Macquarie Research: Buy Pidilite

MacVisit – Pidilite Industries
Building bonds for stronger growth
􀂃 We met with Pidilite Industries’ management to understand the growth drivers
for the company and the outlook for its business. Pidilite is a consumer and
industrial speciality chemicals company. It owns market-leading adhesives
and sealants brands in India. Pidilite operates in two broad segments:
⇒ Consumer & Bazaar products (77% of revenue). Adhesive and sealants
(49%), construction chemicals (18%) and art materials and others (10%).
⇒ Speciality Industrial Chemicals (23% of revenue) Industrial adhesive
(7%), industrial resins (8%) and organic pigments (6%).
Brand building and product innovation are its strengths
􀂃 Creating brands in undifferentiated categories. Pidilite’s flagship brand
Fevicol (65% market share, ~30% of sales) is synonymous with adhesives in
India. Its other brands like FeviKwik, M-seal and Dr. Fixit enjoy strong brand
recognition amongst Indian consumers.
􀂃 Product innovation driving growth. Pidilite has pioneered many categories
in the consumer/industrial chemical space in India, and enjoys leading
positions in most of these categories. It attributes its success to its strong inhouse
R&D capabilities and ability to identify unmet needs of consumers.
Improved demand outlook for all segments
􀂃 Favourable macro catalysts. The company expects 20% growth in
Consumer and Bazaar in FY11, led by rising consumer spending on home
improvements and strong growth in the construction sector. The company
expects that robust industrial growth will drive the industrial chemical
business, which it expects to grow at 13% in FY11.
􀂃 International business – bouncing back. The international business
contributes 23% to Pidilite’s sales. The company is seeing good growth in South
America and Southeast Asia, while growth is muted in the US and Middle East.
Management expects the international business to grow 25% in FY11.
􀂃 Raw material inflation to test pricing power. Pidilite’s main raw material,
Vinyl Acetate Monomer (VAM) is produced from ethylene, which is a crude oil
derivative. Pidilite is importing VAM from Singapore, rather than producing in
its own, as imports are cheaper than captive production.
Elastomer project development – future growth option
􀂃 Pidilite is set to pilot the Elastomer plant at Dahej (acquired from Polimeri
Europa Elastomers, France in 2007) over the next six months. If successful,
company will incur a capex of Rs2.7bn to build a production capacity of
19,000tpa. Given >30% EBITDA margin, the company hopes this will be a key
growth driver.
Trading at a discount to peers
􀂃 Pidilite has gross debt of Rs3.2bn, of which Rs1.7bn is FCCB convertible at
Rs102/share. It has Rs2.2bn cash. It says debt/equity should improve further
as there is no major capex planned.
􀂃 Pidilite is trading at 18x FY12E based on consensus earnings. This compares
with FMCG universe average PER of 23x FY12E.