Buy Pidilite, target price Rs 1,670: ICICI Direct

ICICI Direct has given a buy rating to Pidilite Industries with a target price of Rs 1,670 for six months.

Pidilite is a dominant play in India’s growing adhesive and industrial chemical market with a market share of 70 per cent in its leading brand categories in the organised segment.. Pidilite’s product range includes adhesives and sealants (Fevicol and M-seal), construction and paint chemicals (Dr Fixit), automotive chemicals, art materials (hobby ideas), industrial adhesives, industrial & textile resins and organic pigments & preparations.

The brokerage says Pidilite’s consumer and bazaar segment (~84 per cent of revenue) and industrial products (~16 per cent of revenue) are likely to be hit by the shutdown of plants and slowdown in construction activities. While the company witnessed a slight recovery in volume growth during (January- February 2020) after a lull in the third quarter of FY20, challenges of volume offtake started from mid-March 2020. Lower construction activities owing to Holi and lockdown across the country are likely to hit volume offtake of the company in Q4FY20 and Q1FY21.

Investment Rationale

The brokerage expects a partial recovery in demand from the second quarter of FY21 as normalcy returns as dealers start building inventories for the rainy season. Further, it says that despite a lower operating leverage (due to lower plant utilisation), margins would remain elevated owing to a sharp decline in raw material prices.

According to the brokerage, Pidilite, being a strong brand in the adhesive segment, is well positioned to capitalise on growth momentum with a revival in the economy. It also believes crude oil prices will remain at lower levels in the medium term, which will benefit the market leader as it is least likely to pass on the entire benefit of lower raw material prices.

In addition to this, the brokerage says strong balance (zero debt, RoCE and RoE of 30 per cent and 23 per cent, respectively), average dividend payout of 43 per cent and an efficient deployment of cash for inorganic growth would be an added advantage for Pidilite Industries.

From a valuation perspective, the stock has always commanded premium multiples in consumer discretionary space given its dominance in the adhesive industry. It believes the stock would continue to command premium multiples.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1926.59 crore, up 6.64 per cent from last quarter sales of Rs 1806.58 crore and up 4.24 per cent from last year's same quarter sales of Rs 1848.30 crore. The company reported net profit after tax of Rs 344.53 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 69.97 per cent stake in the company as of December 31, 2019, while FIIs held 11.25 per cent, DIIs 8.28 per cent and public & others 10.5 per cent.