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Pidilite: High input costs dent performance
Aug 11, 2014

Pidilite Industries announced its results for the quarter ended June 2014. The company reported a 20% YoY growth in revenues, while profits were up by only 5% YoY. Here is our analysis of the results.

Performance summary
  • Revenues up by 20% YoY during the quarter ended June 2014.
  • Operating profits up only 5% YoY as higher input costs impact margins, which fall to 17.9% as compared to margins of 20.3% in corresponding quarter last year.
  • Profits up 5% YoY.

Consolidated financial snapshot
(Rs m) 1QFY14  1QFY15  Change
Revenues 11,237 13,438 19.6%
Expenditure 8,951 11,034 23.3%
Operating profit (EBDITA) 2,287 2,404 5.1%
Operating profit margin (%) 20.3% 17.9%  
Other income 97    180 86.3%
Interest 53 27 -49.5%
Depreciation    192    252 31.2%
Forex loss/ (gain) (75) (3) -95.6%
Exception items  - (49)  
Profit before tax 2,213 2,259 2.1%
Tax 598 583 -2.6%
Profit after tax/(loss) 1,615 1,677 3.8%
Share of profit of associates (4) 10  
Minority interest (1) (1) 27.3%
Net profit after tax 1,610 1,685 4.7%
Net profit margin (%) 14.4% 12.5%  
No. of shares (m)   512.6  
Basic earnings per share (Rs)   8.9  
P/E ratio (x) *   41.6  

What has driven performance in 1QFY15?
  • Both of the company's segments - consumer bazaar and industrial products - showed a significant jump in revenues in the quarter gone by. However, similar to previous quarter, high input costs - due to sudden shift in global demand supply mismatch led to a sharp jump in vinyl acetate monomer (VAM; a key input cost for the company) prices. Given that the company had taken a wait and watch approach to see how things pan out, it went in for delayed price hike - to the extent of 3% to 3.5%. It is expected to hike prices of a similar magnitude by the end of August 2014 as the first hike would be insufficient to cover the higher input costs.

  • Depreciation charges were higher largely due to the change in depreciation policy - due to schedule II of the new companies act. While there has been a sufficient improvement in overseas subsidiaries' performances, Brazil operations continue to remain subdued. The company is looking at taking measures to mitigate losses in the region.
What to expect?
At the current price of Rs 370, the stock of Pidilite is trading at a multiple of about 42 times its trailing twelve month earnings. While the stock has breached our target price of Rs 320 a while back, we believe the current situation is one that seems like an aberration in what is otherwise a stable business. While Pidilite is looking to pass on the price hikes over time, it is still too early to take a call on where VAM prices are expected to settle down. While Pidilite's management expects prices to further decline to US$ 1,300 per tonne (from 1,450 currently), we would like to wait for another quarter before making key changes to our estimates. Not to mention, to gauge the impact of the two price hikes on volumes as well. We, as such, maintain our ‘hold' view on the stock.

We would like to remind 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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