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MOSL: PIDILITE INDUSTRIES (Neutral)-Margins impressive, near-term demand outlook challenging

PIDILITE INDUSTRIES: Margins impressive, near-term demand outlook challenging

(PIDI IN, Mkt Cap USD9.2b, CMP INR1289, TP INR1220, 5% Downside, Neutral)

 

• net sales grew 10% YoY to INR20.2b (our estimate: INR19.6b) in 1QFY20. EBITDA increased 16.3% YoY to INR4.4b (our estimate: INR4.0b), while adj. PAT was up 22.4% YoY to INR2.9b (our estimate: INR2.7b).
• Standalone Consumer Bazaar (C&B) segment revenue was up 9.5% YoY to INR15b, with 6% YoY growth in sales volume & mix (our estimate: +4%). EBIT grew 6.5% YoY to INR4.5b, but the margin shrank 90bp YoY to 30%. At the consol. level, segmental revenue was up 8.9% YoY to INR17.4b. EBIT grew 14.8% YoY to INR4.6b, with the margin expanding 135bp YoY to 26.6%.
• Subsidiary performance: Overseas subsidiaries' revenue grew 11% YoY to INR1.4b; EBITDA was up 142% YoY to INR87m and the margin expanded 300bp YoY to 6.1%. Domestic subsidiaries' revenue declined 1% YoY to INR1.6b; EBITDA was flat YoY at INR176m and the margin expanded 20bp YoY.
• Concall highlights: (1) Demand conditions were challenging, more so for the infrastructure-related businesses. (2) VAM costs declined sequentially from USD980 to USD870. (3) PIDI took effective 2% price reduction in April-May.
• Valuation and view: We revise up our EPS estimate by 3.7%/2.0% for FY20/21 to factor in the better-than-expected first-quarter performance and the benign RM cost outlook. The stock price CAGR was sharp at ~23% over FY16-19, despite earnings CAGR of only 5.5%. While the earnings CAGR estimate is healthy at ~18% for the next two years, the RoCE in the early 20s is at a substantial discount to the consumer peer average of ~32%. Moreover, the challenging demand environment and the RM cost dependence on crude price trends add an element of uncertainty to the earnings outlook. Valuations are expensive at 50.2x FY21E EPS. Maintain Neutral.