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Pidilite is a play on India’s current construction boom. The company’s brands such
as Fevicol and M-Seal are almost generic names in their categories. Pidilite has
been able to innovate and create new product categories, which have been driving
growth over the past few years. We initiate coverage with a BUY rating and a price
target of Rs180.
Catalysts
We expect 20% revenue growth over the next three years, which along with current
undervaluation compared to peers is likely to lead stock outperformance.
Anchor themes
We expect the current construction boom in India to continue, leading to increased
spending on construction chemicals and adhesives. Spending on new construction
and on repair and maintenance and furniture picks up as discretionary spending
increases (which we believe is likely in India now).
Derived play on India’s consumption and construction
Pidilite’s Consumer & Bazaar Products business (77% of revenues) is
largely being driven by the construction boom in India, repair and
maintenance activities and work on furniture (using adhesives such as
Fevicol). Art Materials (10% of revenues) is a play on discretionary
spending by India consumers.
Strong brands and distribution
According to Pidilite, its adhesive brand Fevicol has ~70% market
share in the organised adhesive industry in India and has high brand
recall, even in rural India. The company’s other brands such as MSeal
and Dr. Fixit are also well known and are market leaders in their
segments. Pidilite has a good record of identifying new product
categories and successfully launching related brands.
Growth with profitability
Pidilite’s revenues have grown at a CAGR of 23% over the past five
years, and we expect revenue CAGR of 19% over FY10-13F. The
company has a good record of maintaining margins and has had a
consistently high ROCE (25% plus) and ROE (20% plus) from FY05-
10, not including FY09.
Initiate BUY with a price target of Rs180
The stock is trading at 19.9x FY12F EPS of Rs6.70. In line with
historical multiples; we value the company at 22.5x one-year forward
P/E, and our price target is Rs180. We initiate coverage with a BUY.
Key value drivers
Derived play on India’s consumption and construction boom
The Consumer & Bazaar segment forms 77% of the company’s revenue. Construction
Chemicals is the company’s fastest-growing segment, driven largely by the
construction boom in the country. Construction chemicals are used in new construction
as well as repair and maintenance (discretionary spending). The adhesive business
has been a steady revenue generator and should benefit further from India’s economic
growth, while art material (mainly catering to hobby ideas) is dependent on
increase/decrease in discretionary spending.
Brand leverage — strong portfolio of brands in adhesives and
chemicals
Pidilite developed its concept of brand in the adhesive market over the past 50 years.
According to management, “Fevicol” is India’s No. 1 household care brand in the
adhesives segment, is synonymous with adhesives and has high brand recall even in
rural India. It is also Asia’s largest selling adhesive brand and is the adhesive brand
most trusted by carpenters, painters, craftsmen, children, housewives, teachers and
hobbyists in India. We believe this is a result of the product’s superior quality and
durability. Fevicol alone has ~70% (according to management) market share in the
organised adhesive industry in India. Pidilite’s 50-year history in the Indian market has
also aided Fevicol’s brand recall among Indian consumer, in our view.
Backed by innovation, the company has leveraged the “Fevicol” brand name to launch
and market new brands and products such as “Dr. Fixit,” “FEVISTIK,” “Fevikwik” and
“Fevigum.”
Innovation — ability to create new products
We believe Pidilite’s expanding range of products is evidence of its long-standing
ability to gauge consumer needs in the segments in which it operates and create new
products accordingly. In FY09 and FY10, it launched five new products each. This has
helped the company to grow its top line continuously at a CAGR of 23% over the past
five years.
Some recent launches
Year Product/Brand* Use
FY06 Krystalline Capillary waterproofing system for concrete
Dampfree An injection grout for rising dampness
M-Seal Wet Set M-Seal variant that cures on wet surfaces
Motomax Car care products
FY07 Dr. Fixit Gapfill Easy to use sealant
Newcoat Waterproofing coating for terrace
Raincoat Waterproof decorative wall coating
Heatshield Heat reducing exterior coating
FY08 Fevicol 1K PUR Special applications in building construction segment
Fevicol Vertifix Cladding of vertical walls with marble and granite
Fevicol BWP Waterproof adhesive
In construction chemicals Special offerings of antibacterial wall and floor coatings for hospitals, hotels, food and
pharmaceutical manufacturing units
FY09 Dr. Fixit Waterbar Sealing construction joints in RCC structure
Dr. Fixit Roofkote Bituminous waterproofing products for terraces
Dr. Fixit Safeguard Internal waterproofing of the walls of potable water tanks
Fine Art Colours Provide professional artists with high quality colours
FY10 M-Seal Super Versatile epoxy putty meant for DIY applications which can be used in both wet and dry
conditions
Woodlok Retail wood working brand
Fevistik Blue & Purple Coloured sticks, appear coloured when applied but the colour disappears after a few seconds
enabling a person to see & control application of glue
Strong relationship with dealers, carpenters and trade partners
According to management, Pidilite continues to take steps to increase its brand and
product awareness and product consumption and build strong customer relationships.
Every year, it publishes the popular Fevicol Furniture Book, which is widely used by
carpenters, households and interior decorators. In addition, Pidilite’s Dr. Fixit Institute
provides training on the use of waterproofing and construction chemicals to applicators,
consultants, builders, architects and civil engineering students. It also organises
international craft competitions.
Pidilite maintains a strong distribution network of more than 60,000 dealers and 4,000
industrial customers. It has also penetrated deep into rural India and tier 3/4/5 cities,
where we believe there is considerable scope for growth in the coming years.
Valuation
In our view, Pidilite is a distinctive play on India’s consumption story, as the company
has a dominant market share in all consumer markets (adhesives, construction
chemicals) in which it operates. The company has a good record of maintaining
margins and has had a consistently high ROCE (25% plus) and ROE (20% plus) over
FY05-FY10, not including FY09.
The company’s revenues have grown at a CAGR of 23% over the past five years, and
we expect revenue CAGR of 19% over FY10-13F.
The stock is trading at a one-year forward P/E of 20.5x, which is lower than its average
P/E multiple (22.7x) for the past six months. In our view, there will be substantial
improvement in the company’s financial parameters going forward (we expect by
FY13F, D/E to decrease due to payment or conversion of FCCB in FY12F and FCF to
improve due to lower capex from FY13F), which along with steady growth should at
least sustain current multiples. Also, as evident from the comp table below, Pidilite is
currently trading at a 10-25% discount to a group of comparable companies, which
have a similar business profile, margins and return ratios.
Valuing the company at 22.5x one-year forward P/E; our price target comes to Rs180.
Our target P/E multiple is in line with P/E multiples over the past six months, as we
believe that the company’s high earnings growth (19% EPS CAGR over FY10-13F)
and return ratios (ROE over 25%) are likely to persist going forward. Our PT
multiple is also 10% discount to our PT for Asian Paints and in line with the
historical valuation discounts seen between the two companies. We initiate
coverage on the stock with a BUY rating
Investment risks
Slowdown in economic activities or construction industry
Since a major part of Pidilite’s revenue is derived from the construction sector, any
slowdown in construction activities would have an impact our earnings estimates.
Elastomer Plant in Dahej, Gujarat
According to management, Pidilite has spent Rs3,000mn on an elastomer plant in
Dahj, Gujarat, and is expected to spend another Rs2,000-2,300mn. Commencement
of operations, expected in March 2010, has been delayed by the economic crisis; it is
now expected to start in FY13. Given the significant investment, any failure could lead
to considerable write-offs.
High volatility in raw material
Vinyl Acetate Monomer (VAM) is Pidilite’s main raw material, and its price is linked to
crude oil. High volatility in raw material prices can squeeze margins, or the company
might be stuck with high-priced inventory, resulting in write-offs. This is what happened
in FY09.
Currency fluctuation
Pidilite currently imports nearly all of its VAM requirement and exports to more than 80
countries, but its net exposure is only Rs1bn, according to management. It also has an
outstanding FCCB debt of US$37.2mn. Any adverse movement in the US dollar-Indian
rupee exchange rate would be unfavourable if company has to pay back debt.
Overseas subsidiaries
Some of Pidilite’s subsidiaries (Egypt, Dubai) are still making losses, although there
have been reductions in losses. With the economic recovery in the West likely to take
longer, Pidilite’s overseas subsidiaries might continue to report losses. The current
political disturbance in Egypt could also lead to risk in the performance of overseas
subsidiaries.
Economic downturn
Pidilite’s growth is based on consumption and construction activity. Any downturn in
the economy would lead to a cut in these activities, thereby impacting the company’s
earnings.
Secular growth story to continue
In our view, Pidilite is a unique play on the consumption story in India, as the company
has dominant market share in all the consumer markets (adhesives, construction
chemicals) in which it operates. The company’s brands such as Fevicol, M-Seal and Dr.
Fixit are well known, and the company has an excellent track record of creating new
product categories and successfully launching brands in them. The company has been
able to consistently grow revenues around 20% YoY, has been able to maintain
margins and returns ratios (both ROCE and ROE).
Revenue has grown at a CAGR of 23% over the past five years. Revenue growth
dropped in FY09 and FY10 due to economic downturn, but buoyed by strong growth
during the first two quarters of FY11F, we expect that growth momentum to continue.
We expect growth in FY12F to drop slightly, as growth in the Adhesive and Industrial
Product business is very much dependent on the GDP and IIP growth rates. According
to our economists, the GDP and IIP growth rate will dip in FY12F to 8.0% and 7.9%
from 8.7% and 8.4% in FY11F, respectively. Growth in FY13F will be driven by the
growth rate of the economy, international markets and the operation of the elastomer
plant. We have assumed that the elastomer plant will become operational in
September 2012 with 50% and 75% capacity utilization in the first two quarters of
operation, respectively.
The stock is currently trading at one-year forward P/E of 20.5x, which is lower than its
average P/E multiple (22.7x) over the past six months. In our view, there will be
substantial improvement in the company’s financial parameters going forward (for
example, we project a decline in D/E and improvement in FCF), which along with
steady growth should at least sustain the current multiples. Also, as evident from comp
table below, Pidilite is currently trading at a 10-25% discount to a group of comparable
companies that have similar business profiles, margins and return ratios.
Valuing the company at 22.5x one-year forward P/E, our price target comes to Rs180.
Our target P/E multiple is in line with its historical P/E multiples over the past six
months, as we believe that the company’s high earnings growth (19% EPS CAGR
over FY10-13F) and return ratios (ROE over 25%) are likely to persist. Our price
target multiple is also a 10% discount to our price target for Asian Paints and in
line with historical valuation discounts seen between the two companies We initiate
coverage on the stock with a BUY rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
Pidilite is a play on India’s current construction boom. The company’s brands such
as Fevicol and M-Seal are almost generic names in their categories. Pidilite has
been able to innovate and create new product categories, which have been driving
growth over the past few years. We initiate coverage with a BUY rating and a price
target of Rs180.
Catalysts
We expect 20% revenue growth over the next three years, which along with current
undervaluation compared to peers is likely to lead stock outperformance.
Anchor themes
We expect the current construction boom in India to continue, leading to increased
spending on construction chemicals and adhesives. Spending on new construction
and on repair and maintenance and furniture picks up as discretionary spending
increases (which we believe is likely in India now).
Derived play on India’s consumption and construction
Pidilite’s Consumer & Bazaar Products business (77% of revenues) is
largely being driven by the construction boom in India, repair and
maintenance activities and work on furniture (using adhesives such as
Fevicol). Art Materials (10% of revenues) is a play on discretionary
spending by India consumers.
Strong brands and distribution
According to Pidilite, its adhesive brand Fevicol has ~70% market
share in the organised adhesive industry in India and has high brand
recall, even in rural India. The company’s other brands such as MSeal
and Dr. Fixit are also well known and are market leaders in their
segments. Pidilite has a good record of identifying new product
categories and successfully launching related brands.
Growth with profitability
Pidilite’s revenues have grown at a CAGR of 23% over the past five
years, and we expect revenue CAGR of 19% over FY10-13F. The
company has a good record of maintaining margins and has had a
consistently high ROCE (25% plus) and ROE (20% plus) from FY05-
10, not including FY09.
Initiate BUY with a price target of Rs180
The stock is trading at 19.9x FY12F EPS of Rs6.70. In line with
historical multiples; we value the company at 22.5x one-year forward
P/E, and our price target is Rs180. We initiate coverage with a BUY.
Key value drivers
Derived play on India’s consumption and construction boom
The Consumer & Bazaar segment forms 77% of the company’s revenue. Construction
Chemicals is the company’s fastest-growing segment, driven largely by the
construction boom in the country. Construction chemicals are used in new construction
as well as repair and maintenance (discretionary spending). The adhesive business
has been a steady revenue generator and should benefit further from India’s economic
growth, while art material (mainly catering to hobby ideas) is dependent on
increase/decrease in discretionary spending.
Brand leverage — strong portfolio of brands in adhesives and
chemicals
Pidilite developed its concept of brand in the adhesive market over the past 50 years.
According to management, “Fevicol” is India’s No. 1 household care brand in the
adhesives segment, is synonymous with adhesives and has high brand recall even in
rural India. It is also Asia’s largest selling adhesive brand and is the adhesive brand
most trusted by carpenters, painters, craftsmen, children, housewives, teachers and
hobbyists in India. We believe this is a result of the product’s superior quality and
durability. Fevicol alone has ~70% (according to management) market share in the
organised adhesive industry in India. Pidilite’s 50-year history in the Indian market has
also aided Fevicol’s brand recall among Indian consumer, in our view.
Backed by innovation, the company has leveraged the “Fevicol” brand name to launch
and market new brands and products such as “Dr. Fixit,” “FEVISTIK,” “Fevikwik” and
“Fevigum.”
Innovation — ability to create new products
We believe Pidilite’s expanding range of products is evidence of its long-standing
ability to gauge consumer needs in the segments in which it operates and create new
products accordingly. In FY09 and FY10, it launched five new products each. This has
helped the company to grow its top line continuously at a CAGR of 23% over the past
five years.
Some recent launches
Year Product/Brand* Use
FY06 Krystalline Capillary waterproofing system for concrete
Dampfree An injection grout for rising dampness
M-Seal Wet Set M-Seal variant that cures on wet surfaces
Motomax Car care products
FY07 Dr. Fixit Gapfill Easy to use sealant
Newcoat Waterproofing coating for terrace
Raincoat Waterproof decorative wall coating
Heatshield Heat reducing exterior coating
FY08 Fevicol 1K PUR Special applications in building construction segment
Fevicol Vertifix Cladding of vertical walls with marble and granite
Fevicol BWP Waterproof adhesive
In construction chemicals Special offerings of antibacterial wall and floor coatings for hospitals, hotels, food and
pharmaceutical manufacturing units
FY09 Dr. Fixit Waterbar Sealing construction joints in RCC structure
Dr. Fixit Roofkote Bituminous waterproofing products for terraces
Dr. Fixit Safeguard Internal waterproofing of the walls of potable water tanks
Fine Art Colours Provide professional artists with high quality colours
FY10 M-Seal Super Versatile epoxy putty meant for DIY applications which can be used in both wet and dry
conditions
Woodlok Retail wood working brand
Fevistik Blue & Purple Coloured sticks, appear coloured when applied but the colour disappears after a few seconds
enabling a person to see & control application of glue
Strong relationship with dealers, carpenters and trade partners
According to management, Pidilite continues to take steps to increase its brand and
product awareness and product consumption and build strong customer relationships.
Every year, it publishes the popular Fevicol Furniture Book, which is widely used by
carpenters, households and interior decorators. In addition, Pidilite’s Dr. Fixit Institute
provides training on the use of waterproofing and construction chemicals to applicators,
consultants, builders, architects and civil engineering students. It also organises
international craft competitions.
Pidilite maintains a strong distribution network of more than 60,000 dealers and 4,000
industrial customers. It has also penetrated deep into rural India and tier 3/4/5 cities,
where we believe there is considerable scope for growth in the coming years.
Valuation
In our view, Pidilite is a distinctive play on India’s consumption story, as the company
has a dominant market share in all consumer markets (adhesives, construction
chemicals) in which it operates. The company has a good record of maintaining
margins and has had a consistently high ROCE (25% plus) and ROE (20% plus) over
FY05-FY10, not including FY09.
The company’s revenues have grown at a CAGR of 23% over the past five years, and
we expect revenue CAGR of 19% over FY10-13F.
The stock is trading at a one-year forward P/E of 20.5x, which is lower than its average
P/E multiple (22.7x) for the past six months. In our view, there will be substantial
improvement in the company’s financial parameters going forward (we expect by
FY13F, D/E to decrease due to payment or conversion of FCCB in FY12F and FCF to
improve due to lower capex from FY13F), which along with steady growth should at
least sustain current multiples. Also, as evident from the comp table below, Pidilite is
currently trading at a 10-25% discount to a group of comparable companies, which
have a similar business profile, margins and return ratios.
Valuing the company at 22.5x one-year forward P/E; our price target comes to Rs180.
Our target P/E multiple is in line with P/E multiples over the past six months, as we
believe that the company’s high earnings growth (19% EPS CAGR over FY10-13F)
and return ratios (ROE over 25%) are likely to persist going forward. Our PT
multiple is also 10% discount to our PT for Asian Paints and in line with the
historical valuation discounts seen between the two companies. We initiate
coverage on the stock with a BUY rating
Investment risks
Slowdown in economic activities or construction industry
Since a major part of Pidilite’s revenue is derived from the construction sector, any
slowdown in construction activities would have an impact our earnings estimates.
Elastomer Plant in Dahej, Gujarat
According to management, Pidilite has spent Rs3,000mn on an elastomer plant in
Dahj, Gujarat, and is expected to spend another Rs2,000-2,300mn. Commencement
of operations, expected in March 2010, has been delayed by the economic crisis; it is
now expected to start in FY13. Given the significant investment, any failure could lead
to considerable write-offs.
High volatility in raw material
Vinyl Acetate Monomer (VAM) is Pidilite’s main raw material, and its price is linked to
crude oil. High volatility in raw material prices can squeeze margins, or the company
might be stuck with high-priced inventory, resulting in write-offs. This is what happened
in FY09.
Currency fluctuation
Pidilite currently imports nearly all of its VAM requirement and exports to more than 80
countries, but its net exposure is only Rs1bn, according to management. It also has an
outstanding FCCB debt of US$37.2mn. Any adverse movement in the US dollar-Indian
rupee exchange rate would be unfavourable if company has to pay back debt.
Overseas subsidiaries
Some of Pidilite’s subsidiaries (Egypt, Dubai) are still making losses, although there
have been reductions in losses. With the economic recovery in the West likely to take
longer, Pidilite’s overseas subsidiaries might continue to report losses. The current
political disturbance in Egypt could also lead to risk in the performance of overseas
subsidiaries.
Economic downturn
Pidilite’s growth is based on consumption and construction activity. Any downturn in
the economy would lead to a cut in these activities, thereby impacting the company’s
earnings.
Secular growth story to continue
In our view, Pidilite is a unique play on the consumption story in India, as the company
has dominant market share in all the consumer markets (adhesives, construction
chemicals) in which it operates. The company’s brands such as Fevicol, M-Seal and Dr.
Fixit are well known, and the company has an excellent track record of creating new
product categories and successfully launching brands in them. The company has been
able to consistently grow revenues around 20% YoY, has been able to maintain
margins and returns ratios (both ROCE and ROE).
Revenue has grown at a CAGR of 23% over the past five years. Revenue growth
dropped in FY09 and FY10 due to economic downturn, but buoyed by strong growth
during the first two quarters of FY11F, we expect that growth momentum to continue.
We expect growth in FY12F to drop slightly, as growth in the Adhesive and Industrial
Product business is very much dependent on the GDP and IIP growth rates. According
to our economists, the GDP and IIP growth rate will dip in FY12F to 8.0% and 7.9%
from 8.7% and 8.4% in FY11F, respectively. Growth in FY13F will be driven by the
growth rate of the economy, international markets and the operation of the elastomer
plant. We have assumed that the elastomer plant will become operational in
September 2012 with 50% and 75% capacity utilization in the first two quarters of
operation, respectively.
The stock is currently trading at one-year forward P/E of 20.5x, which is lower than its
average P/E multiple (22.7x) over the past six months. In our view, there will be
substantial improvement in the company’s financial parameters going forward (for
example, we project a decline in D/E and improvement in FCF), which along with
steady growth should at least sustain the current multiples. Also, as evident from comp
table below, Pidilite is currently trading at a 10-25% discount to a group of comparable
companies that have similar business profiles, margins and return ratios.
Valuing the company at 22.5x one-year forward P/E, our price target comes to Rs180.
Our target P/E multiple is in line with its historical P/E multiples over the past six
months, as we believe that the company’s high earnings growth (19% EPS CAGR
over FY10-13F) and return ratios (ROE over 25%) are likely to persist. Our price
target multiple is also a 10% discount to our price target for Asian Paints and in
line with historical valuation discounts seen between the two companies We initiate
coverage on the stock with a BUY rating.
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