EQUITIES

Change in consumer habits may hit Pidilite Industries; should investors buy or sell shares?

As the novel coronavirus pandemic is expected to shake up consumer habits, discretionary spending might stay muted in the next few quarters. As consumers curtail their expenditure to essential items, analysts are expecting near-term headwinds for Pidilite Industries. The adhesive manufacturer reported a 5.8% decline in sales in the March quarter and saw profit decline 23% on-year basis. Although Pidilite Industries has been a strong market performer over the years, due to a highly uncertain near-term outlook and expensive valuations analysts expect the scrip’s market performance to be muted. Currently, Pidilite Industries shares are trading 0.68% up at Rs 1,400 per share.

In the March quarter results, Pidilite Industries saw EBITDA drop 7% on-year while profit before tax was down 11.9%. However, gross margins expanded 510 basis points from the previous year to 55.4%. Tax for the quarter was at Rs 65.6 crore, down from 108.4 crore in the previous quarter. “4QFY20 results were well below expectations; the outlook is extremely weak for 1QFY21, with a near-washout witnessed in April and the large part of May,” said brokerage and research firm Motilal Oswal. The brokerage firm has a NEUTRAL outlook on Pidilite saying that earnings growth over the next two years is likely to be weak while valuations are expensive. 

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The outlook for the entire sector of specialty chemicals is neutral in the view of Kotak Institutional Equities. While consolidated statements of Pidilite Industries reported a 6% revenue decline, standalone sales slipped 4.4%, but international subsidiaries of the firm grew 3.5% led by Bangladesh, the Middle East, and Egypt. Earnings growth for Pidilite in the next few years hinges on a few key factors according to a report by Kotak Institutional Equities. These include demand for repainting from the real estate industry, which accounts for 758% of decorative paints demand. Secondly, the investments made by the firm in the previous few years. “We believe these investments would help Pidilite develop/ramp-up in new categories/products, accelerating topline growth,” the report said. 

“We like PIDI for its dominant positioning in a high-growth segment, and track record of expanding product portfolio and developing end-markets. Await a better entry price,” said Kotak Institutional Equities with a REDUCE rating on the stock and a fair value of Rs 1,325 per share. Pidilite’s management indicated that sales in the month of April 2020 were nearly zero due to the lockdown. Business activity is better in smaller towns/rural markets than in large cities. The  Urban/Rural sales split is 65/35. 

ICICI Securities has upgraded the stock to HOLD from REDUCE but the target price hints at a significant downside to the current levels. “With recovery already seen in rural and semi-urban markets (accounting for 30-35% of PIDI’s revenues) and in some of its product segments like cyanoacrylate, construction chemical segments, etc, we expect sizeable volume recovery in the second half of this fiscal year,” said the brokerage firm. The company’s management has said that inventory levels at the dealer’s end remain at 7-15 days while at the company level it is at 30 days, which are normalised levels.

Amidst all the gloom, Edelweiss securities is making a contrarian call putting a BUY call on the stock, saying that the company remains structurally strong. “Demand revival once normalcy returns, entry in new markets/adjacent categories, and anticipated demand shift from unorganised to organised players are likely to boost PIDI’s revenue and earnings. We maintain ‘BUY/SP’ with TP of INR1,500. At CMP, the stock is trading at 53.7x FY22E EPS,” Edelweiss said in a research note.

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