Initiate ‘buy’ on Pidilite with target price of R610 per share, which is based on 35x March 17e EPS. Our target P/E multiple of 35x is supported by 25% EPS CAGR over FY14-FY17e and average RoCE/RoE of 25%/27%. Over various time horizons, the average P/E for the stock has expanded along with increases in EPS growth. In particular, over the past one year the stock has traded at 30x P/E with 18% EPS growth. With forecast EPS growth ramping up to 25%, we believe the fair-value multiple should increase .
Pidilite enjoys strong pricing power due to its product portfolio, well-established brands and distribution reach, being the only pan-India player in a highly fragmented national market. Relatively heavy spending on R&D and marketing have created a competitive moat for the company that is unlikely to be breached.
Although the stock is up 60% year-to-date, we expect a further re-rating as earnings ramp up to a 25% CAGR on rising demand from India’s growing middle-class and as margins widen on falling input costs. Cost of goods (CoGS), which is 50% of Pidilite’s revenue, is almost entirely from different derivatives of crude oil. Recent sharp fall in crude prices, together with operating leverage and an improved overseas performance, will boost the ebitda margin by an expected 325 bps over FY14-17e. Further declines in crude prices offer margin upside risk.
Citi
