Pidilite, Titan Downgraded By Citi Citing High Valuations

Titan Co. and Pidilite Industries Ltd. have limited scope for further re-rating following the recent rally as there are no commensurate earnings upgrades or changes in the long-term growth and profitability outlook, according to Citi Research.

Shares of Titan rallied 20.11% in the June quarter, outperforming the NSE Nifty 50 benchmark. This leaves limited upside potential for the stock to grow, forcing Citi to downgrade it to 'neutral' from 'buy' with a target price of Rs 3,280 apiece, implying an upside of 5.29%. 

However, the research firm remains constructive on Titan's near-term as well as long-term growth prospects due to company-specific initiatives like lightweight jewellery, micromarkets, and regional products, bundled with industry tailwinds, according to a July 11 note.

Citi's target multiple factors in the near term as well as long-term growth potential and return on capital.

Therefore, it sees limited scope for further re-rating and has marginally lowered its estimated earnings per share by 0.2–0.5% for the financial year 2024–26.

Citi said investors would focus on:

• Overall demand trend was seen during July and the impact of 'Adhik Maas'—an inauspicious period in the Hindu calendar for buying—and any sign of demand trend improving or deteriorating.

• Change in competitive intensity and impact of the Hallmark Unique Identification and

• Revenue and margin guidance for the fiscal.

"We model revenue growth of 16% and Ebitda/PAT growth of 16–14% year-on-year," the note said.

Citi's profit after tax estimates for fiscal 2024–26 are broadly in line with consensus estimates.

Higher-than-expected jewellery growth can drive a consensus earnings upgrade and further re-rating of the share price, while the consensus downside earnings risk can arise from a slowdown in demand, the note said.

Citi downgraded the Fevicol maker to 'sell' from 'buy, citing that current valuations have discounted the benefits of margin expansion, but still, the stock price is trading at 70 times one-year forward consensus price-to-earnings.

It has set a target price of Rs 2,220 from the earlier Rs 2,880, implying a downside of 14.34%.

Citi said investors would focus on:

• Competitive intensity from small, local and regional players due to softening raw-material prices and easing supply-chain concerns.

• Outlook on overall demand trend across urban and rural markets

• Any price cuts being planned due to softening raw-material prices.

"We model revenue growth of 12% year-on-year," it said. "However, on the back of lower raw-material prices, we model gross margin expansion of 580 basis points leading to Ebitda and PAT growth of 45% and 47% year-on-year, respectively."

Citi's profit-after-tax estimates for the fiscal year are 7% above consensus estimates.

Key downside risks for consensus earnings can arise from price cuts and/or higher branding/promotion, and lower-than-expected margin expansion. Demand improvement can drive an upgrade in the consensus earnings, the note said.

The research firm is constructive on the quick-service-restaurants. It expects the category to be one of the leading beneficiaries of improvement in demand and discretionary spending. In the short term or three to six months, both the demand and margin trajectory can remain volatile.

Citi prefers Devyani International Ltd., followed by Jubilant FoodWorks Ltd. as most of the risks on growth and margins seem to have been already priced in.

Page Industries Ltd., followed by Asian Paints Ltd. are Citi's top-sell names. It sees downside risk to consensus in the first quarter for Page Industries, both on the top line as well on the margin.

On Asian Paints, Citi sees medium-term (one to three years) challenges in terms of growth and profitability from increasing competitive intensity.