Pidilite Q1 margins difficult to sustain due to week rupee says Nomura

With the falling rupee, Pidilite may incur higher raw material cost and thus would find it difficult to sustain its first quarter margins, says Nomura

There is a slowdown in the chemicals and adhesives market and Pidilite Industries is expected face the slowdown in revenue growth. Although the company benefitted from fall in raw material prices, for Pidilite, sustaining its first quarter margins look difficult owing to raw material price rise ahead, says Nomura Financial Advisory and Securities (India) Pvt Ltd.

 

In a research note, Nomura said it believes that (Pidilite) margins in Q1 peaked as they benefited from a fall in raw material prices and a change in product mix. However, prices of VAM, one of the key raw material for Pidilite is likely to increase from second quarter due to depreciation of rupee against the US dollar and amidst a moderating growth scenario, the company would find it challenging to protect margins, the note said.

 

Nomura continues to acknowledge Pidilite’s ability to innovate, strong brand, penetration in Tier- 3/4/5 towns and cities and strong relationship with carpenters and plumbers.

 

The company’s stock currently trades at a one-year forward P/E multiple of  23.8x (in line with its three-year average and 13% premium to its six-year average) which appears in the fair value zone to Nomura analysts. They have forecasted the company’s return on equity as below:
 


Nomura said it remains optimistic on long-term prospects of spending on construction chemicals and adhesives. Pidilite's ability to identify niche demand and accordingly innovate new products should drive long-term growth, it added.

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Amara Raja Batteries expected to sustain strong performance, says Nomura

Amara Raja Batteries looks well positioned to benefit from strong growth in replacement automotive battery demand in India in the long term. This coupled with a strong technology partner, growing brand awareness, and cost advantage give it an edge over its peers, feels Nomura

Amara Raja Batteries’ June quarter revenues increased by 29% y-o-y versus the market expectation of around 15%, driven by continued robust performance in the replacement segment, the benefit of price increases, and strong volume traction in the telecom segment.

 

According to the company, there was some sales loss in the industrial segment due to capacity constraint. Margins surprised positively, as the stronger revenue growth led to operating leverage benefits. The company took a 5% price increase in the replacement segment in July, which should largely take care of the recent increase in lead prices.

 

Nomura Financial Advisory and Securities (India) Private Ltd said it believes that Amara Raja has strong pricing power for further hikes if required and the company will maintain margins at around 16%. Overall, it is expected that the company will sustain its strong performance and deliver a 19% revenue CAGR and 16% EPS CAGR during FY13-15, estimates, Nomura said in a research note.

 

According to Nomura, Amara Raja Batteries looks well positioned to benefit from strong growth in replacement automotive battery demand in India in the long term. A strong technology partner, growing brand awareness, and cost advantage give it an edge over its peers.

 

Overall, Nomura has given Amara Raja Batteries’ share a ‘buy’ recommendation in the stock market with a target price of Rs350. As the company increases its scale of operations, the stock’s multiples will improve, forecasts Nomura. Nomura’s estimates with respect to the company are given below:


“We expect strong operating cash flows over the next three years. Potential high capex in FY14F for capacity expansion will impact free cash flows, though,” Nomura said.

 

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