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Pidilite: Input cost pressures continue...
Nov 28, 2014

Pidilite Industries announced its results for the quarter ended September 2014. The company reported a 14% YoY growth in revenues, while profits were up by 17% YoY. Here is our analysis of the results.

Performance summary
  • Revenues grow by 14% YoY led by the company's consumer bazaar products division.
  • Operating margins declined to 16.4% as compared to 17.2% in 2QFY14, leading to a slower 8.7% growth in operating profits.
  • Higher other income coupled with a lower tax outgo lead to a 17% YoY growth in profits.

(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Revenues 11,001 12,546 14.0% 22,238 25,984 16.8%
Expenditure 9,111 10,484 15.1% 18,067 21,518 19.1%
Operating profit (EBDITA) 1,890 2,063 9.1% 4,171 4,466 7.1%
Operating profit margin (%) 17.2% 16.4%   18.8% 17.2%  
Other income 82 151 83.6% 179 331 85.1%
Interest 62 27 -56.1% 102 54 -47.2%
Depreciation 208 313 50.3% 400 565 41.1%
Forex loss/ (gain) 59  0 -99.3% (16) (3) -81.3%
Extraordinary items - -   - (49)  
Profit before tax 1,643 1,873 14.0% 3,863 4,132 7.0%
Tax 475 500 5.3% 1,073 1,083 0.9%
Profit after tax/(loss) 1,168 1,372 17.5% 2,790 3,049 9.3%
Share of profit of associates 10 19 86.5% 7 30 327.5%
Minority interest (1) (3) 237.5% (2) (4) 115.8%
Net profit after tax 1,177 1,389 18.0% 2,795 3,074 10.0%
Net profit margin (%) 10.6% 10.9%   12.5% 11.7%  
No. of shares (m)         512.6  
Basic earnings per share (Rs)         9.5  
P/E ratio (x) *         47.7  

What has driven performance in 2QFY15?
  • Growth during the quarter was led by the company's consumer bazaar products (CBP) division, a segment which contributes to about 79% of revenues. This segment grew by 16% YoY, led by a price hike as well as volume increase. As for the industrial products segment, which contributes to the balance portion of revenues, growth came in at a slower pace of 8% YoY during the quarter.

  • Profitability of the segments were impacted by higher input costs during the quarter. As has been the trend for the past few quarters, the higher input costs of vinyl acetate monomer (VAM) has been impacting the company. While the company did hike prices by 3% to 5% across products, the full impact of the same was not captured in the quarter gone by. We had mentioned in the previous quarterly update that the management of Pidilite was taking a wait and watch approach - in terms of gauging the trend of VAM prices - before making any decisions on further price hikes.

    As for the industrial products segment, margins in this segment came in higher by 10 basis points doing the quarter. EBIT margins of the CBP segment came in at 21.9% in 2QFY15 as compared to 24.5% in same quarter last year; industrial products segment's margins stood at 11.5% as compared to 11.4% in same quarter last year.

  • Similar to previous quarter, depreciation charges were higher largely due to the change in depreciation policy - due to schedule II of the new companies act.
What to expect?
At the current price of Rs 455, the stock of Pidilite is trading at a multiple of about 47.7 times its trailing twelve month earnings.

While the company continues to face issues related to input costs, as per us this is not a big concern given its dominant position in the market. And thus, passing on prices to customers should not be an issue; however it could hamper volume growth to some extent. As for the industrial products segment's demand goes, passing on prices is done on a case to case basis; But from what it seems, the company has managed well. What is interesting is that input costs of other raw material (due to their linkage to crude prices) have been softening and this should provide some fillip to the company's profitability.

At current levels, the stock has returned about 93% from our recommendation price of Rs 236. Given the high valuations, and the change in the input costs scenario we feel the need to take a relook at our numbers. We will come out with an updated view on the company soon. We as such maintain our 'hold' view on the stock for the moment.

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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