Pidilite needs to beat inflation to strengthen bond with investors


Commodity cost inflation continues to play a spoilsport for Fevicol maker Pidilite Industries Ltd. In the second quarter of FY23, standalone gross margins slid to a multi-quarter low, hurt by elevated acquisition cost of key inputs chemical vinyl acetate monomer (VAM). Operating margins also remained on a weaker footing.

In an earnings call, the management said that input costs were at an all-time high for the company in the September quarter. VAM consumption cost in the second quarter of FY23 was $2,491 per tonne, higher than $2,231 in the first quarter of FY23. While the current ordering rate is lower at $1200-1300 a tonne, the cost of other raw materials has not seen a reduction. What’s more, the company has a reasonably high inventory of VAM procured at elevated prices. So, the management expects Ebitda margin to improve northwards of 20% only by fourth quarter of FY23. Ebitda is earnings before interest, taxes, depreciation, and amortization.

Unlike paint companies, which have also been battling cost inflation, the Pidilite management indicated that there is no need to take further price increases. So far, they had taken price increases at only 75% of RM cost inflation to be competitive. In fact, in the B2B segment, which is around 15% of their sales, prices have been cut.

According to analysts at Nuvama Research, although, inflation continues to impact consumption and margins, softening VAM prices would improve the margin profile in H2FY23. However, factoring in the Q2FY23 miss and a weaker rupee, prompt a cut in FY23E/FY24 earnings per share estimates by 6.9%/4.1%, said the research house in a report on 10 November.

But that’s not all. Volume growth in its key consumer & bazaar business was unimpressive at 1.2–1.5%. In Q2, demand was subdued across product categories with urban demand being better than rural markets, the management said. The company expects demand to be better in H2FY23 aided by good monsoon and improved construction activity. Note that the company’s management has re-iterated its medium-term plan to grow volumes in double-digit.

In this calendar year so far, the Pidilite Industries stock has risen by nearly 8%, beating Nifty50’s 4.5% returns.


Nonetheless, in the current backdrop, the stock’s valuation is discomforting. Analysts at Motilal Oswal Financial Services are of the view that steep valuations more than discount this growth and do not leave any room for an upside.

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