Hold Pidilite Industries, target Rs 1,130: Emkay Global Financial Services

Emkay Global Financial Services has a hold call on Pidilite Industries with a target price of Rs 1,130.

The current market price of Pidilite Industries is Rs 1,107.90.

Time period given by the brokerage is one year when Pidilite Industries price can reach the defined target.


View on the company by Emkay Global Financial Services:
Strong volume growth in domestic business: Pidilite’s domestic comparable sales grew by 21 per cent, driven by volume growth of 18 per cent. Consumer & Bazaar products sales grew by 23 per cent with strong volume growth of 20 per cent while Industrial Products grew by 11 per cent with volume growth of 7 per cent. Gross margin/EBITDA margin contracted by 70bps/50bps due to high input cost inflation.

Weak international business drags overall subsidiary performance: Subsidiaries organic (excluding CIPY) sales grew by 16 per cent, driven by strong growth in Indian subsidiaries. Indian subsidiaries’ organic sales grew by 27 per cent with EBITDA margin improvement of 240bps on the back of robust performance of the Waterproofing business. International subsidiaries sales grew by only 6 per cent due to weak performance in USA (down by 18 per cent).

Higher VAM prices hurt margins: VAM (key raw material) prices grew by nearly 50 per cent, resulting in gross margin contraction of 120bps. Despite increase in A&P spends (4.2 per cent of sales), EBITDA margin contracted by only 20bps due to lower overheads. The company has taken price increase of 3-5 per cent in Q1FY19 and Q2FY19 to mitigate some of the high input cost inflation. However, with peak margins in base quarters and VAM prices increasing further to US$1,320 (US$1,200 in Q1FY19), we expect near-term margins to remain under pressure.

Strong volume growth but valuation offers limited upside; Maintain HOLD: Pidilite offers strong volume-led growth visibility, but given the near term margin pressure and rich valuation, we see limited near term upside. Therefore, we maintain our HOLD rating with a revised TP of Rs1,130.