Pidilite's new moves come with old triggers

livemint.com:

Pidilite Industries Ltd has caught investors by surprise with its decision to enter the non-banking financial companies (NBFC) sector. Pidilite intends to set up a lending business with the acquisition of promoter group company Pargro Investments Pvt. Ltd.

The aim is to provide small-ticket loans to Pidilite’s channel partners/ecosystem (dealers, masons, and contractors). The Pidilite management feels channel partners do not have easy access to short-term loans at reasonable interest rates. So, this move could help address the issue.

Also, Pidilite will get access to data and deepen connections with intermediaries, which has been its key approach for decades, pointed out Nuvama Research in a report. But the stock’s muted reaction indicates that investors are edgy. Unlike the paints business, which is an adjacent product category, and will help Pidilite become a home décor solutions provider, the NBFC business is not directly related to Pidilite’s mainstay business.

Pidilite recently launched Haisha Paints. Pidilite boasts of a strong brand recall value and solid distribution network, which are among the key factors to succeed in the paints sector. Still, analysts were wary.

Competition in the decorative paints business has heated up with the entry of newer companies with deep pockets such as Grasim Industries, so gaining market share could be a tussle. The Pidilite management is not going full throttle, at least for now, on its NBFC business investment. “We believe that quantum is too small for such a large company—an ₹100 crore exposure over two years implies less than 2% of Ebitda," added the Nuvama report.