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Emkay Global
Pidilite Industries (Sell)
CMP: ₹1,373.55
Target: ₹1,150
We downgrade Pidilite to SELL from Hold due to its expensive valuations amid weaker-than-peer volume performance (2 per cent in Q4FY19 and 6 per cent in Q1FY20) and risks to optimistic margin expansion forecast.
The company’s growth in the waterproofing segment has slowed down due to intense competition from paint companies (as per our channel checks, sales of paint companies in the waterproofing segment since the entry in 2015 are now about one-third of Pidilite’s). Slowdown in the construction activity and weak macro environment in international markets could also affect growth in quarters ahead.
A steep decline in VAM prices provides strong earnings outlook for FY20, but this has been already factored in (around 30 per cent earnings forecast in FY20). Gross margin improvement sequentially in Q1FY20 has been below expectations and we note that the fall in crude prices has been far lower than that in FY10/FY16, which could limit margin expansion.
Following a 20 per cent+ stock run up recently, valuations of 53x FY21E EPS are at a premium to its peers and look unjustified given the recent weakness in volumes and lack of improvement in ROE. Our revised TP is ₹1,150, based on 40x September-21E EPS (17 per cent downside).
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