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UBS Investment Research
Pidilite Industries
M ixed 1Q; reiterate BUY
1QFY12: Slightly below UBS-e and in line with consensus
PIDI reported 1QFY12 PAT of Rs1046mn (flat YoY), in line with consensus and
slightly below our estimates. This was driven by strong topline growth of 21%
YoY but was muted by EBITDA margin decline of 400bps, primarily due to higher
input cost (up 365bps). It has taken price hikes of 1-1.5% in May and another 5-6%
in July, the impact of which would get fully reflected in 2Q. 1QFY11 was an
exceptionally strong quarter and base effect also impacted YoY comparisons.
Segmental performance mixed; international business turning around
The consumer products segment revenue growth of 22.8% (led by volume growth
of 17-18%) was impressive, though margins declined 340bps. Industrial products
segment was sluggish - revenue growth of 18.4% (8-9% volume growth) and
190bps lower EBIT margins. ROCEs in consumer/industrial segments remain
impressive at 115%/61%. The international business did well with 1QFY12 pre-ex
EBITDA of Rs35mn (+75% YoY).
Maintain BUY; margins to improve in next 2 quarters
Management expects improvement in margins over the next 2 quarters, with prices
for most of its inputs having peaked and now coming off along with full impact of
its July price hike getting reflected. Pidilite remains a key beneficiary of household
spending with its strong brands in niche chemical products; focus on new
products/applications and on retail sales. We reiterate our BUY rating.
Valuation: PT of Rs200
We value Pidilite on 21x FY13E PE, at c20% discount to peers.
Key result highlights / conference call
takeaways
Strong revenues growth. In 1QFY12 the company recorded an overall
revenue growth of 21%, primarily led by its consumer & bazaar products
segment. The consumer products segment had healthy revenue growth of
23% driven by 17-18% volume growth and ASP increase of 5-6%. The
industrial product segment’s revenue growth of 18% was led by 8-9%
volume growth and 9-10% price increase.
Margins under pressure. In 1QFY12 the raw material cost as a % of sales
went up by 365bps YoY and 140bps QoQ, led by average raw material price
increase of 20%. The employee expense went up by 150bps YoY on annual
salary revisions and power/fuel cost also increased. All this adversely
impacted EBITDA margins by 400bps on a YoY basis.
Price hike benefits to be seen only in 2Q. However, the company took two
price hikes in this quarter in May (1-1.5%) and July (5-6%) to offset the raw
material cost pressure. With modest price increase in May, it was not able to
pass on entire cost increase due to price competition. The impact of July
price hike would get fully reflected in 2QFY12 as it was taken at the end of
this quarter.
Raw material cost pressures may have peaked. Given this along with the
management’s comment that prices for most of its raw materials have
already peaked and have now started coming off, the management expects to
see some improvement in company margins over the next 2 quarters. Prices
of VAM, one of its key inputs, had touched high of $1400/ton in 1QFY12,
up from $1000/ton in December’11, but have now gradually come off at
$1300/ton level.
Lower interest costs. The interest cost was lower in this quarter (down 37%
YoY) due to - 1) nil interest impact on Rs900mn of non convertible
debentures repurchased last year and 2) interest written back on FCCBs
worth U$0.9m which were converted into equity shares this quarter. Pidilite
now has Rs600mn of NCDs outstanding for repayment in December 2013.
Higher tax rates. The effective tax rate for the quarter increased to 25%
from 22% last year, led by completion of the company’s first five year tax
holiday on its 4th unit in Himachal Pradesh.
International business turning around. The company’s international
business performed well (except Brazil subsidiary) with 1QFY12 pre-ex.
EBITDA of Rs35mn (+75% YoY). The North American subsidiary revenues
and EBITDA grew by 4.3% and 50% YoY, respectively. The Middle East
and Africa business too did well with 86% YoY revenue growth along with
reduced cash losses in UAE and Egypt. The Thailand and Bangladesh
subsidiary revenues grew by 19% with an improvement in operating profit.
Pidilite is planning to expand capacity in its Thailand and Bangladesh
subsidiaries to meet the growing demand in those countries.
Elastomer project on track. Pidilite’s Elastomer (niche synthetic rubber)
project is on track and is expected to get completed by 1HFY13. The
company has already made an investment of Rs3.26bn on it till date and
plans to invest another Rs2.5bn, majority of which will be made in FY12.
The Elastomer project is a potential turnaround catalyst for the company and
can start contributing to revenue from FY13 onwards, in our view.
Pidilite Industries
Pidilite Industries is the leading adhesives and specialty chemicals company in
India with its legacy brand 'Fevicol' holding a 70% market share. It has a
diversified product portfolio comprising adhesives, sealants, construction
chemicals, paint chemicals, art materials, industrial resins and organic pigments.
The company exports its products to more than 80 countries. It has overseas
subsidiaries with significant manufacturing and sales activity in Brazil, Dubai,
Thailand and the US.
Statement of Risk
We believe the key risks facing the company include high raw material cost
pressures, impact of any macroeconomic slowdown, foreign currency risk from
its international operations, performance of its overseas subsidiaries, and failure
or delay in commissioning its Elastomer plant.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Pidilite Industries
M ixed 1Q; reiterate BUY
1QFY12: Slightly below UBS-e and in line with consensus
PIDI reported 1QFY12 PAT of Rs1046mn (flat YoY), in line with consensus and
slightly below our estimates. This was driven by strong topline growth of 21%
YoY but was muted by EBITDA margin decline of 400bps, primarily due to higher
input cost (up 365bps). It has taken price hikes of 1-1.5% in May and another 5-6%
in July, the impact of which would get fully reflected in 2Q. 1QFY11 was an
exceptionally strong quarter and base effect also impacted YoY comparisons.
Segmental performance mixed; international business turning around
The consumer products segment revenue growth of 22.8% (led by volume growth
of 17-18%) was impressive, though margins declined 340bps. Industrial products
segment was sluggish - revenue growth of 18.4% (8-9% volume growth) and
190bps lower EBIT margins. ROCEs in consumer/industrial segments remain
impressive at 115%/61%. The international business did well with 1QFY12 pre-ex
EBITDA of Rs35mn (+75% YoY).
Maintain BUY; margins to improve in next 2 quarters
Management expects improvement in margins over the next 2 quarters, with prices
for most of its inputs having peaked and now coming off along with full impact of
its July price hike getting reflected. Pidilite remains a key beneficiary of household
spending with its strong brands in niche chemical products; focus on new
products/applications and on retail sales. We reiterate our BUY rating.
Valuation: PT of Rs200
We value Pidilite on 21x FY13E PE, at c20% discount to peers.
Key result highlights / conference call
takeaways
Strong revenues growth. In 1QFY12 the company recorded an overall
revenue growth of 21%, primarily led by its consumer & bazaar products
segment. The consumer products segment had healthy revenue growth of
23% driven by 17-18% volume growth and ASP increase of 5-6%. The
industrial product segment’s revenue growth of 18% was led by 8-9%
volume growth and 9-10% price increase.
Margins under pressure. In 1QFY12 the raw material cost as a % of sales
went up by 365bps YoY and 140bps QoQ, led by average raw material price
increase of 20%. The employee expense went up by 150bps YoY on annual
salary revisions and power/fuel cost also increased. All this adversely
impacted EBITDA margins by 400bps on a YoY basis.
Price hike benefits to be seen only in 2Q. However, the company took two
price hikes in this quarter in May (1-1.5%) and July (5-6%) to offset the raw
material cost pressure. With modest price increase in May, it was not able to
pass on entire cost increase due to price competition. The impact of July
price hike would get fully reflected in 2QFY12 as it was taken at the end of
this quarter.
Raw material cost pressures may have peaked. Given this along with the
management’s comment that prices for most of its raw materials have
already peaked and have now started coming off, the management expects to
see some improvement in company margins over the next 2 quarters. Prices
of VAM, one of its key inputs, had touched high of $1400/ton in 1QFY12,
up from $1000/ton in December’11, but have now gradually come off at
$1300/ton level.
Lower interest costs. The interest cost was lower in this quarter (down 37%
YoY) due to - 1) nil interest impact on Rs900mn of non convertible
debentures repurchased last year and 2) interest written back on FCCBs
worth U$0.9m which were converted into equity shares this quarter. Pidilite
now has Rs600mn of NCDs outstanding for repayment in December 2013.
Higher tax rates. The effective tax rate for the quarter increased to 25%
from 22% last year, led by completion of the company’s first five year tax
holiday on its 4th unit in Himachal Pradesh.
International business turning around. The company’s international
business performed well (except Brazil subsidiary) with 1QFY12 pre-ex.
EBITDA of Rs35mn (+75% YoY). The North American subsidiary revenues
and EBITDA grew by 4.3% and 50% YoY, respectively. The Middle East
and Africa business too did well with 86% YoY revenue growth along with
reduced cash losses in UAE and Egypt. The Thailand and Bangladesh
subsidiary revenues grew by 19% with an improvement in operating profit.
Pidilite is planning to expand capacity in its Thailand and Bangladesh
subsidiaries to meet the growing demand in those countries.
Elastomer project on track. Pidilite’s Elastomer (niche synthetic rubber)
project is on track and is expected to get completed by 1HFY13. The
company has already made an investment of Rs3.26bn on it till date and
plans to invest another Rs2.5bn, majority of which will be made in FY12.
The Elastomer project is a potential turnaround catalyst for the company and
can start contributing to revenue from FY13 onwards, in our view.
Pidilite Industries
Pidilite Industries is the leading adhesives and specialty chemicals company in
India with its legacy brand 'Fevicol' holding a 70% market share. It has a
diversified product portfolio comprising adhesives, sealants, construction
chemicals, paint chemicals, art materials, industrial resins and organic pigments.
The company exports its products to more than 80 countries. It has overseas
subsidiaries with significant manufacturing and sales activity in Brazil, Dubai,
Thailand and the US.
Statement of Risk
We believe the key risks facing the company include high raw material cost
pressures, impact of any macroeconomic slowdown, foreign currency risk from
its international operations, performance of its overseas subsidiaries, and failure
or delay in commissioning its Elastomer plant.
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