during the course of the financial year, the management said.
Underlying volume growth (UVG) for Pidilite, at 15.2% in the fourth quarter, however, was robust. The company’s key consumer and bazaar segment saw 12.7% UVG, and for its business-to-business segments, the reading was 25.2%.
The double-digit growth in these segments was aided by distribution expansion, innovation, and supply chain and digital initiatives. Geographically, both urban and rural markets grew during the fourth quarter, with the latter outpacing the former.
Analysts, however, caution that if the value-volume gap persists for long due to price adjustments, it could hurt Pidilite’s earnings outlook. On the other hand, price hikes could be helpful.
For now, the gross margin trend offers solace as it saw a solid year-on-year expansion, hitting a multi-quarter high of 53.4% in the fourth quarter. This was aided by continued moderation in input cost, mainly chemical vinyl acetate monomer (VAM) prices.
In the March quarter, the consumption cost of VAM stood at $900-950 per tonne, and is expected to be stable at around those levels in the ongoing first quarter of financial year 2024-25, the management said.
Although crude prices are showing early signs of inflation, barring any black swan event, Pidilite’s management does not see a major change in VAM prices from these levels.
Easing costs gave Pidilite the flexibility to increase its spending on advertisements and promotions as well as on customer-centric initiatives, as reflected in the company’s rising operating expenses.
“Higher investments in brand building initiatives limited the quantum of operating margin expansion in Q4FY24,” said Kaustubh Pawaskar, deputy vice president, research, Sharekhan by BNP Paribas. Pidilite’s consolidated Ebitda margin at 19.9% was below the average street expectation of 22.2%, and was a key reason for profit after tax coming in lower than expected, he added.
Pidilite aims to continue investing in brand-boosting initiatives. It would, thus, be worth tracking operating margin trends. That said, now that decorative paints leader Asian Paints is also present in the home-décor business, brand visibility and distribution strength has become more crucial than before. Pidilite is already working towards this through store additions and expansions.
In FY24, Pidilite expanded capacity in existing plants and commissioned 10 new facilities. Capital expenditure planned for FY25 remains at 3-5% of sales, which would work out to ₹400-800 crore.
To boost growth and market share, Pidilite is open to acquisitions that are complementary to its portfolio, thanks to its strong balance sheet.
To be sure, Pidilite is optimistic about medium-term demand prospects. It expects its core adhesives portfolio to benefit from upcycling in residential real estate and government spending on infrastructure, although with a lag of some years. In FY25, the company aims to deliver double-digit UVG and maintain its operating margin in the 20-24% range.
So far in 2024, Pidilite’s shares have gained 4%, faring better than the benchmark index Nifty 50 and Asian Paints. Still, valuations don’t provide much comfort as moats of robust execution capabilities and strong brand recall seem to be largely priced in. At the FY25 price-to-earnings, the stock is trading at a rich multiple of 66 times, showed Bloomberg data.
