Multi Baggers

Pidilite Industries Ltd.

Company Overview:

Pidilite Industries is the market leader in adhesives, sealants and construction chemicals in India. The company largely operates in two segments, namely consumer & bazaar products (approx 79 percent revenue contribution) and industrial chemicals (approx 21 percent revenue contribution). Pidilite's product range includes adhesives and sealants (Fevicol and M-seal), construction and paint chemicals (Dr Fixit), automotive chemicals, art materials, industrial adhesives, industrial & textile resins and organic pigments & preparations. Its brand name Fevicol is synonymous with adhesives in India and it is ranked among the most trusted brands with more than 70 percent market share in the adhesive segment. Similarly Mseal is the market leader in sealant segment with approx 70 percent market share as well.

Over the years, the Pidilite Industries has undertaken multiple overseas acquisitions to expand its reach and product lines. Pidilite has 14 overseas subsidiaries (four direct and 10 step-down subsidiaries) including those with significant manufacturing and selling operations in the US, Brazil, Thailand, Singapore, Dubai, Egypt and Bangladesh.

Financial Analysis:

Pidilite reported strong numbers for Q2FY14 with topline increase of 22 percentYoY to Rs.1094Crs led by stellar performances by both consumer & bazaar segment (C&B) and industrial segment with an overall volume growth of approx 17 percent YoY. C&B segment recorded growth of 20 percent YoY (volume growth of 15 percent YoY) to Rs.897Crs backed by 217bps margin expansion while the industrial segment recorded strong growth of approx 27 percent YoY (volume growth of 22 percent YoY) to Rs.216Crs aided by favourable base and higher exports. Revenue from overseas subsidiaries increased 13 percent YoY (on a constant currency basis). The EBITDA margin improved approx 140 bps YoY to 17.2 percent primarily on account of price hike of 2-5 percent across segments, decline in material cost and lower other expenses. PAT increased approx 24 percent YoY to Rs.118.5Crs supported by the improved margin.

Positives:

We like the stock because of the following reasons -

Market leader with strong brands: Pidilite Ltd is a pioneer in the Indian adhesives space with extremely strong brands across categories - Fevicol, Fevikwik, Mseal, Fevistick and Dr. Fixit to name a few. These brands enjoy age old recall among Indian consumers and command dominant (>70 percent) market shares in their respective categories.

Tremendous Volume growth: Pidilite has been successful in attaining robust volume growth in the last few years and is likely to continue on the growth trajectory. This growth has been on the back of rising income levels, which has led to higher expenditure on housing related items like furniture, and allied articles like pipes, plumbing, water proofing and painting.

Focus on capacity expansion: The board of Pidilite Industries has approved the acquisition of the adhesive business of Suparshva Adhesives Ltd. The slump sale agreement includes Brands, Know-how and other assets pertaining to the adhesive business.

Deep rooted distribution network: Pidilite has a strong distribution network, with a total of 1,000 distributors for Fevicol reaching 70,000 retail touch points. Similarly, 1,000 distributors exist for Mseal / Dr. Fixit brands which operate under a different distribution structure, distinct from Fevicol. Constant innovative communication with consumers and intermediaries has been one of the major driving forces behind the phenomenal success of Pidilite.

Valuations:

At the CMP of Rs 286.40 the stock trades at P/E of 32xFY13, 26.8xFY14E and 22.2xFY15E with the EPS of 8.3, 10.2 & 12.3 respectively. When compared to the market, we are comfortable with it given the brand power and growth prospects. While no doubt this is high, we remain enthused by Pidilite's improving product mix, R&D capability and distribution network. Pidilite has initiated 3-5 percent price hike in construction chemicals and 2-3 percent in Adhesive and sealants to offset the impact of Rupee depreciation which will protect gross margins in forthcoming quarters.

Strong long term growth, healthy return ratios (>35 percent ROCE), robust free cash flow generation, strong balance sheet, healthy dividend payout and valuations at 22.2x FY15E (19 percent discount to Industry average) makes Pidilite an attractive bet at current valuations. We recommend Buy with a target price of Rs 370.