Pidilite Industries stock gains on sales growth, margin recovery hopes

Easing raw material prices are a key trigger for the adhesive market leader

The share price of consumer major Pidilite Industries, which manufactures Fevicol, on Monday was the highest gainer among the BSE 100 stocks.

The fourth-largest consumer company by market capitalisation gained 5.3 per cent in trade, outperforming the peer index -- the BSE Fast Moving Consumer index -- which was up 1.2 per cent, and the Sensex, which gained 0.46 per cent.

The stock uptick for the owner of the Dr Fixit and Fevikwik brands, apart from Fevicol, comes amid expectations of lower raw material costs, market share gains, and demand recovery. These triggers, coupled with reasonable valuations, led to upgrades by brokerages.

A key trigger for the stock recovery could be the cooling in crude oil prices. After falling 6 per cent on Friday, crude oil prices were up marginally on Monday. The prices of vinyl acetate monomer, a key raw material ingredient and a crude oil derivative, could see a decline after the rapid surge over the past year. The raw material is trading at Rs 205 a kg, up 38.5 per cent year-on-year (y-o-y) and 2.5 per cent as compared to the May levels.

The Street believes the company could recover margins quickly when input prices correct. After its peak in the September quarter of FY21 (Q2FY21) at 55.9 per cent, gross margins have been coming down for six quarters in a row. From this peak, the margins have come down 1,240 basis points to 43.5 per cent in March quarter.

Higher raw material prices had enabled the company to gain market share as the unorganised segment and smaller players struggled with working capital issues.

On revenues, while the company achieved an in-line performance (12 per cent growth y-o-y) on a high base, three-year annual revenue growth has been the best among the peers. Brokerages believe the company will continue to post healthy sales growth numbers on the back of multiple drivers.

Citi Research analysts, who recently upgraded the stock to “buy” from “neutral” earlier, said: “We expect Pidilite to deliver healthy medium-term revenue/earnings growth, benefitting from continued focus on premiumisation and innovation in core categories (white adhesives, sealants) and market development activities in emerging categories (waterproofing, tile adhesives).”

Prior to the upgrades, the stock saw a 20 per cent fall from its highs in April due to worries of a slowdown in rural and semi-urban areas and inflation in raw material prices. Over the past month, the company has seen the sharpest cut in consensus earnings per share estimates of 4.2 per cent among consumer firms for FY24. The downward revision in earnings over a three-month period too has been high at 5.4 per cent. This could reverse.

At the current price, the stock is trading at 57 times its FY24 earnings estimates. Given the double-digit sales growth outlook, backed by a focus on innovation (multiple product launches in the next year and a half), an enhanced distribution reach, and incremental growth from emerging categories, the prospects for the adhesive market leader are sound. Investors can consider the stock on dips.