 3QFY12 results below expectations: Pidilite Industries ::Motilal oswal,

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 3QFY12 results below expectations: Pidilite Industries (PDID) 3QFY12 results were disappointing with
adjusted PAT declining 7% YoY to INR790m (vs our estimate of INR920m). Sales grew 16.5% YoY to INR6.9b led
by ~14-15% volume growth in consumer and bazaar product segments.
 INR depreciation impacts gross margins: Gross margins declined 330bp to 43.2% due to steep INR depreciation
and higher VAM (Vinyl Acetate Monomer) prices on a YoY basis. Industrial products segment reported 2%
decline in sales and 43% decline in profits due to poor export demand and inventory de-stocking.
 Estimates lowered: We have lowered our FY12 EPS estimates by 5% and FY13 EPS estimates by 2.6% to factor
in lower margins in the consumer business due to high input costs and declining sales in industrial chemicals.
However, going forward, we believe the company would gain from appreciating INR as VAM prices have
eased to USD1,000/MT.
 Positive on volume growth in consumer and Bazaar products: We remain positive on volume growth in the
consumer and Bazaar segments despite the management's cautious outlook. We also believe margins in the
consumer and Bazaar segments would start expanding from 1QFY13; however, the industrial chemicals
segment's margins would take time to recover.
 Valuations and View: We introduce our FY14 EPS estimate at INR10.1/share and forecast 25% PAT CAGR over
FY12-14. The stock price has reacted from INR190 levels due to concerns over falling margins and growth
outlook. It trades at 17.3xFY13E EPS of INR8.3 and 14.1xFY14E EPS of INR10.1. Maintain Buy with target price
of INR181, 27% upside from the current level.
Key takeaways from the concall
 Consumer and Bazaar products has seen 22.6% sales growth in 3Q, growth is
higher in domestic market as the exports have grown at only 14%. Construction
chemicals sales have increased by 30% YoY. Although some headwinds are visible
in volume growth, it is too early to assume any definitive trend emerging.
 Industrial chemicals sales have declined due to decline in exports by 15%,
primarily in USA and Europe. Sales have been impacted in industrial resins and
pigments; there has been inventory de-stocking at the customer level in
anticipation of lower prices.
 Interest cost in 3Q includes MTM restatement of liability in respect of USD33m
FCCB.
 VAM prices have declined to USD1000/MT from USD1100MT in the beginning of
3Q; INR appreciation will reduce the cost of inputs and help increase margins.
PIDI keeps inventory of 40 days of raw material, so 1QFY13 will show gains from
lower input costs for full quarter.
 International business has reported strong growth in Middle East and Africa,
and South East Asia, South America has been adversely impacted due to poor
performance in Brazil. PIDI has taken a write off of INR96.9m in its investments
in Brazil.
 Synthetic elastomer s project still hangs in balance as the board has directed to
consultant to look into a few more issues. PIDI has so far spent INR3.5b on the
project. Some outcome is likely by the end of March2012.
Standalone sales up 16.5%; Margins decline 260bp on input cost pressure
 Pidilite Inds 3QFY12 results are below estimates with Adj PAT declining by 7%
to INR790m (est 920m) as INR depreciation impacted gross margins and industrial
chemicals reported decline in sales led by sluggish exports.
 The company has reported sales of INR6.9b (est Rs7.1b), a growth of 16.5% led
by 14-15% volume growth in Consumer and bazaar.
 Gross margins declined by 330bp to 43.2% due to steep INR depreciation and
higher VAM prices on a YoY basis. However, VAM prices (currently at USD100/
ton) have steadily declined and are now lower by 25-30% from their peak.
Management expects that with VAM prices remaining at lower levels and INR
appreciating, margins are expected to improve from 4QFY12.
 Stable employee costs and 70bp decline in other expenditure restricted EBITDA
margin decline to 260bp at 17.4%. Other income was higher by 120% due to
INR75m onetime gain on relinquishment of tenancy rights. Diminution in value
of investment in the Brazilian subsidiary (INR 96.9m) and forex loss (INR24.9m)
were other exceptional losses, adjusting for these PAT was down by 7% to
INR790m.
 PIDI has incurred a capex of INR900m for the year thus far and expects to incur
capes of INR1.25b. We note that this includes INR400m towards the elastomer
project