Recommendations from Chemicals Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

A STICKLER FOR PROFITABILITY

PIDILITE INDUSTRIES

HERE IS WHY ​
Strong market position 
Good growth prospects 
Low input prices to help profitability.

Pidilite Industries is the largest player in the consumer adhesive and sealant industry. It is an iconic brand in the domestic adhesives segment. Fevicol is its main brand. Other prominent brands include Steelgrip, Dr. Fixit, M-Seal, Fevicryl, Fevikwik, Fevistik, Fevilite, Fevibond and Acron. The company has 23 manufacturing plants in Maharashtra, Gujarat, Union Territory of Daman and Diu, Himachal Pradesh and Assam. To diversify its revenue stream and facilitate global reach, the company has subsidiaries in several countries like the US and UAE, Brazil, Thailand, Bangladesh, Indonesia, Egypt and Singapore. It has used Fevicol’s favourable market presence to acquire and develop new products and variants and build market position.

Having a well-established brand and the ability to customise the product portfolio provides the company a competitive edge over unorganised players. Pidilite Industries has good growth prospects in newer categories such as waterproofing and floor coating. Additionally, increasing focus on some of the overseas markets will also support the growth going forward. It has also developed an extensive pan-India network, comprising over 5,000 distributors, servicing 200,000 dealers, retailers and contractors. The company’s presence across price points and categories acts as an effective barrier against competition.

Pidilite Industries is one of the few Indian listed companies that calculate ‘economic value added’. This means that the company is able to generate more operating cash than its cost of capital.

The company has shown good quarterly results in the past. On a consolidated basis, the gross sales has increased 4.26 per cent to  Rs 1,926.59 crore in Q3FY20 from  Rs 1,847.80 crore in Q3FY19. EBITDA showed an increase of 35.77 per cent to  Rs 463.17 crore in Q3FY20 from  Rs 341.15 crore in the same quarter last year. PAT for Q3FY20 stood at  Rs 344.53 crore as against  Rs 218 crore in the same quarter last year, showing an increase of 57.98 per cent.

In the past too the company has shown year-on-year growth. The company’s profit has grown from  Rs 804 crore in FY15-16 to  Rs 924 crore in FY18-19, showing a CAGR of 4.77 per cent. The recent crude oil prices drop would be an added advantage for the company with a reduction in its raw material expenditure. The return ratios like ROCE are also very strong, indicating the company’s ability to to be profitable. The ROCE for last year stood at 34.27 per cent. Its operating profitability could remain strong during the current fiscal due to benign raw material prices. The company has generated good cash profits too. It has a healthy dividend payout ratio of around 35 per cent. 

The company has a dominant market position with extraordinary recall value which helps it have such high return ratios. With the help of reduced raw material prices, the company might see improved growth in PAT for FY19-20. Additionally, with market leadership in core adhesive categories, healthy growth prospects of underpenetrated water proofing segment coupled with its foray into niche segment areas such as floor coating, wood finishes and focus on increasing distribution reach will result in good growth. By virtue of these factors, we recommend our readerinvestors to BUY this stock.