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Pidilite Industries BUY
Niche innovator
Pidilite Industries is a niche consumer and specialty
chemicals player in India. It has pioneered multiple brands of
national top-of-the-mind recall like Fevicol and M-Seal.
Construction chemicals (primarily retail consumption) is the
company’s new growth driver, as legacy strengths remain in
place for now mature categories like adhesives and sealants.
This should drive ~16% revenue CAGR leading to 20.3% EPS
CAGR over FY10-13ii. The stock is valued at 17.9x FY12ii P/E
and offers 12-month upside of 25%. We recommend BUY.
Consumer products remain key driver: Of the three businesses
that are part of the consumer and bazaars pie (78% of revenues),
the construction chemicals business, with brands such as Dr Fixit and
Roff (~20% of revenues), has registered over 25% revenue CAGR in
the past five years. We expect this momentum to sustain. The core
adhesive business is a mature staple (50% of revenues), which has a
dominant market share (we expect 10-12% steady-state growth).
Profitability supported by pricing power: Pidilite enjoys a strong
market position as the de facto price setter in 65-70% of the
revenue pie. Our sensitivity analysis reveals that even if estimates of
raw-material price inflation surprise on the upside by 12%, Pidilite
can be earnings neutral by increasing product prices by 7%. We see
no demand destruction for price increases up to the low teens.
Strong product development and capital discipline: Pidilite
undertakes product development for long periods of time until they
become significant contributors. The value of this discretion and
patience is borne out in its brand creation track record. Barring
FY09, the company has delivered 20%+ RoE for the last ten years,
and dividend payouts have typically been one-third of profits.
Elastomer project an uncertainty, but valuations reasonable:
The chief investment risk is Pidilite’s elastomer project in Dahej—
Rs2.6bn has been invested, with no visibility yet on commissioning,
and a Rs1.5bn further investment requirement (as per company
guidance). A comparison with our consumer coverage universe
reveals that even after having high capital productivity, dividend
yield (1.6%) and steady-state earnings growth of 18-20%, Pidilite
trades at a significant discount to peers.
Elastomer project an uncertainty, but
valuations reasonable
Elastomer project: uncertainty in big-ticket capex
In June 2007, the company acquired plant and machinery, patents,
trademark and technology of a synthetic elastomer
(polycholoroprene rubber) facility. Polycholoroprene rubber is a
speciality synthetic rubber featuring superior mechanical strength,
load-bearing capacity, adhesion to metal, and superior resistance to
weather, oil and chemicals vis-à-vis other synthetic rubbers. Hence,
polycholoroprene rubber is the preferred synthetic rubber for many
applications in automotive, industrial components, building products
and adhesives. The plant was located in Champaigner, France, and
was owned by Polymeri Europa Elastomers, France.
The plant was earlier expected to commence commercial production
in March 2010, and its production capacity was estimated at
25,000tpa. This was to be increased to 35,000tpa through debottlenecking.
The total capital investment in the plant, excluding
de-bottlenecking, was estimated at Rs5.3bn. The company was also
considering putting up a caustic soda + chlorine plant at an
additional investment of Rs0.9bn at the same location, as both
caustic soda and chlorine are important inputs for the manufacture
of polycholoroprene.
However, in view of the slowdown in global industrial demand
(especially global auto-linked demand), the company was going slow
on the project. The company had earlier indicated that once it
chooses to commence work in full swing, time to commissioning
should be around 18 month
The project was earlier indicated to entail a further capex of Rs2.5bn
(Rs2.6bn has already been spent). Elastomer prices have ranged
from US$3,000-6,000 per tonne in the recent past and are currently
at the lower end of the range. At 19,000tpa guided capacity, this
represents a ~US$60m revenue opportunity. The company is
planning to commission the Elastomer capacity by FY12 with an
incremental capex of Rs1.5bn (less by Rs1bn) plus working-capital
deployments. We are not building in any revenue from the
Elastomer project in our projections, but we are assuming
incremental capex of Rs2.5bn versus the revised lower
guidance of Rs1.5bn from the company.
Efficient asset utilisation
During the global financial crisis, the company’s net working-capital
intensity and asset turnover ratios remained range-bound, a
testimony to the robustness of the operating model
Valuations are reasonable
A comparison with our consumer coverage universe reveals that
even after having high capital productivity, dividend yield and
steady-state earnings growth of 18-20%, Pidilite trades at a discount
to peers. While some discount is justified, given that 22% of Pidilite’s
revenues come from the commodity chemicals business - current
valuations are reasonably attractive, in our view
Key risks
Elastomer project: With Rs2.6bn invested, no visibility yet on
commissioning and further investment requirement of Rs1.5bn, this
project is the biggest risk in the investment case.
Ongoing business risks: The industrial pigments business is
cyclical in nature and could pass through periods of unprofitability if
inventories/capacities run high. In adhesives, margins are likely to
erode over time, as it is now a mature market. In art products,
external competition is strong, and Pidilite will need to fight to gain
market share. In construction chemicals, managing service/solutions
as it scales up fast will be the biggest challenge.
Raw-material price risks: The company is backward integrated in
its key raw-material VAM and now has a hedging mechanism in place
for the net RM import forex exposure. But in case of sharp swings,
similar to that in FY09, impact on profitability cannot be ruled out.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pidilite Industries BUY
Niche innovator
Pidilite Industries is a niche consumer and specialty
chemicals player in India. It has pioneered multiple brands of
national top-of-the-mind recall like Fevicol and M-Seal.
Construction chemicals (primarily retail consumption) is the
company’s new growth driver, as legacy strengths remain in
place for now mature categories like adhesives and sealants.
This should drive ~16% revenue CAGR leading to 20.3% EPS
CAGR over FY10-13ii. The stock is valued at 17.9x FY12ii P/E
and offers 12-month upside of 25%. We recommend BUY.
Consumer products remain key driver: Of the three businesses
that are part of the consumer and bazaars pie (78% of revenues),
the construction chemicals business, with brands such as Dr Fixit and
Roff (~20% of revenues), has registered over 25% revenue CAGR in
the past five years. We expect this momentum to sustain. The core
adhesive business is a mature staple (50% of revenues), which has a
dominant market share (we expect 10-12% steady-state growth).
Profitability supported by pricing power: Pidilite enjoys a strong
market position as the de facto price setter in 65-70% of the
revenue pie. Our sensitivity analysis reveals that even if estimates of
raw-material price inflation surprise on the upside by 12%, Pidilite
can be earnings neutral by increasing product prices by 7%. We see
no demand destruction for price increases up to the low teens.
Strong product development and capital discipline: Pidilite
undertakes product development for long periods of time until they
become significant contributors. The value of this discretion and
patience is borne out in its brand creation track record. Barring
FY09, the company has delivered 20%+ RoE for the last ten years,
and dividend payouts have typically been one-third of profits.
Elastomer project an uncertainty, but valuations reasonable:
The chief investment risk is Pidilite’s elastomer project in Dahej—
Rs2.6bn has been invested, with no visibility yet on commissioning,
and a Rs1.5bn further investment requirement (as per company
guidance). A comparison with our consumer coverage universe
reveals that even after having high capital productivity, dividend
yield (1.6%) and steady-state earnings growth of 18-20%, Pidilite
trades at a significant discount to peers.
Elastomer project an uncertainty, but
valuations reasonable
Elastomer project: uncertainty in big-ticket capex
In June 2007, the company acquired plant and machinery, patents,
trademark and technology of a synthetic elastomer
(polycholoroprene rubber) facility. Polycholoroprene rubber is a
speciality synthetic rubber featuring superior mechanical strength,
load-bearing capacity, adhesion to metal, and superior resistance to
weather, oil and chemicals vis-à-vis other synthetic rubbers. Hence,
polycholoroprene rubber is the preferred synthetic rubber for many
applications in automotive, industrial components, building products
and adhesives. The plant was located in Champaigner, France, and
was owned by Polymeri Europa Elastomers, France.
The plant was earlier expected to commence commercial production
in March 2010, and its production capacity was estimated at
25,000tpa. This was to be increased to 35,000tpa through debottlenecking.
The total capital investment in the plant, excluding
de-bottlenecking, was estimated at Rs5.3bn. The company was also
considering putting up a caustic soda + chlorine plant at an
additional investment of Rs0.9bn at the same location, as both
caustic soda and chlorine are important inputs for the manufacture
of polycholoroprene.
However, in view of the slowdown in global industrial demand
(especially global auto-linked demand), the company was going slow
on the project. The company had earlier indicated that once it
chooses to commence work in full swing, time to commissioning
should be around 18 month
The project was earlier indicated to entail a further capex of Rs2.5bn
(Rs2.6bn has already been spent). Elastomer prices have ranged
from US$3,000-6,000 per tonne in the recent past and are currently
at the lower end of the range. At 19,000tpa guided capacity, this
represents a ~US$60m revenue opportunity. The company is
planning to commission the Elastomer capacity by FY12 with an
incremental capex of Rs1.5bn (less by Rs1bn) plus working-capital
deployments. We are not building in any revenue from the
Elastomer project in our projections, but we are assuming
incremental capex of Rs2.5bn versus the revised lower
guidance of Rs1.5bn from the company.
Efficient asset utilisation
During the global financial crisis, the company’s net working-capital
intensity and asset turnover ratios remained range-bound, a
testimony to the robustness of the operating model
Valuations are reasonable
A comparison with our consumer coverage universe reveals that
even after having high capital productivity, dividend yield and
steady-state earnings growth of 18-20%, Pidilite trades at a discount
to peers. While some discount is justified, given that 22% of Pidilite’s
revenues come from the commodity chemicals business - current
valuations are reasonably attractive, in our view
Key risks
Elastomer project: With Rs2.6bn invested, no visibility yet on
commissioning and further investment requirement of Rs1.5bn, this
project is the biggest risk in the investment case.
Ongoing business risks: The industrial pigments business is
cyclical in nature and could pass through periods of unprofitability if
inventories/capacities run high. In adhesives, margins are likely to
erode over time, as it is now a mature market. In art products,
external competition is strong, and Pidilite will need to fight to gain
market share. In construction chemicals, managing service/solutions
as it scales up fast will be the biggest challenge.
Raw-material price risks: The company is backward integrated in
its key raw-material VAM and now has a hedging mechanism in place
for the net RM import forex exposure. But in case of sharp swings,
similar to that in FY09, impact on profitability cannot be ruled out.
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