MOSL: PIDILITE INDUSTRIES (Buy)-Double-digit volumes sustained-near-term margin pressure remains

Pidilite Industries: Double-digit volumes sustained; near-term margin pressure remains

(PIDI IN, Mkt Cap USD6.4b, CMP INR955, TP INR1130, 18% Upside, Buy)

• Pidilite’s (PIDI) consolidated net sales grew 14.9% YoY to INR17.6b (est. INR17.1b) in 2QFY19. Standalone Consumer and Bazaar segment revenues were up 11% YoY to INR12.8b with underlying sales volume and mix growth of 11%, while EBIT margins contracted 490bp to 29.4%.
• 1HFY19 performance: Reported sales and EBITDA grew 17.4% and 7.1% YoY, while adj. PAT declined 1.2% YoY. EBITDA margin shrank 200bp YoY to 20.8%; for 2HFY19 we expect sales growth of 9.7% YoY, while EBITDA and Adj. PAT are expected to decline by 1.5% and 5.5% YoY.
• Concall highlights: (1) Demand environment continues to witness gradual improvement with more stability, (2) Ad spend was at 3.5% in 1HFY19 and is likely to remain at similar levels for the full year.
• Valuation and view: Consequent to the margin miss, we have reduced our EPS forecasts by 7.1%/4.7% for FY19/FY20. While near-term margin pressures will be significant (hence, we expect a decline in EPS for the year before reviving smartly from FY20 onwards), 2QFY19 was particularly important because the company delivered double-digit volume growth in Consumer and Bazaar segment, despite four previous quarters of strong double-digit volume growth (including 15% in base quarter 2QFY18). Apart from Titan, PIDI is the only player to have already witnessed and likely to witness even more gains over the next few years as a result of a shift from the unorganized sector (30% of the adhesives market) to the organized sector - a seismic shift - also aided by its policy of sacrificing near-term margins for longer term growth. Management confidence on volume growth in Consumer & Bazaar remains high, and encouragingly, domestic and overseas subsidiary performance also appears to have turned the corner on both growth and profitability. Given the tremendous structural opportunity, which leads to elevated earnings growth beyond FY19, we continue to maintain a Buy rating with a target price of INR1,130 (46x September 2020 EPS, 10% premium to 3-year average).