Pidilite Industries Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Volume-led quarter, weather-hit but structurally intact: Domestic consumer & bazaar UVG was 8% and B2B UVG 20%, despite a wet July that disrupted operations for 10–15 days in the North. Management sees no underlying slowdown versus Q1.
• Rural engine is firing faster than urban: Rural and semi-urban markets are growing faster, driven by years of distribution investment, new-category penetration (waterproofing, Araldite, tile adhesives) and the expanding Pidilite Ki Duniya network, now at 12,000 outlets.
• Margin recovery is on, and the company is spending it forward: EBITDA margin expanded 600 bps YoY to 23.2% on moderating input costs, but employee costs are rising as 12 new plants are staffed ahead of capacity and pioneer categories absorb front-loaded people investment.
• The NBFC and paints pilots are early, and management is asking for patience: An inactive NBFC was acquired from the promoter group to pilot contractor lending in one geography; a paints pilot is live in sub-50,000-population towns across three states. Both are too nascent for metrics, and management explicitly deflected questions on differentiation and returns.
• What to watch next quarter: Whether the volume–value gap begins to close as guided, any sign of input-cost pressure from warming VAM prices, and the first read on festive-season demand after the extended monsoon disruption.

Demand & Volume Performance

• Broad-based volume growth: Domestic consumer & bazaar UVG of 8% (14% four-year CAGR) and B2B UVG of 20% (11% four-year CAGR) show demand is solid where it is domestically driven. Overseas-linked B2B demand remains challenged.
• Rural and semi-urban outperformance: Growth here is structurally higher than urban, the payoff from 3–4 years of distribution investment. Pidilite is often the first branded company to reach these towns with products like waterproofing, Araldite and tile adhesives.
• Q2 disruption was weather, not demand: An extremely wet July caused 10–15 days of disruption in the North, including one warehouse flooded and out of action for seven days. Management does not see a great difference between Q1 and Q2 growth when adjusted for this.
• Volume–value gap to close in six months: The 4–5% gap between volume and value growth reflects price corrections passed through from lower input costs. Management expects value growth to return as the base effect washes out over the next 3–6 months.
• K-shaped recovery context: Post-COVID, the economy has seen a K-shaped recovery; Pidilite’s target segment (lower middle class and above) sits in the better part of that K. For broader FMCG, 8% volume growth is a standout when many are struggling at 0–4%.

Bharat Puri: "post COVID, there has been a bit of a K-shaped recovery and I suspect for both, for life to be good for all of us, from K it has to become a hockey stick."

Margins & Input Costs

• EBITDA margin expanded sharply YoY: At 23.2%, margins improved 600 bps YoY and 50 bps QoQ, helped by moderating input costs and suitable price adjustments, even after passing some benefit back to customers and increasing A&SP spends.
• Employee cost is the rising line: Three drivers: staffing 12 new plants commissioned over 18 months (cost ahead of revenue), front-loaded people investment in pioneer categories, and last year’s high-inflation wage increases now flowing through while value growth is still muted.
• VAM prices warming, but within range: VAM has started to inch up from its trough of \$950/ton (down from \$2,500). Management is comfortable with the extent of increase so far and sees current pricing as appropriate.
• Margin philosophy unchanged: The company will stick to the 20–24% EBITDA range and continue investing behind volume growth rather than letting margins drift higher. No additional price adjustments are planned as of now.

Product Mix & Category Dynamics

• Core-to-Pioneer mix shifting on plan: The ratio has moved from 75:25 five years ago to 65:35 now, on track to reach 60:40 by year-end. Growth categories are delivering, while flagship Fevicol still posts double-digit growth over the four-year period.
• Waterproofing is a three-segment, multi-competitor market: The market is growing double digits (10–13% by volume) across institutional, new construction and repair/renovation. Competitors differ by segment: multinationals (Sika, Fosroc) in institutional, cement companies in new construction, paint companies in repair/renovation. Pidilite’s growth rates remain strong and management does not believe they are losing share.
• Araldite acquisition is beating the case: Under Huntsman, Araldite grew volumes at 6–8% CAGR; under Pidilite, volumes have grown in excess of 20%, beating the acquisition case “by a large measure.” Rural penetration, virtually zero at acquisition, is now building strongly and has stunted the adhesive business of the main competitor, per management.
• PVA joinery vs retail shift is slower than expected: Ten years after a consultant forecast of 70:30 on-site vs off-site, the market remains 85:15. Large parts of India outside metros still prefer handmade furniture at home, so joinery growth, while faster than retail, has not transformed the mix.

Bharat Puri: "prior to the acquisition of Araldite, when Huntsman owned the brand, their average growth rate of the brand was in a volume sales between 6% to 8%. Ever since we have acquired the brand, on volumes we have grown the brand in excess of 20%."

Distribution & Network Expansion

• Pidilite Ki Duniya scaling rapidly: The branded-outlet network has reached 12,000, adding 1,000–1,500 per quarter. These are not franchise stores with extra margins; shopkeepers stock a wide variety of products and find their own ROI, while Pidilite supplies through its distributor network with a two-member demand-generation cum servicing team.
• Rural distribution is a structural moat in the making: In many small towns, Pidilite is the first company to reach with categories like waterproofing, Araldite and tile adhesives. This first-mover distribution edge is driving rural outperformance and market-share gains in acquired brands like Araldite, where competitors such as Astral had stronger rural networks in some states.
• Supply chain investment continues: Four new plants were commissioned in the quarter (eight in the financial year so far), and a regional distribution center in Hyderabad was commissioned in October 2023 to strengthen the supply chain ecosystem.

New Ventures: NBFC & Paints

• NBFC acquired for in-house contractor lending: An old, inactive NBFC was bought from the promoter group for ease of doing business and speed. The rationale: Pidilite has unique credit-history data on its contractor ecosystem and sees a gap where contractors struggle for working capital because builders pay in 3–6 months while labour wants cash every evening.
• Pilot design is cautious: The NBFC will be run by a separate, heavyweight team (not Pidilite executives), piloted in only one geography, and follow an asset-light model with partners. Management does not see employing a large amount of capital and will limit Pidilite’s exposure. A firmer plan is expected in about a year.
• Paints pilot is tiny and deliberately quiet: Launched in AP, Telangana and Orissa, only in towns with population below 50,000. Management explicitly declined to share differentiation strategy or early metrics, asking for three months to come back with answers and until Q1 CY24 for clarity on purchase rates.

Bharat Puri: "We are the only people who have a history of each of these parties. We know their credit history, we know their buying capacity, we know exactly in a sense, what they are capable of doing and therefore we wanted to keep this in-house."

Bharat Puri: "You know, Percy, I would request you give us three months and we will give you all the answers. Right now, we are quiet as like the proverbial, we are paddling under the water. Let us keep paddling for some time before we give you the answers."

International & Working Capital

• International subsidiaries improving: Excluding Pidilite USA (being wound down), international businesses reported modest sales growth despite uncertain global conditions, inflation and currency devaluation. EBITDA registered robust growth and margins improved both sequentially and YoY, now in double digits.
• Cash conversion healthy: Working capital remained healthy, resulting in conversion of most profits into cash.

Guidance & Commitments

Key Metrics