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Nath Balakrishnan

SHAREHOLDERS can retain their holdings in the stock of Pidilite, the dominant player in the adhesive and the sealant market. Since the earlier buy recommendation on the stock in December 2002 when the stock was trading at about Rs 225, the stock's price movement has been muted in comparison with key indices such as Sensex and Nifty. The stock did peak to about Rs 400 last December, before cooling off to settle at the current level of Rs 300.

For the quarter ended December 2003, growth in topline at about 6 per cent is lower compared to what was seen in the first two quarters of this fiscal. Usually, Pidilite reports a spurt in sales in the pre-Diwali season. However, with Diwali occurring in October last year, the second quarter turned out to be the beneficiary, reporting topline growth of 16 per cent.

Notably, there has been a decline in operating profit for the latest quarter under consideration, largely on the back of a disproportionate expansion in material costs and a spurt in staff expenditure. One of the key raw material inputs for Pidilite is Vinyl Acetate Monomer, a derivative of crude. The uptick in crude prices over the past few months has contributed to the contraction in operating margins; with crude prices continuing to rule strong, margins are not likely to show significant improvement in Q4 FY04 either. This impact could, however, be mitigated to some extent by the reduction in imported material costs, thanks to duty cuts and the repealing of special additional duty in the interim Budget.

What could work to Pidilite's advantage in an environment of escalating raw material costs is its ability to pass on such hikes to consumers, given the formidable strength of brands such as Fevicol, M-Seal and Dr Fixit, to name a few, that are part of its portfolio. Pidilite has also erected high entry barriers on account of its robust distribution network, which would further cement its ability to command pricing power.

At the current price of Rs 300, Pidilite trades at a price-earnings multiple of about 13 times its trailing four-quarter earnings per share, which represents a discount to its peers in the FMCG market. Part of this could be attributed to Pidilite's presence in the industrial products segment, where profitability levels are significantly lower than the consumer products segment, which encompasses Pidilite's key brands. Steps to hive off the industrial products segment could see a re-rating of the stock and a contraction in the valuation gap between Pidilite and its contemporaries. For the moment, however, remaining invested appears the best option.

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