Home Market Neutral Pidilite Industries, target Rs 1,216: Citi

Neutral Pidilite Industries, target Rs 1,216: Citi


Citi has a neutral view on Pidilite Industries with a target price of Rs 1,216.

The current market price of Pidilite Industries is Rs 1,104.75.

Time period given by the brokerage is one year when Pidilite Industries price can reach the defined target.

Citi's view on the company:
Citi's Take — Pidilite reported broadly in-line 1QFY19 results. 1QFY19 consolidated PAT at Rs2.39bn grew 5 per cent YoY and was 6 per cent below Citi estimate of Rs2.54bn due to higher tax outgo (tax rate of 36 per cent vs. Citi at 33 per cent). Consolidated revenue at Rs18.3bn grew 20 per cent YoY (1QFY18 revenue fell 3 per cent YoY – GST rollout impact) and was 6 per cent ahead of Citi at Rs17.3bn. On a comparable basis, (ex-sales of Cyclo-division of Pidilite USA which was sold in June 2017), sales grew 23 per cent YoY. Consolidated EBITDA at Rs3.8bn grew 19 per cent YoY and was 5 per cent ahead of Citi at Rs3.6bn. PBT at Rs3.8bn grew 14 per cent YoY and was in-line with Citi at Rs3.8bn.

Volume growth was decent in 1QFY19 — Standalone consumer & bazaar segment had 20 per cent growth in volume on a low base (due to GST related disruption in 1QFY18). Standalone industrials segment had 7 per cent growth in volume.

Demand environment improving slowly — Management highlighted that demand environment has been improving, albeit gradually; widening distribution reach has been the other key driver aiding Pidilite's volume growth. GST implementation has led to some market share gain for organized players; although the network rationalization benefits have been neutralized by freight (crude) cost increase.

Margins may come under pressure — Gross margin pressure was seen in both the segments in 1QFY19 due to input cost headwinds. VAM prices averaged $1200/ton during 1QFY19; spot prices have inched up to $1320/ton. Besides VAM, prices of other raw materials such as rubber base have also increased; consequently, there are downside risks to gross margins. Pidilite has taken price hikes in the range of 3-5 per cent in certain categories in both segments, (including after 1Q end). A&P spends were high in the quarter at about 4.7 per cent; management clarified that it does not view A&P spend reduction as an EBITDA margin expansion lever.

Implications — Maintain Neutral on Pidilite Industries given expensive valuations, peak margins and high raw material costs related headwind.

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