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Pidilite: Margin pressure - Views on News from Equitymaster

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Pidilite: Margin pressure
Oct 23, 2008

Performance summary
  • Topline reports a growth of 29% YoY in 2QFY09. During 1HFY09, the topline increases by 31% YoY.

  • Operating margins during 2QFY09 decline by 530 basis points (5.3%) while they are lower by 420 basis points (4.2%) in 1HFY09.

  • Excluding extraordinary items, profits are down 5.7% YoY led by the decline in operating margins and higher interest expenses during 2QFY09.



Financial performance snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 3,753 4,850 29.2% 7,511 9,863 31.3%
Expenditure 2,981 4,111 37.9% 5,933 8,209 38.3%
Operating profit (EBDITA) 772 739 -4.3% 1,578 1,654 4.8%
EBDITA margin (%) 20.6% 15.2%   21.0% 16.8%  
Other income 5 3 -26.1% 8 6 -16.9%
Interest 32 75 134.4% 49 126 155.8%
Depreciation 80 126 57.1% 164 232 41.3%
Profit before tax 664 541 -18.5% 1,372 1,303 -5.1%
Extraordinary item/expense (10) 191 (8) 309
Tax 111 19 -82.6% 237 114 -52.1%
Profit after tax/(loss) 563 331 -41.2% 1,143 880 -23.0%
Net profit margin (%) 15.0% 6.8%   15.2% 8.9%  
No. of shares (m) 252.4 253.1   252.4 253.1  
Diluted earnings per share (Rs)*         6.4  
Price to earnings ratio (x)         15.9  
* On a trailing 12-months earnings

What has driven performance in 2QFY09?
  • Pidilite’s topline reported a growth of 29% YoY in 2QFY09. During 1HFY09, the topline increased by 31% YoY. The results are however not comparable to the extent of VAM revenues this quarter, which are not reflected in the corresponding period last year. Excluding this unit, the sales were up 20% YoY during the quarter and 22% YoY during 1HFY09.

    Segment-wise performance
    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Consumer & bazaar products 3,188 3,770 18.3% 6,414 7,774 21.2%
    PBIT margin (%) 22.8% 17.4%   23.7% 20.1%  
    % of revenue 75.9% 68.7%   76.2% 69.3%  
    Industrial products 1,012 1,275 26.0% 2,003 2,492 24.4%
    PBIT margin (%) 14.5% 14.9%   13.1% 13.2%  
    % of revenue 24.1% 23.2%   23.8% 22.2%  
    Others - 445   - 945  
    PBIT margin (%)   4.2%     6.2%  
    % of revenue   8.1%     8.4%  
    Total revenues* 4,200 5,490 30.7% 8,416 11,211 33.2%
    PBIT margin (%) 20.8% 15.8%   21.2% 17.4%  

  • While consumer segment division continued to be the major revenue earner, the growth in the industrial segment was faster than the consumer division during both the periods under consideration. The VAM segment contributed about 6% to the revenues during the half year.

  • The operating margins during 2QFY09 declined by 530 basis points (5.3%) while they were lower by 420 basis points (4.2%) in 1HFY09. The main reason for the decline was the higher raw material costs which increased by 41% YoY during both the periods under consideration. The company’s raw materials are dependent on crude and with crude prices touching record highs during the quarter, the company faced pressure. Even other expenses (as a percent of sales) were higher.

  • On the divisional front, PBIT margins of the industrial segment remained stable for both the periods under consideration. However, the consumer division witnessed pressure as the PBIT margins reduced to 17.4% in 2QFY09 (22.8% in 2QFY08) and 20.1% in 1HFY09 (23.7% in 1HFY08).

  • Excluding the extraordinary items (currency translation difference in respect of Foreign Currency Convertible Bonds (FCCB)) and donations, the bottomline for 2QFY09 declined by 5.7% YoY on account of lower operating margins and higher interest expenses. For 1HFY09, the profits were up by 4.8% YoY. However, lower taw outgo brought some relief. The tax rate reduced from 16.7% in 2QFY08 to 3.6% in 2QFY09.

What to expect?
    At the current price of Rs 102 the stock is trading at a price to earnings multiple of 15.9 times its trailing 12 month earnings. Rising crude price has a direct effect on vinyl acetate monomer (VAM), which is the key raw material for Pidilite. With crude prices touching all time highs in recent times, the company did witness margin pressure. However, with the prices having corrected in recent times, the pressure may ease off. The management is targeting a turnover of Rs 20 bn in FY09. Apart from concentrating on the adhesive division, the company is also looking at other divisions such as construction chemicals, auto care and maintenance products. It is setting up a project to manufacture Synthetic Elastomer. The approximate capacity is believed to be 25,000 tonnes per annum and is proposed to be located at Dahej (Gujarat). We continue to be positive on the company’s growth prospects going forward.

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