Stick To The Path Of Gains With Pidilite

Pidilite Industries operates under two chief business segments, namely, branded consumer and bazaar products and industrial products. The former offers products like adhesives, sealants, arts and crafts, and construction and paint chemicals and contributes 84 per cent of the company’s sales. The latter offers industrial adhesives, synthetic resins, organic pigments, polymers, surfactants etc. to industries like packaging, textiles, paints, paper and leather. It contributes 15 per cent of the company’s sales. Most of the company’s products are developed through in-house R&D. Pidilite enjoys a wide geographic presence. It exports to over 80 countries and had registered an export turnover of Rs 5,185 million in FY18. 

Financial Performance 

On a consolidated quarterly basis, the revenue from operations increased to Rs 1,834.07 crore in Q1FY19 from Rs 1,485.31 crore in Q4FY18, posting a growth of 23.48 per cent. Its EBITDA rose to Rs 381.66 crore in Q1FY19 from Rs 273.93 crore in Q4FY18, marking an increase of 39.32 per cent. The profit after tax fell to Rs 240.78 crore in Q1FY19 from Rs 247.52 crore in Q4FY18, posting a drop of 2.72 per cent. The modest growth in PAT is primarily due to elimination of profit on inter-company transfer of certain intangible assets and effect of tax thereon during the present quarter. Additionally, the proceeds from the sale of Cyclo business in Q1FY18 have been excluded from PAT calculations as they are a one-time non-recurring item. In Q1FY19, the company delivered robust double digit volume growth. The consolidated net sales and PBIT posted a growth of 19 per cent and 15 per cent, respectively, vis-à-vis the performance in Q1FY18.

 

Here is why 

High market share Solid moat against competition Consistent rise in sales, profits and dividend payout 

On a consolidated annual basis, the revenue from operations surged 2.58 per cent to Rs 6,218.76 crore in FY18 from Rs 6,062.31 crore in FY17. The EBITDA stood at Rs 1,341.22 crore in FY18 in comparison to Rs 1,259.79 crore in FY17, registering a growth of 6.46 per cent. Profit for the year increased to Rs 966.09 crore in FY18 from Rs 863.22 crore in FY17, posting an increase of 11.91 per cent. The company’s net worth climbed to Rs 3,564 crore as on March 31, 2018, from Rs 2,039 crore as on March 31, 2014, thereby registering a CAGR of 14.99 per cent. 

The current ratio dropped to 3.00 in FY18 from 3.40 in FY17. The company’s economic value-added (EVA) figure dropped to Rs 563 crore in FY18 from Rs 594 crore in FY17. This metric, also referred to as economic profit, measures the value generated by a company from the funds invested in it. It quantifies the cost of investing capital in the firm and is then used to ascertain if the company’s cash generation is sufficient enough to justify the investment. 

Long-term growth 

Since 2007 to 2018, the consolidated financials demonstrated sustainable growth with the net sales and PBIT increasing at a CAGR of 13 per cent and 20 per cent, respectively. Its market capitalisation stood at Rs 33,624 million in 2007-2008 and has shot up to Rs 466,424 million in 2017-2018, registering a CAGR of 30 per cent. 

Pidilite has maintained steady dividend payout. This can be seen in its dividend payout as a percentage of net profit, which stood at 34.1 per cent in 2007- 2008 and is at 38.4 per cent in 2017-2018. 

Distribution 

Largely, the company’s products are traded through 13 varying channels such as hardware, FMCG, and electrical stores, to name a few. Feviquik ranks the most distributed product and is sold at 4 million outlets! With 300,000 wholesalers at its disposal, Pidilife enjoys the second-deepest distribution reach after Asian Paints, with a presence in 40,000 outlets out of the universe of 60,000 outlets. 

Growth Drivers 

Pidilite invested Rs 131.94 crore in fixed assets and on information technology during the year. It plans to set up new manufacturing facilities in Ethiopia and Bangladesh, while its new factory in Sri Lanka recently became operational. It is currently the market leader in Nepal and Bangladesh and boasts 80 per cent market share in the latter. Pidilite has identified opportunities for inorganic growth in the following areas- premium wood finish, turnkey waterproofing solutions, floor coating and CIPY polyurethanes. Pidilite is strategically filling the voids in its portfolio by means of acquisition, joint ventures and licence agreements. In conjunction with its wholly-owned subsidiary Fevicol Company Ltd, it jointly acquired 70 per cent stake in CIPY Poly Urethanes Pvt. CIPY is the largest player in floor coatings. Post-acquisition, CIPY reported sales of Rs 26.7 crore and EBITDA of Rs 2.2 crore as of March 31, 2018. The company’s arts business globally is fetching INR 1 billion. 

Opportunities

The market for adhesives has expanded in unconventional ways. Fascinatingly, some airplane wings and electric vehicles use adhesives instead of nuts and bolts!! Even the recent floods in Kerala have opened doors for business in the waterproofing products segment. The penetration in this segment is below 25 per cent, as less than 10 out of 100 houses in India use waterproofing. 

Floor coatings present opportunities in the domestic market. For example, Mumbai itself has 500-1,000 small clinics which require CIPY floor coatings. Car parking decks is the most obvious market in this segment. In general, the overall demand is burgeoning on account of increased discretionary spending following recovery in GDP. 

The government's initiatives such as ‘Housing For All’ envisage abundant prospects for the company. In conclusion, re-balancing the trade channel, deepening penetration and product innovation will propel demand and drive the topline upwards. 

Strategy 

Pidilite’s strategy involves penetrating the rural market. Two-thirds of its revenue is derived from the core businesses, which are projected to grow 1-2x GDP. One-third of revenue growth is achieved from the growth and pioneer categories. 

The company is on the verge of setting up four new factories. It aims to bear 25 per cent of input cost inflation by reducing costs, while passing on the remaining 75 per cent to end customers through price hikes. The surge in input costs can be somewhat attributed to shut down of capacities. At least one-fourth of inputs are derived from China. 

Pidilite has raised cost efficiency targets for FY19 and launched Project Parivartan to achieve the same. It also aims for warehouse optimisation over the upcoming three years. 

Threats 

Brand Ranipal, which was acquired as a pioneer business, has not performed well. The synthetic elastomer project is unsuccessful. The prices of raw materials and packing materials are on the rise, resulting in a short-term gross margin compression. 

Pidilite’s major international subsidiaries are located in the US, Brazil, Thailand, Egypt, Dubai and Bangladesh. The business climate in some of these nations remains subdued. Consequently, it is contemplating strategic exit options in Brazil and America. Additionally, since input prices are linked to the dollar, the rupee depreciation is lowering margins. 

Input cost volatility and currency-led inflation remain areas of concern. Other expenses have been high on account of advertising and promotional (A&P) spends. However, the management does not intend to cut back on A&P in order to conserve EBITDA margin band. The competition in this industry is intensifying.

Although the construction chemical business has done reasonably well, the market share remains modest in this segment because of stiff competition. However, Pidilite stands unrattled owing to its brand equity and strong distribution reach. It is anticipated that brand equity alone will allow the company to command a 10-15 per cent premium. The management’s emphasis on volume growth over margin expansion, vast distribution reach and strong connect with middlemen and consumers is an assured deterrent for new entrants. 

Outlook 

Revival of demand, entry in new markets as well as adjacent categories and a projected demand transition from unorganised to organised players constitute the factors that could potentially propel Pidilite’s revenue and earnings. In the long run, the company is confident of achieving double digit volume growth, with 15 per cent growth in revenue. 

Conclusion and recommendation 

Pidilite enjoys a dominant market share, a robust portfolio of trusted brands and ample opportunities for business growth in the domestic market. Its presence in niche, under-penetrated and high growth categories results in high gross margins, greater barriers to entry, powerful brand equity, mass acceptance and loftier development opportunities. Pidilite enjoys near monopoly in the industry with Fevicol and M-seal holding 70 per cent market share in their respective categories. 

The company’s solid sustainability is evident in its consistent track record of proliferating sales and profits. Its strong financial performance, steady cash flow and attractive balance sheet with zero debt obligations render investment in this stock a lucrative option. By virtue of this, we urge our reader-investors to BUY this stock.

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