Analyst Corner| Pidilite: Downgrade to ‘reduce’; target price revised to Rs 1,378

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April 30, 2020 12:46 PM

The prolonged lockdown in Q1 and expected decline in volumes of discretionary-based products (plywood and laminates) in near term is expected to put pressure on PVA volumes (growth likely to decline in double digits) in FY21.

Industrial product segment is likely to post a 5% decline in revenues in FY21.

The lockdown and the resultant (expected) sharp fall in renovation demand in the near term is likely to put an incremental pressure on Pidilite Industries’ PVA revenues (expect 15% degrowth in FY21E) in particular, which, in turn, would lead to a 4% decline in growth in overall revenues in FY21E. Gross margins, however, are likely to improve 340 bps to 54.9% in FY21E, driven by lower input costs (VAM prices in particular) and firm pricing power. With Covid-related issues likely to fade out starting FY22E, we expect it to bounce back strongly with a 14% topline growth while Ebitda margins are expected to moderate to 23%.

Earnings cut by 5.5%/9.0%/12.4% for FY20/FY21/FY22 after factoring in near-term Covid concerns. The lockdown and expected deferment in renovation demand is likely to adversely impact demand for the adhesives and construction chemical space in India. Factoring the same, we cut our revenue/earnings estimates by 6.6%/21.6%/21.3% and 5.5%/9.0%/12.4%, respectively, for FY20/FY21/FY22. Considering the recent sharp recovery in the stock price, we downgrade the stock to ‘reduce’ from ‘add’ earlier with a revised target price of `1,378 (48x FY22E earnings) vs Rs 1,574 earlier.

The prolonged lockdown in Q1 and expected decline in volumes of discretionary-based products (plywood and laminates) in near term is expected to put pressure on PVA volumes (growth likely to decline in double digits) in FY21. This along with a flat growth in the construction/paint chemicals segment would result in a 4% decline in the C&B product revenues in FY21. Industrial product segment is likely to post a 5% decline in revenues in FY21. While FY21 overall revenues are expected to drop 4% in FY21, estimate overall revenues to jump 14% in FY22E driven by a double-digit growth recovery in PVA. RoCEs may remain firm despite challenging environment. Earnings resilience in near-medium term, strict working capital discipline and rising free cashflows would enable PIDI to generate RoCEs of ~30% over the next two years.

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