Pidilite Industries' Q2 nos are good but its foray into lending business could be a concern

Pidilite Industries Q2 results, Pidilte Industries share price: Pidilite Industries, a leading manufacturer of adhesives and sealants, along with other construction chemicals, has been hogging the limelight lately. Firstly, the company's stock got a major boost earlier this month when the foreign brokerage Goldman Sachs upgraded the stock to 'buy' from 'sell', saying the stock's earnings downgrade cycle was a thing of the past and that the company is poised for strong growth on the back of new products and paint segments. It also revised the target price to Rs 2,725 from Rs 2,325. READ MORE

Thereafter, the Fevicol maker released its financial results for the quarter ended September 30 on Wednesday (November 8), which were in line with analysts' estimates. The company reported a 35.76 per cent increase in consolidated net profit to Rs 458.53 crore for the second quarter, helped by volume growth and stable input prices. The company had logged a profit of Rs 337.75 crore in the April–June period a year ago.

Revenue from operations was up 2.15 per cent to Rs 3,076.04 crore during the second quarter of this fiscal. It stood at Rs 3,011.15 crore in the year-ago period. “Consolidated revenue for the quarter grew by 2 per cent led by strong underlying volume growth (UVG) across categories and geographies,” said an earnings statement from the company. READ MORE

However, in a separate announcement, Pidilite Industries announced it intends to set up a lending business. "The New Business would provide credit to its domain ecosystem to support its business growth. This credit will be provided primarily in the form of small-value retail loans, it added.

The brokerages look divided on the stock post-September quarter numbers and the company's plan to foray into the lending business. For instance, Macquarie has maintained an 'underperform' rating on the stock with a target price of Rs 2,160. It added that the 2Q EBITDA was in line with estimates; however, its plan to enter the lending business is perplexing.

Similarly, Goldman Sachs, too, notes that the intention to set up a lending business may raise concerns. The brokerage, however, has maintained a 'buy' call on the stock with a target price of Rs 2,725. It said in its note that Q2 was an operationally strong quarter for Pidilite Industries. It further said that the company's key risks remain as there is a weaker-than-expected pickup in the housing market. It also added that the company is seeing rising competitive intensity in waterproofing. The brokerage expects a sharp rise in input costs, adversely impacting the EBITDA margin.

Independent market analyst Ambareesh Baliga says that if the company has cash, it must invest; however, that should be in related areas. Getting into something new where the company does not have a forte or domain expertise is surprising. However, Pdilite's investment in the NBFC space is quite small as compared to its size—Rs 100 crore plus Rs 10 crore. Besides, the new business will be limited to loans to their ecosystem (dealers, suppliers, etc.). Hence, the step does not look like a major negative for the company, the expert told Zeebiz.com.