Mark to Market: Will Pidilite continue to outperform?
Sep 30, 2012 (Menafn - Mint - McClatchy-Tribune Information Services via COMTEX) --Pidilite Industries Ltd has rallied 27% after it announced first quarter results in mid-July on the back of upbeat revenue growth and lower raw material costs. Its business grew at a better rate than that of other consumer firms, at least in the June quarter. It reported net sales growth of 18.1% year-on-year to Rs.998 crore and stellar 40% growth sequentially helped by robust volume and price hikes between 4-5%.
Net profit was up 22.3% to Rs.128 crore y-o-y and almost doubled q-o-q. Operating profit margins also improved 80 basis points to 18.5% on the back of 7% decline in its key raw material (vinyl acetate monomer) and 120 basis points decline in advertisement spend. One basis point is one-hundredth of a percentage point. On the other hand, consumer firms such as Asian Paints Ltd, Berger Paints India Ltd and Clariant Chemicals (India) Ltd reported sub-20% growth in net profits during the same period.
Pidilite has two divisions -- consumer bazaar and industrial chemical. In the June quarter results, revenue from the consumer segment, which makes up 77% of sales, grew 22% y-o-y, in line with estimates. The industrial segment, which contributes around 23% to sales, grew at a slower pace of 11%.
Margins are expected to improve between 30-50 basis points in FY13 if the down trend continues in raw material costs, along with a strong rupee and a price hike. But all the positives in terms of upbeat earnings growth in the September quarter may have already been discounted in the stock. The stock is up 41% year to date and is trading at 22 times one year estimated multiple. The company had invested Rs.350 crore in Dahej elastomer project, which continues to remain on hold. Spark Capital Advisors (India) Pvt. Ltd in a note dated 27 July said, "We believe clarity on elastomer project and resultant impact on capital commitment to the project will largely drive re-rating of its valuation multiples."
Analysts expect the consumer bazaar segment to continue to grow at 20% in the coming quarter, while growth in the industrial segment may remain around 10-11% and continue to reflect the overall weakness in the domestic economic environment. There may not be any significant improvement in international operations as well that account for 11-14% of the total sales because of subdued recovery in the West. Raw material prices in terms of crude oil have already inched higher in the September quarter and the focus will remain on management commentary about future direction of vinyl acetate monomer prices.
Moreover, advertisement spend generally goes up during championships such as T20 cricket tournament, World Cup, etc., and may rise in the coming quarters. An analyst who did not want to be named said, "In the short term, most of the positives in terms of earnings growth in the upcoming quarter are priced in the stock, but the building materials company continues to remain a long term (1-2 year) play even at current valuations."
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