The price of chemical vinyl acetate monomer (VAM) almost doubled in the June quarter (Q1FY22) from the same quarter last year, indicating that cost inflation has been a niggling worry for investors in Pidilite Industries Ltd, given that VAM is a key input for the firm.
Consequently, the consolidated gross margin of the maker of the popular adhesive Fevicol has contracted by 440 basis points (bps) to 49.1% in Q1FY22. One basis point is one-hundredth of a percentage point. VAM prices in Q1 were $1,610 per million tonne (mt) compared to $1,200/mt in the last quarter, the firm’s management said in a post earnings conference call. However, it expects margin pressure to peak in Q2 and moderate in the second half of FY22, with VAM prices falling to around $1,500/mt. Pidilite has also raised prices by 4-6%, offsetting about 75% of input cost inflation.
For a firm battling input cost inflation, easing of raw material prices should come as a relief. However, the stock’s expensive valuations leave no room for disappointment on this front, said analysts. Shares of Pidilite are trading at a one-year forward price-to-earnings multiple of around 70 times, according to Bloomberg data. Lower expenses compensated for the miss on gross margins, but the current valuations fail to adequately factor in risks of input cost pressures persisting in the second half of the year, cautioned analysts at Macquarie Securities. In Q1, employee expenses and advertisement spends saw a steep decline, leading to a 1,040bps year-on-year expansion in Ebitda margin to 17.9%. Ebitda is short for earnings before interest, tax, depreciation and amortization. The management is hopeful of a further recovery in operating margins in the second half of the year to its targeted range of 22-23%.
Another risk is rising competition from paint companies, especially in the waterproofing segment, according to analysts at Prabhudas Lilladher. “Although lower penetration in waterproofing and distribution expansion in rural and semi-urban markets provides huge headroom for growth, potential entry of paint companies in broader waterproofing remains a risk,” they said in a report. Pidilite’s earnings are volatile because of input cost variations with intermittent years of high and low growth, they said. Considering the stock’s sky-high valuations, they recommended that investors book profits.
Meanwhile, in the past one year, Pidilite shares have risen 60%, outperforming benchmark index the Nifty50, which gave 46% returns in the same span. However, Pidilite has underperformed Asian Paints Ltd, whose shares have rallied 66%. The positives of consolidation-led market share gains from the unorganized sector are already factored into the stock, analysts said. On a two-year compound annual growth rate basis, Pidilite’s sales in Q1 have declined by 4%, while that of Asian Paints have risen by 5%. This could have led to the lag in the former’s stock performance, analysts said.
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