Sales of adhesives and industrial chemicals are, to a good extent, linked to the fortunes of the economy. With the economy showing signs of a pick-up, manufacturers of these products should benefit.
The stock of Pidilite Industries, the market leader in the adhesives segment, seems a good buy now. Increasing foot print in tier II/III towns, ability to pass on cost increases and improving fundamentals of its overseas subsidiaries bode well for the company.
Its strong balance sheet is the other positive. Despite its run-up over last year, the Pidilite stock still holds upside potential, given the company’s sound growth prospects. At ₹368, the stock trades at 33 times its estimated earnings for 2014-15. Its one-year forward multiple has been in the range of 16-34 times in the last five years.
Growing revenue
Over the last decade, Pidilite’s revenue has grown manifold — from about ₹650 crore in 2003-04 to over ₹4,000 crore in 2013-14. Strength in the core adhesive business and diversification into non-adhesives helped. Pidilite’s flagship brand ‘Fevicol’ has garnered the lion’s share (about 70 per cent) in the adhesive market.
Dr Fixit, Pidilite’s construction chemical brand, holds about 50 per cent market share in the waterproofing segment. The focus on market expansion, the creative ad campaigns and efforts to connect with end-users through several programmes over the last many years, have paid off well for Pidilite.
The company generates nearly four-fifth of its revenue from consumer and bazaar products which include adhesives, sealants, art materials, construction and paint chemicals.
The rest comes from the industrial chemicals that include synthetic resins and surfactants which find use in sectors such as paper, textiles, leather and packaging materials.
The company has 13 overseas subsidiaries that contribute about 10 per cent of the consolidated revenue. In 2013-14, despite weak market conditions, Pidilite’s consolidated revenue grew 16 per cent to about ₹4,261 crore, thanks to the expansion of the distributor base in tier II/III towns. The company’s US subsidiary, too, clocked higher sales and helped boost overall numbers.
The company has made a good start in 2014-15. In the June quarter, Pidilite’s revenue grew 20 per cent, aided by an increase in volumes in consumer products and price hikes.
In the coming months, an expected revival in the housing sector should see revenues get a further boost. Also, if user industries such as paper, textile and footwear do better, the company’s industrial segment will gather pace.
The company’s US subsidiary is likely to show improved performance this year with the economy there reviving. The other big overseas operation in Brazil which had cut losses in 2013-14 on restructuring of manufacturing process and cost-control measures, should also do better.
Pricing power
In 2013-14, profit growth at 7 per cent lagged the 16 per cent revenue growth for Pidilite (operating profit, though, grew by 13.8 per cent). This was mainly because other income (income from investments) came down and there was a foreign exchange loss due to unfavourable rupee movements.
Further, the company’s raw material cost went up sharply in the March quarter on higher international prices.
The cost of vinyl acetate monomer (VAM), the key raw material for the company, has been rising due to supply constraints arising from plant showdowns in Europe and the US.
Prices of VAM may continue to rise for some more time, but the company should be able to pass this on. It also helps that the rupee has stabilised.
Pidilite’s operating margin dropped to 15.9 per cent in 2013-14 from 16.3 per cent in 2012-13. In the recent June quarter, however, the margin revived to 18 per cent, thanks to a 4-6 per cent price increases in May.
Pidilite intends to take further price increases in this quarter and pass on cost increases. With market leadership in most products in its basket, it may not be tough for the company to do this. The company has no long term borrowings and has been a consistent dividend payer in the last five years.
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