Pidilite Industries Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Volume-led growth on a tough base: Standalone net sales grew 4.8% against a 26% prior-year quarter that was inflated by channel stocking after two price hikes; underlying volume momentum stayed healthy.
• Gross margin inflection is imminent: High-cost VAM inventory suppressed margins this quarter, but spot VAM has fallen to \$1,200/ton and the benefit begins flowing through from Q4 itself.
• Rural is the soft spot, not a hole: Tier 4/5 markets are still growing, just no longer at the historical 1.5x urban premium; management expects a turnaround starting January as crop receipts and government spending kick in.
• Competitive intensity is the next test: Small regional players, squeezed out during the raw-material spike, are showing early signs of returning; management expects materially more competition in the next three to six months and says it is prepared.
• What to watch next quarter: Whether the expected Q4 margin exit into the 20–24% corridor actually materializes, the pace of rural recovery, and any early share loss to resurgent regional competitors.

Demand Environment

• Urban demand held post-festival: Tier 1, 2 and 3 towns saw no seasonal drop after the festival period; November and December improved over October, and that trend continued into January.
• Rural growth converged with urban: Semi-urban and rural markets are still growing, not declining, but the growth premium over urban has vanished, a departure from the normal 1.5x relationship. Management attributes this to broader rural consumption stress and expects a recovery within six months.
• Repair and renovation anchor the mix: Two-thirds of business comes from repair and renovation, one-third from new construction, insulating demand from construction-cycle swings. Post-COVID, consumers have re-evaluated their relationship with homes, driving renovation, expansion and new-home attention.
• Real estate acts as a multiplier: Organized construction and real estate in big cities, plus individual house-building in Tier 2/3 towns, is fairly robust; as houses get completed, home improvement demand is expected to persist. Commercial activity in hospitality, malls and offices is also driving renovation demand.
• B2B is split sharply by end-market: Domestic B2B businesses including the Nina Percept waterproofing brand are strong, lifted by corporate, factory and government infrastructure investment. Export-oriented B2B segments serving Western Hemisphere customers, notably pigments, have been substantially hit and showed no improvement in the first 15–20 days of January.

Bharat Puri: "Unlike the conventional consumption mass FMCGs, our business even in rural and semi-urban India is not declining or constant, it is still growing. The only thing is normally our expectation is that it grows 1.5 times in urban. It has come at times to the same level as urban or even a little below urban."

Margins & Input Costs

• High-cost inventory masked the turn: Material cost as a percentage of net sales was 175 bps higher YoY but 88 bps lower QoQ, reflecting gradual liquidation of high-priced inventory. Gross margins improved marginally over the previous quarter.
• VAM is the swing factor: VAM consumption in Q3 was roughly 2,000 tons versus 2,500 tons in Q2; current spot rates around \$1,200/ton are materially lower, and the benefit starts accruing from Q4 without waiting for Q1 next year.
• EBITDA held flat despite investment spend: EBITDA margins were in line with the previous quarter even as advertising and sales promotion spend increased; nine-month EBITDA grew 5.5% YoY, constrained by input costs that were not fully passed on.
• International subsidiaries under dual pressure: Moderate sales growth was offset by higher input costs and currency depreciation, keeping EBITDA under strain. Domestic consumer and bazaar subsidiaries continued to deliver industry-leading growth and profitability.
• Pricing stance is now neutral: The company took pricing at only 75% of inflation and sees no need for further price increases, consistent with the priority on volume growth.
• Raw material stability expected: Management expects raw material prices to remain largely stable across the next three to four months barring new black swan events; the depreciating rupee is already accounted for in that view.

Sandeep Batra: "We will see, as I said earlier, margins improving throughout the fourth quarter and we would certainly look to hit the range by the time we exit March."

Competitive Dynamics & Strategy

• Regional players are regrouping: Small regional competitors who suffered during the raw material inflation cycle are showing early signs of returning; management expects materially increased competition in the next three to six months and says it is prepared.
• The margin corridor is a deliberate moat: The 20–24% EBITDA range is explicitly designed to maintain the right price-to-equity relationship while keeping competition at bay; management will not chase margin beyond that band at the expense of volume or share.
• Volume growth is the stated priority: The company frames its strategy as "profitable volume growth" with volume growth as the primary lever, reinforced by the decision to absorb 25% of input inflation rather than pass it through.
• Category mix is shifting structurally: Five years ago the split was 75% core and 25% growth plus pioneer; it now stands at roughly two-thirds to one-third, with a stated target of 50:50 in the next three years. Growth categories like waterproofing are outperforming at an overall level.

Bharat Puri: "We have always said that we prioritize volume growth and market share over a greater margin. We believe this margin range allows us the right price to equity relationship and it also keeps competition at bay."

Category & Innovation Pipeline

• Core adhesives sustain momentum: Adhesives, the largest category, continued to grow; nine-month growth across categories ran at roughly 23–24% with a volume CAGR of about 14%, indicating broad-based expansion across categories and geographies.
• Waterproofing leads the growth bucket: Both retail waterproofing and the B2B Nina Percept brand are performing strongly; new launches like Raincoat Neo, an economy exterior waterproofing solution, and Roofseal in the roof acrylic coating segment are doing very well.
• Araldite is beating the acquisition case: Revenue and profitability are running ahead of plan, with growth materially above Huntsman's historical 6–8% average. Araldite was merged into Pidilite from 1 April 2022 and is reported within the Consumer and Bazaar segment with prior-year comparatives restated.
• Innovation cadence is institutionalized: Management expects to deliver one major and two minor innovations per quarter from its divisions; HomeFix, a nail substitute being tested in Kerala, is among the current experiments.
• Growth framework governs resource allocation: The portfolio is managed in three buckets: core (grow at 1–2x GDP, normally 1–1.5x), growth (2–4x GDP), and pioneer (aim to become growth categories in three years). If market or GDP improves, volume growth is expected to follow.

Bharat Puri: "Five years back it was 75% core and 25% growth in pioneer. It is now about two-thirds and one-third. In the next three years, we will make it 50:50."

Capex & Capacity Build-Out

• Major capacity expansion underway: Six brownfield expansions and eight greenfield factories are in progress, all scheduled for completion in the next financial year. In the last 24 months, seven brownfield expansions and five greenfield factories have been completed.
• The build-out supports the category shift: The capacity investment aligns with the ambition to grow the growth and pioneer portfolio to half the business, requiring manufacturing footprint for newer categories like waterproofing and construction chemicals.

Guidance & Commitments

Key Metrics