Pidilite’s results prove why it pays to stick with leader in tough times
Extraordinary expenses worth ₹737 cr took a toll as the firm posted a loss of ₹644 cr. This has unnerved the StreetCurrently, Pidilite shares trade at nearly 55 times FY21 estimated earnings, based on Bloomberg data
Investors don’t appear to be worried about Pidilite Industries Ltd’s high valuations. In fact, the stock hit a new 52-week high on Monday on NSE, after the company impressed the Street with strong earnings performance last week.
Currently, Pidilite shares trade at nearly 55 times FY21 estimated earnings, based on Bloomberg data. Note that this is marginally higher than consumer products behemoth Hindustan Unilever Ltd’s valuations, which itself is pricey.
Coming to Pidilite’s December quarter results, consolidated revenue grew 4% from a year earlier. However, softer raw material costs meant earnings before interest, tax, depreciation and amortization (Ebitda) jumped 36%. Ebitda margin expanded more than five percentage points to 24%.
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Sure, revenue growth trended lower. Revenue at the mainstay consumer and bazaar products in the domestic market grew just 3.9% last quarter. Tight liquidity conditions in the user industries weighed on sales.
On the other hand, the industrial products segment, the much smaller contributor to revenue, performed better thanks to strong exports.
Going ahead, commentary about the mainstay consumer and bazaar products division, where Pidilite is the market leader, remains cautious. The management says one has to wait for two more quarters to call out any definitive demand trends. Recovery in real estate and construction sectors is important.
Pidilite’s focus is on “stimulating" volume growth. It is stepping up spends on advertising and brand promotions, and is trying to expand its customer base (rural areas). These measures will require market recovery to show results.
Meanwhile, despite a notable fall in raw material costs, the company has implemented only modest price cuts, and that, too, on select products. This indicates its strong competitive positioning in the market.
Importantly, raw material prices continued to remain soft. This should leave enough room for promotional spends and price cuts. It should also help grow earnings in Q4 at a decent pace despite muted sales. “ We model an increase in Ebitda margin by 330 basis points in FY20E to 23%," ICICI Direct Research analysts said in a note.
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