Neutral Pidilite Industries; target of Rs 2340: Motilal Oswal

Motilal Oswal recommended Neutral rating on Pidilite Industries with a target price of Rs 2340 in its research report dated November 11, 2021.

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Motilal Oswal’s research report on Pidilite Industries

While Pidilite Industries (PIDI)’s EBITDA and PAT were in-line, healthy sales momentum (two-year CAGR of ~21% in 2QFY22) led to a significant sales beat, even as material cost pressures remained high. VAM costs have nearly tripled in recent months over 1HFY21 levels after a relative drop over Jun-Jul’21. Good volume momentum and price increases (already healthy in the double digits, with more likely to come) would keep the sales momentum intact, even as margins continue to be under pressure. Three factors highlight that PIDI has been able to manage steep cost inflation better v/s paint companies (which also have a similarly large proportion of crude-related RMs): a) its near-monopoly in Adhesives, b) the absence of mix deterioration, and c) material costs peaking earlier compared with paint companies. PIDI has admittedly navigated the twin challenges of the second COVID wave and steep RM inflation reasonably well in the first half. However, the base for sales as well as EBITDA is extremely challenging for 2HFY22. In addition, material costs are increasing sharply. The valuation of 82x FY23E EPS is rich and leaves no room for an upside. We maintain Neutral.

Outlook

While the structural investment case remains intact, valuations are expensive at 81.7x FY23E EPS. We maintain our Neutral stance, with TP of INR2,340 per share (65x Dec’23 EPS).

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