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Pidilite: Consumer segment slows down - Views on News from Equitymaster
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Pidilite: Consumer segment slows down
Mar 20, 2014

Pidilite Industries announced its results for the quarter ended December 2013. The company reported a 15% YoY growth in revenues and an 18% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Consolidated revenues increase by 15% YoY during the quarter led by a 17% growth in the industrial product segment and 15% growth in consumer products segment.
  • Operating profits rise by 6.6% YoY only as margins contract by 1.1% YoY to 14.9%.
  • Net profits decline by 18% YoY.
  • During 9mFY14, consolidated revenues and profits rise by 16% YoY and 10% YoY respectively.

Consolidated financial snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Revenues 9,318 10,688 14.7% 28,391 32,926 16.0%
Expenditure 7,824 9,096 16.3% 23,573 27,149 15.2%
Operating profit (EBDITA) 1,494 1,592 6.6% 4,818 5,777 19.9%
Operating profit margin (%) 16.0% 14.9%   17.0% 17.5%
Other income 190 71 -62.7% 488 250 -48.8%
Interest 1 57 5054.5% 153 173 13.4%
Depreciation 180 213 17.9% 512 613 19.8%
Forex loss/ (gain) (88) 34   (8) 18
Exception items 6 (64)   6 (64)
Profit before tax 1,596 1,296 -18.8% 4,655 5,159 10.8%
Tax 413 334 -19.3% 1,237 1,407 13.7%
Profit after tax/(loss) 1,183 962 -18.6% 3,418 3,752 9.8%
Share of profit of associates 1 11 1485.7% 3 18 480.6%
Minority interest 7 (1)   6 (3)
Net profit after tax 1,190 972 -18.3% 3,427 3,767 9.9%
Net profit margin (%) 12.7% 9.0%   12.0% 11.4%
No. of shares (m)         512.6  
Basic earnings per share (Rs)         8.9  
P/E ratio (x) *         31.5  

What has driven performance in 3QFY14?
  • Pidilite Industries' (PIL) revenues increased by 15% YoY during the quarter ended December 2013. Revenue growth was led by the company's industrial product segment which grew by 17% YoY and formed about 18% of revenues, while its consumer bazaar product segment - which contributed to the balance - grew by 15% YoY. As per the company's management, growth in the industrial segment was largely led by export driven growth, on the back of weakening rupee. In the consumer products segment volume growth stood at about 11% YoY while the pricing impact contributed to the balance. As per the company, its growth in this division slowed down largely due to lower growth seen in the discretionary product segment.

  • PIL's operating profits increased at a slow pace of 7% YoY during the quarter. Margins contracted by 1.1% YoY largely due to higher other expenses, which mainly included advertising and promotion expenses. As per the company, the same expenses were higher due to bunching up of spends on media (to give fillip to products across categories), and as such will not be a trend going forward. It expects the full year spends on advertising to be in line with historical levels (as a percentage of sales). The profit before tax figure was down by about 19% YoY. This was mainly due to a slow growth in operating profits coupled with lower other income, higher interest costs, higher depreciation charges, forex losses (as compared to gains last year) as well as extraordinary loss (as compared to a gain last year). As per the company, adjusting for the one-time items during both the periods, the PBT figure would have been lower by about 9% YoY.

  • During 9mFY14, company's revenues and profits increased by 16% YoY and 10% YoY respectively. During this period, the consumer products division led growth with a 16% YoY rise in revenues, while the industrial segment increased by 15% YoY. Margin expansion at the operating level occurred largely due to lower input costs (as a percentage of sales).
What to expect?
At the current price of Rs 280, the stock is trading at a multiple of about 26 times our FY16 estimated earnings per share and at about 32 times its trailing twelve month earnings. While the performance of the company's international businesses improved a lot, largely led by its Brazilian operation - which saw a significant reduction in losses - it will still take some time for these businesses to contribute to the overall profitability. As for the domestic segment, the growth in volume terms is a reflection of the overall macro environment.

In the quarter gone by, PIL became a debt free company as it paid off its debt of Rs 600 m. It currently has a strong cash position (of about Rs 3 bn), more than enough to cover its capex plans of about Rs 1.25 to 1.5 bn per annum. Not to mention the fact that it has been generating free cash in excess of Rs 2.5 bn over the past three years. What the company plans to do with the cash it generates is something that needs to be seen. Notwithstanding its comfortable position and growth potential, we believe the valuation that the stock is commanding at the moment is above our comfort levels and as such we reiterate our hold view on the stock from a long term perspective.

We would like to reiterate to our subscribers that for the purpose of diversifying risk no stock should form more than 5% of one's portfolio. Please visit our asset allocation page for more details.

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