Pidilite Industries (3QFY15) : Convergence of positives. Upgrade to BUY :: HDFC Securities

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Convergence of positives Pidilite’s anticipated pick-up in demand seems further delayed as volumes grew merely 8% YoY (2QFY15: 10%). We are not worried, and are enthused by an upcoming margin expansion coupled with macro tailwinds. This will lead to higher revenue growth and even better EPS CAGR over FY15-FY17E. 3QFY15 revenues grew 12.5% to Rs 12bn. A&P spends were postponed to 4Q; EBITDA margin expanded 120 bps (16.1%) despite the 94 bps adverse COGS impact. Driven by a lower tax rate, APAT grew 20.5% YoY to Rs 1.25bn. Almost 60% of Pidilite’s portfolio will benefit as urban housing construction, home improvement and industrial production pick up. Meanwhile, lower crude and VAM prices will be margin accretive in FY16E. Price hikes taken in white glue (3-4% in May- 14, Aug-14 and 2-3% in Dec-14) and stable INR are further positives. Upgrade to BUY with a TP of Rs 650 (35x FY17E, from 27x). Volume growth disappoints, recovery likely  Operating revenues grew 12.5% YoY (~8% volume led). EBITDA margin expanded 120bps led by lower other expenditure (-271bps). This was partially offset by higher COGS (+94bps) and staff costs (+57bps).  The quantum of RM benefit was merely ~4% as RM basket for the company corrected from 120 (index) in July-14 to 115 (index) in Dec-14. VAM prices have corrected to USD 1200/ton (3QFY15 average VAM price: USD1350/ton). The company will benefit from lower VAM prices Mar-15 onwards. Key segments witness YoY EBIT expansion  Consumer & Bazaar sales grew 13% YoY (2QFY15: 15.1%; 1QFY15: 20.7%) to Rs 10bn due to a sluggish demand environment. EBIT margin expanded 143bps aided by lower A&P.  Industrial segment revenues grew 5.2% to Rs 2bn as EBIT margin expanded 298bps YoY to 12.3% bps. High competition led to a price cut in few products as the company passed on the RM benefit.  International subsidiaries grew ~15% YoY (10% in constant currency) impacted by weakness in Brazil.

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