Pidilite: Lower oil price the only saving grace, challenging times ahead

Gross profit margins were up 507 basis point year-on-year to 55.4 per cent, the highest since December 2010 quarter, aided by lower input prices
Pidilite Industries’ March quarter (Q4) results indicated that sales recovery would remain a challenge, though benign input costs — led by lower crude oil prices — could provide comfort.

In Q4, Pidilite’s consolidated top line declined by 5.8 per cent year-on-year (YoY) to Rs 1,545 crore, dragged by a 4.2 per cent fall in domestic volumes. Profit before tax (PBT) and exceptional items fell 12.3 per cent YoY to Rs 255 crore. These were lower than consensus estimates of Rs 1,570 crore and Rs 301 crore, respectively.

PBT saw a higher impact, due to the sharp fall in other income — to Rs 16.5 crore, from Rs 52.5 crore last year. The 35 per cent YoY fall in net profit to Rs 159.6 crore was aggravated by exceptional costs (impairment of assets) of Rs 37 crore.
Importantly, operating profit margin beat estimates. Gross profit margins rose 507 bps YoY to 55.4 per cent — the highest since the December 2010 quarter — aided by lower input prices. Ebitda margin, however, rose just 247 bps to 19.5 per cent due higher other expenditure. Nevertheless, it was better than expectations of 18.6 per cent.

Outlook for margins remains healthy. According to Pradip Menon, CFO of Pidilite: “Input prices have softened, but we need to see if these are sustainable. We look forward to maintaining our Ebitda margins in the range of 20-24 per cent.”


An analyst at a domestic brokerage said: “Lower input costs will support profitability and protect earnings.” The price of the key raw material — vinyl acetate monomer (35-40 per cent of input costs), a crude oil-derivative — fell 16 per cent YoY in Q4. Given the subdued demand globally, crude oil prices are unlikely to bounce back sharply.

However, weak top line visibility remains the biggest concern. Therefore, most analysts say the top. line will remain under pressure during FY21.
Pain in the realty sector, severe decline in urban sales (65-70 per cent of revenue), dependency on discretionary sales like furniture — for which the outlook remains muted — all indicate challenging times.

The last few days of Q4 saw sales being hit to the tune of Rs 150 crore, because of the lockdown. The situation could be worse in the June quarter, given that half the quarter has been a complete washout.

Consequently, the stock — which has been among investors’ favourites — hasn’t recovered much from its March lows. It was down 3 per cent on Wednesday to Rs 1,391, following the Q4 results, weak outlook, and the pricey PE valuation of 64x its FY20 earnings.

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