Hold Pidilite Industries; target of Rs 1475: ICICI Direct
ICICI Direct’s research report on Pidilite Industries
Pidilite’s Q2FY20 performance was lower than our estimate with continuous pressure in volume growth in the consumer & bazaar segments (C&B volume growth during Q4FY19, Q1FY20 and Q2FY20 were ~4%, ~6% and -1%, respectively). Volume growth was largely impacted by a slowdown in the real estate sector and decline in interior decoration activities. On the other hand, gross margins expanded notably by ~400 bps YoY in Q2FY20 largely on account of benign raw material prices (VAM prices declined ~8% QoQ at US$ ~900/t) and price hikes. However, the company reported a slight contraction in EBITDA margin by 48 bps YoY to 20.4% (vs. I-direct estimate: 21.8%) mainly due to higher advertisement & promotion and employee costs. The management sees a demand recovery in C&B segments from FY21E onwards with no major fluctuations in raw material prices given a stable demand-supply scenario. We cut our revenue, earnings estimate by 4% & 3% for FY20E, 5% & 6% for FY21E, respectively.
We believe that at the CMP the stock discounts major key factors like strong revenue, earning growth along with strong balance sheet (with healthy return ratios). Hence, we revise our recommendation from BUY to HOLD with a target price of Rs 1475 considering the sustained pressure in volume growth in the near term.
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