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Company Background and Business Model
Pidilite Industries, promoted by the Parekh family, is an established player in
adhesives and specialty chemicals in India. It has a diversified product portfolio
comprising adhesives, sealants, construction chemicals, paint chemicals, art
materials, industrial resins and organic pigments. The company’s major brands
include Fevicol, Fevikwik, M-Seal and Dr Fixit. The company exports its products to
more than 80 countries. Pidilite derives ~12% of revenues from international
markets. The Company has 14 Overseas subsidiaries (4 direct and 10 step-down)
including those having significant manufacturing and selling operations in USA,
Brazil, Thailand, Dubai, Egypt and Bangladesh.
Financials
The Company has been posting healthy financials over the years as suggested
from 20.6%, 29% and 28% CAGR in net sales, PAT and operating profits between
FY07-11. Its return ratios have historically been healthy. For FY11, it reported
ROCE and ROE of 33% and 32% respectively. However, this takes into account its
investment in international subsidiaries and the Elastomer project. Adjusted for
these, the ROCE and ROE would have been higher.
Investment Argument
• Strong brand equity: Its legacy brand 'Fevicol' is clearly the market leader
holding a 70% market share. The Company has a special knack for creating a
demand for almost non-existent segments which makes them a market leader.
With its excellent branding and marketing techniques, Pidilite products enjoy
the highest branding recall.
• Enjoys strong pricing power: The Company enjoys strong pricing power in
all sub-segments with a market share of over 80% in each. It has been able to
pass on any rise in raw material costs to end-consumers, though after a lag.
• Turnaround in international operations: Pidilite’s international business has
been posting losses due to its low scale of operations. In FY11 international
business reported 12% increase in turnover to Rs 302 cr however EBIDTA
declined by 57% to Rs 4 crore. The company is taking initiatives to revamp
management and increase revenue. Management expects this segment to
start contributing to PAT in FY12.
• Elastomer project coming on stream: The plant was earlier expected to
commence commercial production in March 2010, and its production capacity
was estimated at 25,000tpa. This project was delayed by the economic
slowdown in 2008-09, and is now slated for completion by end-FY12.
Management expects this business to start contributing to earnings from
FY13. So far the company has spent around Rs 300 crore on the project and
another Rs 200 crore will be spent on the project to ensure its stability. The
management expects payback in 4-5 years.
Valuations:
With the extensive distribution network, excellent brand image and introduction of
new products, Pidilite would be able to leverage its strength and cater to the
growing demand from user industries. Its excellent return ratios, low debt: equity
ratio, cash rich status and a good track record of paying consistent & healthy
dividends are some of its financial strengths. The recent fall in crude oil prices
augurs well for the Company as it will reduce its raw material cost and improve the
margins. At the CMP of Rs 158, the stock is quoting at P/E of 20.5x its FY12E EPS
of Rs 7.7.
Technicals
Pidilite is having a history of consolidation and delivering longer rallies after
breakout. Recently the level of Rs 160 where healthy consolidation has taken place
has been taken out. This neckline at Rs 160 has now changed its status from
resistance to support. Considering its history, next leg of rally can take this stock to
new highs. Accumulate around Rs 160 levels for target of Rs 190.
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