Pidilite Industries Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Volume-led quarter, pricing drag fades: Underlying volume growth hit 9.6%, while value lagged due to carry-over price cuts from softer input costs. Management expects value and volume to converge from Q2 onward if pricing holds.
• Gross margins surge on input tailwind: Gross margin expanded 465 bps YoY, lifting standalone EBITDA margin to 24.6%, up 187 bps YoY. The margin band is guided to stay at 20-24%, likely at the higher end if conditions remain benign.
• Rural engine keeps outrunning urban: Rural growth outpaced urban for the eighth straight quarter, driven 90% by same-store penetration, not new outlets. Management sees this gap persisting for the next 2-3 years.
• B2B delivers breakout growth: The B2B portfolio grew 18% by volume, led by a strong comeback in pigments and healthy industrial adhesives. Double-digit underlying volume growth is the stated 2-3 year objective.
• What to watch next quarter: Whether Kerala demand revives during Onam, the pace of value-volume convergence, and any early signal from the real estate cycle’s multiplier effect on core categories.

Volume & Value Dynamics

• UVG vs value gap: The 9.6% underlying volume growth was driven by C&B (8%) and B2B (18%), but reported value growth trailed because of pricing actions taken in the prior year when input prices softened. No significant rollbacks were taken in Q1 itself.
• Convergence path: If pricing stays at current levels and raw material volatility stays low, value and volume growth rates will converge starting Q2, and definitely by the second half.
• Double-digit ambition: The Q1 UVG of 9.6% is not far from the full-year double-digit target. Management measures underlying volume growth (turnover at constant prices) as the better indicator of real growth. Barring black-swan events, double-digit volume growth is the clear objective for the year.
• Pricing floor in sight: VAM prices are "very near the bottom" per current conversations with manufacturers. If input prices soften further, management will take both pricing actions and aggressive market moves, but from the current standpoint prices do not appear likely to go much lower.

Puri: "I would say we are very near the bottom. This is very near the bottom."

Margin Structure & Input Costs

• Gross margin tailwind: A 465 bps YoY expansion in gross margin flowed from moderating input prices, taking standalone EBITDA margin to 24.6%.
• Margin band commitment: EBITDA margin will remain in the 20% to 24% range, probably at the higher end if everything remains benign. If input prices soften, management will take both pricing and aggressive actions in the market rather than hoard the benefit.
• Other expenses flattish QoQ: Unusual versus the historical pattern where Q1 runs higher than Q4. Advertising and sales promotion, the biggest chunk, continues to be dialed up as management sees opportunities to build brands and categories. No conservation of ad spends for later reinvestment: planning is done on a longer-term basis.
• VAM comfort: At current VAM price levels, management is very comfortable with the 20-24% margin range.

Puri: "From where we sit now, it doesn't appear that it's going to go much lower. But again, then these days, it's far better to really fly the plane visually than plan 6 months in advance."

Rural & Distribution Reach

• Eight-quarter streak: Rural (Emerging India) growth has outpaced urban for eight consecutive quarters, driven primarily by B2C, with very little B2B in rural and semi-urban areas.
• Same-store penetration, not shelf-filling: 90% of rural growth is same-store growth; new outlets contribute less than 10%. A massive education opportunity remains across glues, waterproofing, tile adhesive, and Araldite in existing markets with existing stores.
• Runway intact: Management expects rural to continue outpacing urban for the next 2-3 years, with an internal objective of 1.5x the urban growth multiple. Substantial penetration and range incremental opportunity remain.
• Pidilite Ki Duniyas: Now 14,000 such outlets, covering roughly 28,000 villages directly (villages below 10,000 population).

Puri: "90% of our growth is same-store growth. The new outlets, etc. is less than 10%. So we still have a massive opportunity in penetration in existing markets with existing stores."

B2B & Category Mix Shift

• Three verticals, all growing: Industrial adhesives, the pigments division (paper/textile emulsions), and the B2B project business (waterproofing and related areas) are all growing healthily. The pigments business had a strong comeback after being challenged in the same quarter last year.
• 18% not the new normal: The 18% B2B volume growth is not expected to continuously repeat itself, but the objective is clearly double-digit underlying volume growth on a 2-3 year basis.
• Portfolio mix transformation: Over five years, the mix of core versus growth-plus-pioneer categories has shifted from 80-20 to 55-45, per an analyst's math. This shift explains why capex has roughly doubled to ~INR 2,000 cr over the last five years versus ~INR 1,000 cr in the prior five: spending moved from core alone to core plus growth plus pioneer categories including tile adhesives, tile grouts, and marble glues. Asset turnover has come down as a result.
• Capacity and capex normalization: Capacity utilization sits at 70-75% (a back-of-the-envelope range; a single figure is difficult across 30 verticals). Once 75% is crossed, fresh capacity is considered. Twenty plants are currently undergoing brownfield expansion. The elevated capex level, partly from COVID lumpiness and pioneer category investments, will equalize over the next 2 to 3 years.

Real Estate Cycle & Core Categories

• T+3, T+4 beneficiary: Pidilite is largely a beneficiary of the real estate cycle in larger towns on a T+3, T+4 basis. The current real estate upcycle is in its second year. Substantial inquiry and some institutional waterproofing sales are visible, but no significant upturn in other categories yet.
• Multiplier still to come: Historically, years 3 and 4 give a much stronger multiplier than years 1 and 2. The current growth rate is being achieved without substantial benefit from the real estate cycle. Starting maybe end of this year or beginning of next year, that multiplier will start showing. If the real estate boom continues without unforeseen events, greater benefits will be seen in years 3, 4, and 5.
• Kerala soft patch: Kerala demand has been soft versus other markets. Management declined to give a definitive explanation, citing only anecdotal factors (foreign remittances, government spending), and will wait for Onam (August-September) and the festive season before worrying.

Puri: "I would just wait and rather the real time is now when Onam comes in August, September, if the same thing continues for the next 3 months, then we would worry."

New Bets & Experiments

• NBFC pilot: The first set of loans has been given out in a pilot limited to one city and one geography with limited capital. Management will give the pilot about six months, then decide on next steps.
• Exterior new product: A product bridging paints and cement with long shelf-life durability is being piloted across geographies. Very early days; management expects better answers in six months on size, application issues, demand generation, and the selling module.
• Electronic adhesives partnership: A tie-up with a Chinese/German company in electronic adhesives is just beginning in initial stages.
• Paints foray: Management needs more time to assess and will be best equipped to answer after markets have gone through one festive season.
• Domestic subsidiaries: Flattish revenue growth in Q1 due to heat wave and elections; expected to normalize by the second half as demand conditions improve from the September festive season onward.

Puri: "We will give it about 6 months in the pilot and then come back to you and tell you fellows what we want to do with this, if you want to do anything."

Guidance & Commitments

Key Metrics