MOSL: PIDILITE INDUSTRIES (Buy)-Growth delivered, demand outlook positive

Pidilite Industries: Growth delivered, demand outlook positive

(PIDI IN, Mkt Cap USD8.1b, CMP INR1101, TP INR1320, 20% Upside, Buy)

• Pidilite's (PIDI) reported consol. net sales grew 20% YoY to INR18.3b (est. of INR18.5b) in 1QFY19. Reported Consumer Bazaar segment revenue increased 11.3% YoY to INR15.9b, with the segmental EBIT margin expanding 190bp YoY to 25.3%. Reported Industrial segment revenue grew 3.7% YoY to INR2.6b, with the segmental margin contracting 10bp YoY to 14.7%. Standalone reported Consumer Bazaar segment revenue was up 9.6% YoY to INR13.7b, with underlying sales volume and mix growth of 20% (est. of +20%).
• Concall highlights: (1) Demand situation is improving. (2) There have been market share gains in a few categories. (3) Have taken price hike to the tune of 4-5% in select products. (4) Key objective is to achieve 14-15% volume growth in the Consumer Bazaar segment for the full year.
• Valuation view: Three key positives from the results were: (i) Sustenance of strong volume growth for the fourth consecutive quarter. (ii) Management calling out a recovery in the demand situation, along with market share gains from both organized and unorganized players. (iii) Target of 14-15% volume growth in Consumer Bazaar, which, if achieved, could result in elevated growth v/s FY12-17 average growth of ~10%. Strong volume and sales growth is also likely to lead to healthy operating leverage, offsetting some of the impact of higher VAM costs. Nevertheless, the pricing discipline that enables faster conversion from ~30% unorganized trade in adhesives will have near-term margin implications. As a result, EPS growth in FY19 is likely to come in single-digits before reviving FY20 onward. Apart from Titan, PIDI is the only player to have already witnessed and also likely to witness even more gains over the next few years driven by the shift from unorganized to organized trade. Given the tremendous structural opportunity leading to elevated earnings growth beyond FY19, we continue maintaining our Buy rating with a TP of INR1,320 (50x one-year forward EPS, 20% premium to three-year average).