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Risks outweigh rewards, concerns around the elastomer project
Action: Downgrading to Reduce with TP of INR 142
Following a transfer of coverage, we are downgrading Pidilite to Reduce
and scaling back our TP to INR142 as we factor in a more conservative
target multiple in context of weakening demand outlook, factor in
headwinds from higher raw material (VAM) prices mainly due to a
depreciating INR, and highlight increased uncertainty around the
prospects of its elastomer project.
Catalyst: Elastomer project put on hold, poses significant risks
Our detailed analysis on the elastomer project (~INR5bn of planned
investment, of which INR3.4bn or 23% of the total capital employed has
already been invested) indicates that it will be difficult for the project
ROCE to exceed the group cost of capital even in the next three years.
Our detailed analysis of this project, which will be majorly reliant on
exports, indicates that global demand for Polycholoroprene elastomer has
been adversely affected by an increasing trend of substitution in the
automotive and adhesive sectors by cheaper elastomers.
Valuation: Premium to the Sensex is the highest in eight years
After Pidilite’s outperformance this year (outperformed Sensex by ~25%
and midcap index by ~27% YTD), its valuation at 20.5x one-year forward
P/E multiple implies a ~68% premium to the Sensex, which is the highest
level in the past eight years. Our TP of INR142 is based on a one-year
forward P/E multiple of 17.5x, in line with its three-year average.
Favour a shift to Asian Paints ( Buy, TP INR 3500) at current levels
We flag Asian Paints, which has a similar end-market profile, as a more
compelling buy at this point for investors and believe that its current
valuation premium is justified given its stronger growth profile.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Risks outweigh rewards, concerns around the elastomer project
Action: Downgrading to Reduce with TP of INR 142
Following a transfer of coverage, we are downgrading Pidilite to Reduce
and scaling back our TP to INR142 as we factor in a more conservative
target multiple in context of weakening demand outlook, factor in
headwinds from higher raw material (VAM) prices mainly due to a
depreciating INR, and highlight increased uncertainty around the
prospects of its elastomer project.
Catalyst: Elastomer project put on hold, poses significant risks
Our detailed analysis on the elastomer project (~INR5bn of planned
investment, of which INR3.4bn or 23% of the total capital employed has
already been invested) indicates that it will be difficult for the project
ROCE to exceed the group cost of capital even in the next three years.
Our detailed analysis of this project, which will be majorly reliant on
exports, indicates that global demand for Polycholoroprene elastomer has
been adversely affected by an increasing trend of substitution in the
automotive and adhesive sectors by cheaper elastomers.
Valuation: Premium to the Sensex is the highest in eight years
After Pidilite’s outperformance this year (outperformed Sensex by ~25%
and midcap index by ~27% YTD), its valuation at 20.5x one-year forward
P/E multiple implies a ~68% premium to the Sensex, which is the highest
level in the past eight years. Our TP of INR142 is based on a one-year
forward P/E multiple of 17.5x, in line with its three-year average.
Favour a shift to Asian Paints ( Buy, TP INR 3500) at current levels
We flag Asian Paints, which has a similar end-market profile, as a more
compelling buy at this point for investors and believe that its current
valuation premium is justified given its stronger growth profile.
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