Pidilite’s Q4FY16 revenue, EBITDA and PAT growth at 18.9%, 78.1% and 89.2% YoY, respectively, was well ahead of estimates. The 7-quarter high sales growth was impressive, albeit on a low base (3.1% YoY volume growth in Q4FY15). Gross margin, at 55.3% (highest in at least 8 years), led by softer VAM during tough macro economic conditions is reflective of strong pricing power. Entry of Asian Paints into adhesives (Loctite) and increased aggression in waterproofing (Smartcare) need to be closely monitored. We remain positive in view of gradual demand recovery, new businesses and pick up in international growth. Maintain ‘BUY’.
Growth and margins: Firing on all cylinders
Key highlights: (i) 20.7% YoY growth it consumer and bazaar (C&B) business (highest in past 7 quarters; 13.6% YoY in Q3FY16) with 1,012bps YoY expansion in EBIT margin to 25.2%; (ii) sustained recovery in industrial business which grew 7.5% YoY with 20% EBIT margin (highest in 26 quarters); (iii) strong 35% constant currency growth in international business, led by US (grew 41% YoY driven by art materials) and SAARC (133% YoY growth led by Bangladesh and Sri Lanka); and (iv) 853bps/638bps YoY expansion in gross/EBITDA margins helped by soft raw materials prices
Q4FY16 conference call | Key highlights
Volume growth surpassed value growth. PIDI aspires to grow revenue in mid teens. Smaller towns are growing faster than bigger towns, though growth rate in small towns has slowed down. Nina’s annual revenue was INR1.6-1.7bn (14-15% like-to-like growth) with ~15% EBITDA margin. The company intends to target both B2B and B2C segments with newly acquired ICA brands; can earn annual sales of INR1bn. Outlook for international business is robust. Distribution network is ~3mn outlets. Currently, VAM prices are USD900-950.
Outlook and valuations: Positive; maintain ‘BUY’
We expect 19% CAGR over FY16-18E. Good performance of acquisitions (Bluecoat, Nina, ICA, Sri Lankan local glue player) and sustainability of robust growth in core business (paint players also saw robust growth in Q4FY16) outweigh risks from Asian Paints in water proofing and adhesives space. At CMP, the stock is trading at P/E of 31.3x FY18E. We maintain ‘BUY/Sector Outperformer’ with target price of INR731.
