We initiate ‘buy’ on Pidilite Industries, a pioneer in consumer and specialty chemicals used in home construction and maintenance in India.
Although the stock is up 60% YTD, we expect a further re-rating as earnings ramp up to 25% CAGR on rising demand from India’s growing middle-class and as margins widen on falling input costs.
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.
Falling raw material prices are a near-term catalyst. 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.
Rising growth in the consumer segment (80% of revenue), along with a continuing recovery in the industrial segment (20% of revenue), should deliver FY14-17e CAGRs of 17% for consolidated revenue, 25% for EBITDA and 25% for PAT, with RoCE/RoE averaging 25%/ 27% over FY15-17e. Our target price of R610 is set at 35x March 17e EPS.