Pidilite Industries -All-round performance…beats our estimates -All-round performance…beats our estimates :: ICICI Securities, report

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All-round performance…beats our estimates • Net sales increased ~13% YoY in Q3FY15, led by an 8% YoY rise in volume. Revenues from the consumer & bazaar (C&B) and industrial segment recorded growth of 13% and ~5% YoY, respectively • In spite of a decline in gross margin by 90 bps YoY due to use of higher cost inventory, the EBITDA margin improved 120 bps YoY led by saving purchase of traded goods and lower advertisement cost. We believe the full benefit of benign raw material prices would flow in Q4FY15E. Higher EBITDA margin coupled with lower tax outgo helped PAT to grow 28% YoY during Q3FY15 • Sales from subsidiaries in constant currency grew 10% YoY in Q3FY15. Sales from the Brazilian subsidiary declined 3% YoY due to weaker currency and higher inflation in the 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 that contributed ~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 (standalone) in consumer and bazaar will be at 21% CAGR in FY14-17E on the back of an increase in penetration in smaller towns (population below 50,000). Revival in industrial activity to drive industrial chemical demand Specialty industrial segment contributes ~21% of standalone revenue. This segment grew 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 to grow at ~26% CAGR 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. Fairly valued; recent rally captures near term positives 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 and earnings CAGR of ~20% and ~22%, respectively, in FY14- 17E supported by demand from tier II, tier III cities. We believe a recovery in margin coupled with strong return ratios would justify the company’s current valuation. At the CMP, the stock is trading at 33x FY16E and 27x FY17E earnings. We believe the recent rally in the stock captures near term positives. Thus we change our recommendation from BUY to HOLD with a revised target price to | 560/share (valuing at 35x FY17E).

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http://content.icicidirect.com/mailimages/IDirect_PidiliteInds_Q3FY15.pdf