The stock of Pidilite Industries, a leading manufacturer of adhesives, sealants and chemicals, which had fallen about 13 per cent between January and March last year, rebounded quickly and has rallied 50 per cent since then. Release of pent-up demand from across the country, since the economy opened up, has helped the company deliver strong performance, particularly in the last two quarters. It reported double-digit volume growth during the December quarter of FY21.
Pidilite Industries is a dominant player in the market for its products, has strong market penetration and good brand recognition. The company has witnessed business recovery across its business segments, including adhesives and sealants, industrial resins and pigment preparations. The acquisition of Huntsman Advanced Material Solution (name changed to PAPL - Pidilite Adhesives Pvt) in November last year is likely to strengthen the company’s adhesives and sealants business. PAPL has presence across the country and is a market leader in epoxy adhesives (an industrial adhesive used for both metal and plastics), which is likely to aid in revenue, going forward.
Further, improved demand conditions across sectors, including construction, automotive and other industries, should help in the revenue growth of the company. Being the market leader in most of its products, it has good command over pricing. The company has negligible debt level.
Despite the positives, investors can consider partially exiting the stock at this point, high valuation being the main reason; at ₹1,806 Pidilite Industries is trading at 94 times its trailing 12-month earnings, higher than its five-year average (60 times). While there is no direct comparison for Pidilite, it is still expensive when compared to its closest competitor, Godrej Industries, trading at 40 times its twelve-month earnings.
Also, as most of its raw materials are crude derivatives, benign crude oil prices helped in the growth of the company last year. But since November 2020, crude oil prices have been slowly inching up. From $35-$37 per barrel, prices are currently $65-$67 per barrel. With crude prices rising, the company’s margins could take a hit.
Market position
The company operates in two major segments. One is consumer and bazaar (C&B), which includes adhesives and sealants, construction and chemicals, and art and crafts materials. This segment is the main-stay, contributing nearly 80 per cent of the revenue of which 50 per cent is driven by adhesives and sealants products. The company has an extensive distribution network with pan-India presence which helps in easy access to its products in both urban and rural areas. The C&B segment caters to the needs of people from varied professions, including painters, plumbers and carpenters, helping the company achieve a dominant position in the market as well.
The balance revenue, about 19 per cent, comes from its industries segment where the products including resins, chemicals, adhesives and pigments cater to industrial needs.
Though the company has a strong presence in both its segments, it faces competition from small regional players and a few large players. In its industrial segment particularly, paints and other chemical companies have started expanding their market base. For instance, Asian Paints entered the water proofing business a few years back. Other products where the company faces stiff competition include wood finishes and paints, and construction and chemicals.
While the presence of competitors may not have much impact on companies like Pidilite in the near term, it may affect its pricing power in the long run.
Rise in input costs
For most paints, adhesives, sealants and chemical companies, the raw materials are derivatives of crude oil. With lockdown in many countries, crude oil prices were benign and helped these dependent companies, including Pidilite, to save on their input costs and improve margins.
For Pidilite, for the September quarter of FY21, raw material cost (as a percentage of sales) stood at 38 per cent, about one percentage point lower compared to the same period last year. But in the December quarter of FY21, it stood at 40 per cent, about 2 per cent lower compared to the December quarter last year (42 per cent). This helped improve the company’s operating margin. For the same period, the operating margin improved to 28 per cent from 24 per cent in December quarter last year.
As the world economies opened up, crude oil prices started to increase due to production cut by oil producers. Since then companies whose raw materials are crude oil derivatives have witnessed rise in their input costs, including Pidilite. With continued increase in the cost of vinyl acetate monomer (VAM), a key raw material, Pidilite’s margin is likely to come under pressure, going ahead. This, along with volatile rupee, also adds to margin woes. According to the management, the company has taken price hike in its industrial segment of products (B2B products) due to rise in raw material costs, but it is yet to decide on price hikes in the C&B segment.
Given that the company is the market leader in various products such as Fevicol and M-Seal, it can pass on the input cost increase under normal circumstances, which could aid margins. However, given the slowdown in the economy, price hikes could also impact demand and hence the company may not resort to the same.
Financials
The company was able to improve its earnings despite the challenging market conditions and register double-digit volume growth of over 20 per cent during the December quarter FY21 when compared to the same period last year. During the same period, it reported revenue and profit growth of 20 per cent y-o-y to ₹2,299 crore and profit growth of 29 per cent y-o-y to ₹446 crore. The company has stable financials. Its revenue and profit registered annual average growth of 5.2 per cent and 6.8 per cent between FY16 and FY20.