Pidilite, Higher VAM prices hit margin… • :: ICICI Securities, report link

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Higher VAM prices hit margin…
• Net sales increased 14% YoY in Q2FY15, led by a 10% YoY rise in
volume. Revenues from the consumer & bazaar (C&B) and industrial
segment recorded growth of 15% and ~8% YoY, respectively
• EBITDA margin declined ~81 bps YoY on adverse VAM price
movement (~7% YoY), leading to increase in raw material price by
195 bps YoY. However, Pidilite took a price hike of ~3% in May and
August 2014 to offset the raw material price hike. The full impact of
the price hike would flow in the coming quarters. PAT growth of 17%
YoY can be attributed to higher other income and lower tax outgo
• Sales from subsidiaries in constant currency grew 6.3% YoY in
Q2FY15. EBITDA increased 5% YoY to | 5 crore, due to a sharp
reduction in losses in the Middle East and Africa region
Market leader in adhesive segment
Pidilite Industries (Pidilite) is a dominant play in India’s growing adhesive
and industrial chemical market with a market share of ~70% in its leading
brand categories in the organised segment. The company’s two major
segments, consumer & bazaar (C&B) and speciality industrial chemical
have grown at a CAGR of ~20% and ~15% (standalone), respectively, in
FY10-14. The consumer & bazaar segment contributes ~79% of Pidilite’s
standalone revenue. This segment has grown mainly driven by the
adhesive and sealants segments, which contributes ~50% to the
company’s consumer & bazaar segment revenue (FY14). We believe since
the segment growth is largely driven by construction, repair and
maintenance, sales growth in the consumer and bazaar will be at 19%
CAGR in FY14-17E on the back of an increase in penetration in smaller
towns (population below 50,000).
Revival in industrial activities to drive industrial chemical demand
The specialty industrial segment contributes ~21% of Pidilite’s
standalone revenue. This segment has grown at 20% CAGR in FY10-14
mainly driven by growth in demand from packaging, cigarettes, stickers,
labelling, footwear, etc. The specialty industrial segment has three major
sub-segments: industrial adhesive, industrial resins and organic pigments
& preparations. We have modelled industrial segment revenues will grow
at a CAGR of ~19% in FY14-17E led by strong growth in industrial
adhesives & resins.
Strong brand: More of consumer pull model
Pidilite Industries is one of the well known adhesive companies in India
for the quality and reach to end users. Fevicol, the legacy brand of the
company, is a generic name in the adhesive category in India. In spite of
the strong brand, the company has kept its marketing & selling expenses
at ~4% of sales to gain market share.
Maintain BUY on strong fundamentals with economic revival
We believe that while the Indian economy is on a revival mode, Pidilite,
being a strong brand in the adhesive segment, is well positioned to
capitalise on the growth momentum. We believe efficient deployment of
cash for inorganic growth would be an added advantage. We estimate
revenues, earnings CAGR of ~19% in FY14-17E on the back of intact
demand from tier II, tier III cities. We believe a recovery in margin coupled
with strong return ratios would justify the company’s re-rating
possibilities. At the CMP, the stock is trading at 33x FY16E and 27x FY17E
earnings. We maintain our view on the stock with a target price of
| 462/share (valuing at 31x FY17E) with a BUY recommendation.

LINK

http://content.icicidirect.com/mailimages/IDirect_PidiliteInds_Q2FY15.pdf