Pidilite Industries share price: Motilal Oswal maintains Neutral stance with a price target of Rs 1700 per share

Brokerage firm Motilal Oswal expects earnings growth to potentially become healthy after FY22, once the near-term lockdown inflicted restrictions are lifted and material cost stabilises (their ongoing rise is not driven by structural factors). Motilal Oswal maintains Neutral stance with a price target of Rs 1700 per share (60x FY23E EPS). It said while the structural investment case remains intact, valuations are "very expensive" at 66x FY23E EPS.

Motilal Oswal expects the company to bounce back strongly post the lifting of lockdowns and perform similar to what they did last year after a 56.5% decline in sales in 1QFY21. 

Pidilite Industries has been the most consistent and is among the highest wealth creators over a long period (wealth creation note). Transformative changes are underway in the business as highlighted in CEO track note, leading to continued strong topline growth in the medium term.

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Pidilite delivered a strong topline performance in 4QFY21, Motilal Oswal said. Even if one were to exclude the addition of the first full quarter of the Huntsman business (4.5% of sales in 4QFY21), which was acquired in November 2020, sales grew by 37.6% YoY. 

Vinyl acetate monomer (VAM) prices have doubled in Apr-March 2021 from consumption cost of USD970/mt in 3QFY21. 

Pidilite’s management has guided that despite price increases and cost savings, margin will be impacted over the next 2-3 quarters until material cost stabilizes some time in 2HFY22.

On demand trends, Pidilite Industries management indicated that unlike the impact seen during the first COVID wave in 1QFY21, rural and small towns in India have also been affected in the ongoing second wave. It said that the B2B business (15% of sales) has not been affected so far. 

Motilal Oswal says that despite the addition of the Huntsman business (4.5% of sales in 4QFY21 with 12- 13% higher operating margin) to their FY22E forecasts, FY22E/FY23E EPS has been cut by 4.7%/3%. Full year sales for the Huntsman business and its higher operating margin (12-13 percentage points higher than Pidilite’s business) would limit sales and margin impact in FY22 to some extent, the brokerage firm said. The structural story remains attractive, but valuations at 66x FY23E EPS are expensive. Motilal Oswal maintains a Neutral rating on Pidilite Industries.

"The management is continuing its high capex path with a long-term growth opportunity in mind, which will result in higher-than-expected depreciation compared to our earlier forecasts," Motilal Oswal said. Topline growth in 4QFY21 is a vindication of the latent growth opportunity in the core, pioneer, and growth categories, it further said.