1 26 July 2017 1QFY18 Results Update | Sector: Consumer Pidilite Industries BSE SENSEX S&P CNX 32,382 10,021 CMP: INR805 TP: INR810 (+1%) Neutral Motilal Oswal values your support in Results below expectation; expect normalcy from 3QFY18 the Asiamoney Brokers Poll 2017 for PIDI’s 1QFY18 results came in below expectations. Gross sales were down India Research, Sales and Trading 1.3% YoY to INR16.7b. Net sales declined 2.6% YoY (est. of flat growth) to team. We request your ballot. INR15.3b, with flattish volume growth (est. of flat growth) in the Consumer Bazaar segment. EBITDA was down 18.5% YoY (est. of -4% YoY) to INR3.2b, while adj. PAT declined 16.7% YoY (est. of -6.1%) to INR2.3b. Gross margin contracted 60bp YoY to 51.7%, led by uptrend in key raw Bloomberg PIDI IN Equity Shares (m) 512.7 material costs. Staff costs increased 150bp YoY to 11.8%. Other expenses were M.Cap.(INRb)/(USDb) 427.6 / 6.6 up 200bp YoY to 18.9%, led by 39.6% increase in adspend due to timing 52-Week Range (INR) 837 / 569 difference between advertisement and promotion spends compared to 1, 6, 12 Rel. Per (%) -7/0/-5 1QFY17. EBITDA margin thus contracted 410bp YoY (est. of -150bp YoY) to 21%. Avg. Val, INR m/Vol m 385 Free float (%) 30.4 Consolidated segmental performance: Consumer Bazaar revenues were down 1.6% YoY to INR14.3b. Segmental EBIT margin shrunk sharply by 390bp YoY to Financials & Valuations (INR b) 23.0%. Consumer Bazaar EBIT declined 15.7% to INR3.3b. Industrial segment Y/E Mar 2017 2018E 2019E was flat at INR2.5b, with margin contraction of 360bp to 14.7%. Net Sales 56.2 62.4 72.4 Concall highlights: 1) No significant schemes launched in 1QFY18 to push stock. EBITDA 12.6 13.6 15.5 Provided certain amount of money to channel partners for loss on stock due to PAT 8.6 9.3 10.6 GST transition; accounted fully in other expenses in 1QFY18. 2) Company had EPS (INR) 16.7 18.1 20.6 Gr. (%) 6.7 7.9 14.0 taken price hikes in segments that were affected more by RM inflation; no BV/Sh (INR) 64.5 79.0 96.1 price hikes taken in bigger products like Fevicol and Fevikwik. 3) Company sees RoE (%) 28.2 25.2 23.5 reasonable pick-up in demand after 1st week of July. RoCE (%) 26.8 24.1 22.7 Valuation and view: We cut our EPS numbers by 2%/3% for FY18/FY19 to build P/E (x) 48.1 44.6 39.1 in the miss on revenue and margins. PIDI offers a high-quality discretionary EV/EBITDA (x) 32.0 29.4 25.3 play with strong competitive positioning, proven in-market excellence, and an impeccable track record of generating long-term shareholder value over Estimate change multiple periods. While we admire the business franchise and long-term TP change growth prospects, fair valuations at 39x FY19E EPS lead us to maintain our Rating change Neutral rating with a revised target price of INR810 (INR835 earlier, 38x FY19E EPS, 5% premium to three-year average). Consolidated - Quarterly Earning Model (INR Million) Y/E March FY17 FY18 FY17 FY18E FY18 Var. 1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE 1QE (%) Net Sales 15,694 14,177 13,344 12,954 15,289 15,594 16,146 15,384 56,168 62,414 16,008 -4.5 YoY Change (%) 6.8 7.5 -0.3 4.9 -2.6 10.0 21.0 18.8 4.8 11.1 2.0 Total Expenditure 11,754 10,951 10,477 10,375 12,079 12,015 12,516 12,250 43,570 48,861 12,226 EBITDA 3,939 3,225 2,866 2,579 3,210 3,579 3,629 3,134 12,598 13,552 3,782 -15.1 Margins (%) 25.1 22.8 21.5 19.9 21.0 23.0 22.5 20.4 22.4 21.7 23.6 Depreciation 258 303 295 296 313 318 316 318 1,151 1,264 270 Interest 35 26 30 48 37 26 30 34 139 127 32 Other Income 241 324 272 286 432 275 272 279 1,123 1,259 193 PBT 3,887 3,209 2,814 2,520 3,292 3,510 3,556 3,061 12,430 13,419 3,672 -10.4 Tax 1,174 912 793 971 1,033 1,088 1,102 937 3,851 4,160 1,120 Rate (%) 30.2 28.4 28.2 38.5 31.4 31.0 31.0 30.6 31.0 31.0 30.5 Adj PAT 2,713 2,309 2,020 1,549 2,260 2,422 2,454 2,124 8,579 9,259 2,552 -11.5 YoY Change (%) 16.3 12.4 1.5 -7.5 -16.7 4.9 21.5 37.1 6.7 7.9 -6.1 Margins (%) 17.3 16.3 15.1 12.0 14.8 15.5 15.2 13.8 15.3 14.8 15.9 E: MOSL Estimates Krishnan Sambamoorthy - Research analyst ([email protected]); +91 22 3982 5428 Vishal Punmiya - Research analyst ([email protected]); +91 22 3980 4261 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Pidilite Industries Key quarterly charts Exhibit 1: Segmental Performance (Consolidated) Segmental 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Consumer and Bazaar Sales (INRm) 11,478 10,326 10,009 8,418 13,259 11,820 12,090 10,764 14,548 12,929 12,186 11,579 14,318 Sales Growth (%) 20.7 15.1 13.0 7.7 15.5 14.5 20.8 27.9 9.7 9.4 0.8 7.6 -1.6 EBIT (INRm) 2,474 2,009 1,905 1,269 3,421 2,984 2,935 2,519 3,915 3,072 2,943 2,651 3,300 % Contribution 95.1 88.7 89.5 83.4 91.3 88.9 89.2 85.0 89.6 87.7 90.2 87.1 90.1 EBIT Growth % 1.3 3.4 21.5 18.3 38.3 48.5 54.1 98.4 14.4 2.9 0.3 5.3 -15.7 EBIT margin % 21.6 19.5 19.0 15.1 25.8 25.2 24.3 23.4 26.9 23.8 24.1 22.9 23.0 Industrial Products Sales (INR m) 2,169 2,327 2,039 2,157 2,359 2,270 2,262 2,510 2,480 2,388 2,181 2,541 2,485 Sales Growth (%) 16.4 7.7 5.2 -1.6 8.8 -2.5 10.9 16.4 5.2 5.2 -3.6 1.2 0.2 EBIT (INRm) 161 267 251 288 366 339 367 470 452 455 330 409 365 % Contribution 6.2 11.8 11.8 18.9 9.8 10.1 11.2 15.8 10.4 13.0 10.1 13.5 10.0 EBIT Growth % -16.0 8.2 38.8 56.9 127.4 26.9 46.4 63.1 23.6 34.1 -10.1 -12.8 -19.3 EBIT margin % 7.4 11.5 12.3 13.4 15.5 14.9 16.2 18.7 18.2 19.0 15.1 16.1 14.7 Source: Company, MOSL Exhibit 2: Consol. sales declined 2.6% YoY Exhibit 3: Gross margins contracted 60bp YoY Sales growth (%) Gross Margins (%) 55.3 21.6 19.6 53.5 53.2 18.4 53.1 18.1 52.3 51.8 51.7 51.6 14.7 14.0 12.5 12.1 11.3 49.1 9.4 5.3 5.1 6.8 7.5 4.9 48.0 46.6 44.6 45.1 42.9 43.9 44.1 44.2 (0.3) (2.6) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Source: Company, MOSL Source: Company, MOSL Exhibit 4: Employee expenses up 150bp YoY… Exhibit 5: ...and other expenses were up by 200bp YoY Employees Cost (%) Other Expenditure (%) 24.3 24.1 12.4 12.4 20.9 12.0 20.8 11.8 20.3 11.6 19.7 19.3 18.9 18.9 11.0 18.4 10.9 10.8 10.6 17.5 17.5 17.5 10.6 10.4 16.9 9.9 10.2 9.9 16.5 16.4 10.0 16.1 9.7 9.5 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Source: Company, MOSL Source: Company, MOSL 26 July 2017 2 Pidilite Industries Exhibit 6: EBITDA margins thus contracted 410bp YoY Exhibit 7: Consol. PAT declined 16.7% YoY EBIDTA Margins (%) PAT Growth (%) 25.1 99.0 23.3 22.8 22.8 21.9 49.6 21.5 21.0 35.5 20.3 12.4 18.5 16.3 1.5 20.5 19.0 11.9 11.2 19.9 19.2 11.1 58.6 17.9 17.2 (7.5) 16.4 16.1 14.8 10.4 12.8 (2.7) (6.7) (16.7) 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 Source: Company, MOSL Source: Company, MOSL Standalone performance for 1QFY18 Gross sales declined by a meager 0.2% YoY to INR14.9b.