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INITIATING COVERAGE

PIDILITE INDUSTRIES
Adhesive growth: Ties that bind
India Equity Research| Consumer Goods

Pidilite (PIDI) is a high quality niche consumption play imbued with strong EDELWEISS 4D RATINGS
brand equity in under penetrated and high growth categories. The Absolute Rating BUY
company has sustained its dominant position (Fevicol, M-seal have ~70% Rating Relative to Sector Performer
market share) by virtue of direct reach to influencers/end users, Risk Rating Relative to Sector Medium
successful brand extensions, innovation spurred by robust R&D, out-of- Sector Relative to Market Overweight
the-box and catchy ads, acquisitions (ROFF, Mseal, Sargent Art, Hobby
Ideas), limited competition and widespread distribution. Key
MARKET DATA (R: PIDI.BO, B: PIDI IN)
risk/concerns are performance of its international portfolio (especially
CMP : INR 294
Brazil) and the Elastomer project. We expect 17% revenue CAGR with
Target Price : INR 357
robust 20% PAT CAGR over FY14-16E. We initiate coverage with ‘BUY’. 52-week range (INR) : 304 / 206
Share in issue (mn) : 509.8
Consumer business will continue to sizzle M cap (INR bn/USD mn) : 151 / 2,425
Robust growth across segments spurred PIDI’s consumer & bazaar products (CBP) and Avg. Daily Vol.BSE/NSE(‘000) : 280.0
industrial chemicals segments to post 19% and 14% CAGR, respectively, over FY08-13.
Though we expect the CBP business to maintain growth momentum, the industrial SHARE HOLDING PATTERN (%)
chemicals business may grow at a slower pace (11.5% CAGR) over FY14-16E due to the Current Q1FY14 Q4FY13
economic slowdown. Overseas business (has been a drag) margins are likely to improve Promoters * 70.1 70.1 70.1
riding sales pick up (Bangladesh, Thailand fastest growth engines), effective MF's, FI's & BK’s 5.3 5.4 5.6
management changes, price hikes and mix improvement. FII's 13.7 13.9 13.6
Others 10.9 10.6 10.7
Direct connect, distribution and innovation key strengths * Promoters pledged shares
(% of share in issue)
: Nil

PIDI directly reaches out to influencers/end users (furniture makers, plumbers,


architects) via Dr. Fixit Institute, Fevicol Furniture Book and workshops which also PRICE PERFORMANCE (%)
enables it to introduce new products imbibing their feedback. Successful brand Stock over
Sensex Stock
extensions (Marine Fevicol, Speedex), acquisitions (Suparshva) and low-priced SKUs Sensex
amidst limited MNC competition provide it the bandwidth to outpace regional players. 1 month (1.9) 11.1 13.0
3 months 11.6 32.3 20.7
Outlook and valuations: Positive; initiate with ‘BUY’ 12 months 7.1 39.2 32.1
We are positive on PIDI and expect re-rating to sustain. We value PIDI at 25x FY16E EPS
and arrive at TP of INR357. At CMP, the stock is trading at 24.5x FY15E and 20.6x
FY16E. We initiate coverage with ‘BUY/Sector Performer’ recommendation/ rating.
Financials Abneesh Roy
Year to March FY13 FY14E FY15E FY16E +91 22 6620 3141
abneesh.roy@edelweissfin.com
Revenues (INR mn) 36,781 42,997 50,600 58,960
Rev. growth (%) 17.6 16.9 17.7 16.5 Click on image to view video
EBITDA (INR mn) 5,990 7,358 8,712 10,145
Pooja Lath
Net profit (INR mn) 4,240 5,070 6,149 7,326 +91 22 6620 3075
Shares outstanding (mn) 510 510 510 510 pooja.lath@edelweissfin.com

Diluted EPS (INR) 8.2 9.9 12.0 14.3 Tanmay Sharma


EPS growth (%) 32.9 20.1 21.3 19.1 +91 22 4040 7586
Diluted P/E (x) 35.7 29.7 24.5 20.6 tanmay.sharma@edelweissfin.com

EV/EBITDA (x) 24.4 19.6 16.3 13.7


ROAE (%) 28.3 27.8 28.1 27.8 November 28, 2013
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Consumer Goods

Investment Rationale
Flagship brands to anchor growth
PIDI’s presence in niche, under-penetrated and high growth categories with limited
competition makes it a good play on Indian consumer goods spends. The niche presence
yields high gross margins, high barriers to entry, strong brand equity, mass acceptance and
superior growth opportunities.

Chart 1: Consumer & Bazaar product sales expected to grow at 19% CAGR over 14-16E
48,500
“We keep our eyes and ears
open to what customers want, 40,500
while our strong R&D gets us
exactly the right products" 32,500
(INR mn)

- M B Parekh, 24,500
Chairman & MD
16,500

8,500

FY14E

FY15E

FY16E
FY08

FY09

FY10

FY11

FY12

FY13
Source: Company, Edelweiss research

The adhesive & sealants segment, contributing 51% to total sales, houses strong brands like
Fevicol, M-seal and Fevistik under its umbrella. The company has near monopoly in this
segment with Fevicol and M-seal enjoying ~70% market share each in the adhesive and
sealants product categories, respectively. The category grew 18% YoY in FY13.

The second largest category, construction chemicals (contributing 20% to total sales), also
has strong brands, Dr. Fixit (largely used as waterproofing and repair solution) and Roff
(used as complete range of tile fixing solution) under its umbrella. This category grew 20%
YoY in FY13.

PIDI’s third largest category, art materials (contributing 10% to total sales), surged 35% YoY
in FY13. In art materials, the company has a host of brands like Hobby Ideas, Ranipal,
Motomax and Cyclo. Off late, the segment has seen significant growth on account of fresh
look at products, new product introductions, better communication and improved
distribution model.

Industrial products account for 19% of the company’s revenue. This segment has lower
margin vis-à-vis consumer and bazaar segment; it includes three sub-segments: (i) Industrial
adhesives: Being market leader, PIDI provides an extensive range of products catering to
packaging, cigarettes, stock labels, stickers, footwear, etc. (contributes 7% to company’s
revenue); (ii) Industrial resins: The company produces polymers and co-polymers for
industries like paints, non-woven and flocked fabrics and leather (contributes 6% to total
revenue); and (iii) Organic pigments and preparation: Pioneer in manufacturing Pigment

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Pidilite

Violet 23 in India. Market leader in pigment dispersions for textile segment; the segment
contributes around 6% to total revenue.

Since the industrial segment caters to various industries (textiles, leather, footwear, ink,
packaging, etc.) its growth pattern largely mirrors IIP growth figures.

In the others category, PIDI manufactures a variety of special acetates. Currently, these
products are under test marketing with special focus on niche segments targeted at import
substitution.

Chart 2: Robust growth across categories


30.0

“It is the efforts that we put in to


create demand, which would 25.0
drive the sales growth for our
products.” 20.0
(% YoY)

- Sandeep Batra, 15.0


Director Finance

10.0

5.0
FY08 FY09 FY10 FY11 FY12 FY13
Consumer & Bazaar Speciality Industrial Chemical
Source: Company, Edelweiss research

Chart 3: EBIT margins strong in both categories especially in CBP


30.0

26.0

22.0
(%)

18.0

14.0

10.0
FY08 FY09 FY10 FY11 FY12 FY13
Consumer & Bazaar Speciality Industrial Chemical
Source: Company, Edelweiss research

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Consumer Goods
Chart 4: Consumer & bazaar products’ sales split
100.0

80.0

60.0

(%)
40.0

20.0

0.0
FY08 FY09 FY10 FY11 FY12 FY13
Adhesives & Sealants Construction/Paint Chemical Art materials & others
Source: Company, Edelweiss research

Chart 5: Speciality industrial chemical sales split


100.0

80.0

60.0
(%)

40.0

20.0

0.0
FY08 FY09 FY10 FY11 FY12 FY13
Industrial resins Industrial adhesives Organic pigments and preparations
Source: Company, Edelweiss research

PIDI commands a premium over competitors riding strong brand—our channel checks
indicate that Fevicol commands a premium of 10% over its nearest competitor Jivanjor
(Jubilant Industries)—and it has created a huge entry barrier in the adhesive segment.

The company’s recent launches in the premium end—Marine Fevicol (for furniture in
constant touch with water), Speedex (fast adhesives) and fabric glue—are growing faster
than base adhesives.

Huge brand equity is a high entry barrier


PIDI is not present in competitive consumer segments or well-penetrated segments; it
focuses on only niche sub-segments. This has resulted in the company developing market-
leading brands Fevicol, Dr Fixit and M-Seal. As there are no large competing products in
these sub-segments, it has developed products that now enjoy indisputable market
leadership.

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Pidilite

Table 1: Low competitive intensity creating a strong entry barrier


Segment Pidilite brands Competition brands Use
Adhesive & Sealant Fevicol, Fevistik, Fevikwik, Mseal, Jivanjor, Carpenter, Woodwork, Flooring, Upholstery,
Steelgrip, Feviquick Araldite, Dendrite Footwear, Plumbing, electrical and
decorative purposes
Construction chemical ROFF, Dr. Fixit, Fevimate Sika, Fosroc Waterproofing, Admixture, Tile fixing,
Floor hardening, Sealants, Heat reduction
coating
Art material & stationery Fevicryl, Hobby Idea, Fevicraft, Camlin, Faber Castle Education, Publication, Painting
Sargent Art
Fabric care Ranipal Ujala Cloth brightner, Stain removal
Automotive Cyclo, Motomax Castrol Lubricant, Engine Oil, Maintenance,
Polishing
Decorative paints Wudfin, Piditint Asian Paints, Berger Wood finishing, Interior coating and wall
finishing
Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol, Henkel, Huntsman, Packaging and converting, cigarette, book
Pidiprimer, Kondicryl Sika, 3M, HB fuller binding, stickers, lamination and
labelling, Footwear
Textile Chemical Texcron, Dopcron, Pidifinish, BASF, Jubiliant Pigment dispersion, Pigment printing
Pidicryl
Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubiliant Waterbased decorative paint, Industrial
paint, Coatings and Construction
chemical
Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic
Masterbatches, Textile Dispersions,
Rubber, Dry Colours
Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubiliant Fungicide, Bactericide, Degreasing agent,
Binder
Source: Company, Edelweiss research

The company operates in categories where presence of large multi nationals is limited,
which enables it to outpace small regional players (who lack financial strength, economies of
scale and have poor distribution network and weak brand image) with aggressive ads and
product extensions. Though PIDI leads most categories it is present in, Huntsman's brand
Araldite (epoxy resin segment) is ahead of the former’s Fevitite, although Huntsman’s white
glue brand, Carpenter, has not met with much success.

The Henkel Group has presence in this industry and poses competition in industrial specialty
segment. The Sika Group, based in Switzerland, with significant presence in construction
chemicals poses competition. Similarly in eastern part of India, Dendrite from the Kolkata-
based Chandra's Chemical Enterprise, also has significant presence but not at a national
level. Pidilite faces competition in art and stationery segment from the likes of Camlin, Faber
Castle.

In the construction chemicals category PIDI is not affected by entry of large paint players
(Asian Paints) as penetration levels are low. Though Asian Paints is posing competition by
providing one-stop solution to retail users Dr.Fixit continues to remain the market leader in
the construction chemical business due to its strong relationship with architects and
builders. In our view, new entrants will have limited presence in this space and will help
expand the nascent category.

5 Edelweiss Securities Limited


Consumer Goods

Innovating and reinvigorating offerings to capture consumer pie


Strong brand: Consumer pull model
Since adhesive is a low involvement category, consumer tends to go with a superior brand
of good quality and durability. PIDI aptly exploited creative marketing strategies, including
successful advertising campaigns to make its brand generic name in the adhesive category.
Fevicol’s simple and creative advertisements, over the years, have always made an impact,
right from Bob Cristo wrestling with a chair, to a politician who is glued to his chair, to the
hen that laid unbreakable eggs, to the overflowing bus, to the joint family that refuses to fall
apart and the latest animated elephants bond Raksha Bandhan. Use of Fevicol brand name
in the item number Fevicol Se featured in Bollywood blockbuster Dabangg-2 is a huge
testimony to the brand’s media success.

Chart 6: A&P— helps build strong brands


5.0

4.4
(as % of sales)

3.8

3.2

2.6

2.0
FY08 FY09 FY10 FY11 FY12 FY13

Source: Company, Edelweiss research

Advertisements have created a pull for the white glue among retail consumers. This was the
first product in the category to generate sales not only from hardware stores, but also from
consumers who had a strong brand recall due to the creative and eye-catching television
commercials.

Connecting with end users—Carpenters


Fevicol has held most competitors at bay by establishing a strong connect with the major
driver of sales in furniture making (~85% unorganised market)—carpenters—by direct
marketing, which helped PIDI establish a strong recall for its brand in the white glue market.
To further strengthen its connect, Fevicol introduced Fevicol Furniture Booklets, which
showcased furniture designs with illustrations and measurements. Also, Fevicol Champion’s
Club (FCC) was another initiative introduced by the company as a platform for carpenters to
enhance their social contacts and be part of a social network.

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Table 2: Promotional activities


Activities Purpose
Fevicol Furniture Book Publishing magazines for 300,000 carpenters every quarter showcasing furniture designs
with illustrations, measurements, etc aimed to enlighten carpenters on the recent trends
and styles
Fevicol Champion's Club ~45000 member club that provides a platform for carpenters to increase their social
contacts and to make them a part of the social network
Different courses Courses aimed for housewives for the effective use of art material
Dr Fixit Institute Knowledge centre aimed to help Indian construction experts interact with the
international experts in the field of waterproofing and building repairs
Fevicol science project challenge Initiated an inter school contest in 2011 tp promote its hobby ideas products reaching
over 330 schools across India and over 55,000 students
Source: Company, Edelweiss research

M-Seal and Steelgrip are also leading brands in the epoxy sealants and PVC insulation tape
categories, respectively. Roff is the second brand after Dr. Fixit in the construction chemicals
portfolio.

Dr. Fixit Institute of Structural Protection & Rehabilitation (DFI – SPR) is an initiative by
PIDI to develop the service life of civil structures in India. It is a non-profit organisation
operating as a knowledge centre to create awareness and skill development among
professionals about waterproofing, repair and rehabilitation via training programmes,
workshops and seminars.

PIDI in its endeavour to reach out to users launched Fevicol Furniture Book showcasing
samples of furniture designs, suitable for Indian homes, commercial spaces, offices,
showrooms, restaurants, farm houses, bungalows etc. The company has launched 31
successful volumes of this book riding high on numerous design variants, user-friendly
approach, easy to follow furniture diagrams and affordable price.

The company, under the aegis of its Arts, Stationery and Fabrics division, does the Fevicol
Science Project Challenge. It is an annual nationwide competition that identifies talent from
across schools. This contest encourages students to think about topics that are related to
their everyday life, futuristic concepts and make 3-D models of their interpretations of the
subject/topic. The 3-D modeling is to promote the “Learning by doing” attitude so that
young minds understand the theory as well as the actual working of concepts.

Leveraging brand Fevicol to promote other products, SKUs


PIDI has been successful in keeping alive the freshness quotient of its brands by consistently
innovating and introducing variants catering to customer needs. As part of its strategy, the
company has successfully leveraged its Fevicol brand to fill gaps by targeting specific
consumer needs with Fevikwik, Fevistik, Fevitite, etc, in new sub categories. To reach out to
retail markets, Fevicol was launched in collapsible tubes at an attractive price of INR5 to
capture the mass market; other smaller packs also helped encourage use by school
students, professional and educational institutions. The new packaging formats transformed
the brand from an industrial product to all-purpose glue.

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In FY08, the company introduced Fevicol craft adhesive at INR2 and Fevigum at INR1 which
made high quality adhesives available to consumers at very affordable prices. The company
has continued to attract consumers with its strategically priced LUPs to drive volumes.

PIDI also introduced Fevistik Blue and Fevistik Purple in FY10. Unlike white glue, these
coloured sticks when applied appear coloured, but the colour disappears after a few
seconds, enabling young children to see and control the application of glue.

Brand extension: Tried and tested method to boost brand recall


As per Nielsen, in India, extensions of existing brands are five times more successful than a
new brand. Brand extensions can grow incremental sales up to 38% and contribute as much
as 30% to parent brand sales apart from promoting brand equity. Brand extensions leverage
equity of the parent brand, lead to faster adoption and deliver higher marketing efficiency.

On similar lines, PIDI launched Fevicol SPEEDX, a premium white adhesive which is India’s
first fast-setting adhesive. This water-based adhesive is apt when time is of essence. It is
based on Nano Magnet Technology, which brings molecules closer very fast, resulting in an
exceptionally strong bond. It provides handling strength in just two hours against six to eight
hours taken by regular adhesives.

Similarly, in the construction chemicals segment several new products were launched under
Dr. Fixit brand—Dr. Fixit Low Energy Consumption systems (for high-end waterproofing
coupled with insulation for terraces and walls), Dr. Fixit Extensa (high-end puncture-proof
waterproof coating for roofs & basements) and Dr. Fixit Bathseal Kit (for comprehensive and
long lasting waterproofing for bathrooms).

Premium products in glue doing well


The company’s launches in premium adhesives are doing well. Marine Fevicol (for furniture
in constant touch with water), Speedex (fast adhesives) and fabric glue are growing faster
than base adhesives.

Strong brand equity enables price hikes to offset raw material inflation
VAM and packaging materials (HDPE, LLP) are the key raw materials for PIDI, constituting
30-35% of raw material costs. VAM, a petrochemical produced from ethylene is a crude oil
derivative, which the company imports from Singapore (as imports are cheaper than captive
production). Hence, INR depreciation has a bearing on costs. The company tries to contain
COGS inflation by taking price hikes, which we believe, is not difficult due to its strong brand
equity and high market share.

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Chart 7: Stable gross margin despite RM volatility due to high pricing power
58.0

53.0

48.0

(%)
43.0

38.0

33.0
FY08 FY09 FY10 FY11 FY12 FY13
Source: Company, Edelweiss research

Chart 8: EBITDA margin stable despite rising crude prices


7,000 25.0

6,000 20.0

5,000 15.0
(INR/barrel)

(%)
4,000 10.0

3,000 5.0

2,000 0.0
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Source: Company, Edelweiss research

Rich product portfolio backed by strong R&D


PIDI has successfully identified and met potential consumer demands (water proofing, damp
proofing) backed by its strong in house R&D capabilities and an innovation centre in
Singapore (two third sales come from products pioneered in India).

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Chart 9: R&D spends - Key to maintaining leadership
0.50

0.48

0.46

(as % of sales)
0.44

0.42

0.40
FY10 FY11 FY12 FY13
Source: Company, Edelweiss research

The construction chemical category will be one of the faster growth drivers (Dr. Fixit and
ROFF) as it is a play on retail consumer’s discretionary income and in construction activity.
Its recent innovations like Fevicol Glue Drop, Dr Fixit Waterbar and smaller sized SKUs of
Fevikwik at INR 5 have done well. It has an extensive product portfolio across segments like
adhesives, sealants, fabric care, decorative paints, arts & stationery material and organic
pigments.

The company has a major research and development facility at Kondivita, Mumbai. Further,
the Pidilite Innovation Centre (company’s step-down subsidiary) was incorporated in
Singapore in December 2006 with the objective of undertaking R&D activities. The group’s
R&D team works closely with marketing and technical service teams to upgrade existing
products and develop new products to meet the continuously changing requirements. The
group has developed most of its products through strong in-house research and
development teams. The company aims to continuously develop new and innovative
products for consumers, craftsmen and industries.

Acquisitions: Key to augmenting product capability and new markets


PIDI intends to pursue acquisition opportunities in a disciplined and planned manner. The
company uses this strategy to add to its existing portfolio of products, complement
manufacturing and research and development facilities and gain access to new markets as
well as increase market penetration in existing markets. The company, in the past, acquired
companies like ROFF, Mseal, Sargent Art, Hobby Ideas to consolidate its position in
respective segments. In Q1FY14, it acquired the adhesive business of Suparshva Adhesives
(sales less than 1% of PIDI’s sales). The slump sale agreement includes brands, know-how
and other assets pertaining to the adhesive business which is into various adhesives and
sells the same under the Falcofix brand. Suparshva Adhesives had a strong presence in
Maharashtra with its products are priced at a discount to Fevicol; it has good brand equity at
the lower end of the market with wood working intermediaries. PIDI plans to retain the
brand and leverage it in some of the other markets as well. The acquisition will help the
company reduce competition in Maharashtra.

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Table 3: Major acquisition- Successful record of acquiring and integrating businesses and brands
Year Major Acquisition
2000 “M-Seal”, a brand of epoxy compounds was acquired.
2002 “Steelgrip”, a brand of PVC insulation tape was acquired.
2004 “Roff”, a brand of construction chemicals was acquired.
2005 Incorporated subsidiaries in Singapore, Brazil and Dubai to undertake its international operations.
Through its subsidiaries acquired Chemson, a Singapore based company manufacturing waterproof coating and
emulsion paints and Jupiter Chemicals LLC, a Dubai based company manufacturing construction chemicals
2006 “Tristar Colman” and “Fine Art”, brands, business and certain assets of canvas and student art colours and brushes
of drawing and painting, respectively, were acquired.
Bamco Limited, Thailand, a construction chemical company was acquired.
Pidilite USA Inc, Delaware, a subsidiary of the Company, acquired the business and assets of Sargent Art Inc. (the
makers of art material range of products) and Cyclo Industries LLC (the sellers of automotive maintenance
Established a research and development centre in Singapore.
2007 Pidilite Do Brazil Desenvolvimento De Negocios Ltda, a wholly-owned subsidiary of the Company, acquired Pulvitec
(adhesives, sealants and construction chemicals).
Acquired plant and machinery, patents, trademark and technology of Synthetic Elastomer (Polycholoroprene
Rubber) plant in June 2007.
2008 Acquired assets and business of branded sealants and adhesives from Hardcastle & Waud Manufacturing Co. Ltd
and associates (brands like Holdtite, Rustolene and Leakgaurd).
2010 Acquired the retail wood working brand of Henkel, i.e. Woodlok
2013 Acquired the adhesive business of Suparshva Adhesives; strong presence in Maharashtra with its products priced
at a discount to Fevicol; it has good brand equity at the lower end of the market with wood working intermediaries.
The slump sale agreement includes brands, know-how and other assets pertaining to the adhesive business (under
the “Falcofix” brand).
Source: Company, Edelweiss research

Management has no plans to enter any new line of business as of now, but is looking to
expand and strengthen its current portfolio.

Expansion in distribution reach


PIDI has an extensive distribution and marketing network, especially in the adhesive and
sealant industry. The company has a field force of over 1,000 representatives and each of
these representatives have 50 retailers/dealers under them. Distribution is a key
differentiator for the consumer and bazaar category and like Asian Paints, PIDI’s widespread
distribution is its key strength against competition.

“In terms of looking at the split of Rural markets continue to drive growth
the demand I think it is the The company does not intend to vacate the LUP space (INR5 pack) as it is highly popular in
smaller towns, the smaller rural areas (growing faster than urban). In this price segment volume leverage offsets input
population agglomerations, cost inflation.
which are seeing stronger growth
than the larger Tier-1 cities.”

- Sandeep Batra,
Director Finance

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Sensitivity analysis: Impact of INR depreciation

As PIDI imports 30-35% of its raw material including VAM (constituting ~10.5% of total
COGS) fluctuation in INR impacts the company’s margin.

As per our calculations, for a 10% INR depreciation (considering 35% of RM to be imported)
the EBITDA will decrease by 11.7% and the PAT will decrease by 16.7% keeping all other
variables constant. In order to mitigate this impact of INR depreciation (to maintain EBITDA
margin at 16.3% as in FY13) PIDI will have to take a price hike of 2%.

However, taking into account exports (constitute ~9% of total sales) the impact is lesser.
Taking into account export earnings, 10% INR depreciation leads to 6.2% decrease in EBITDA
and 8.9% fall in PAT.

Table 4: Sensitivity analysis of INR depreciation on EBITDA and PAT


Without considering export benefit With export benefit
(INR mn) FY13A 10% depreciation % change 10% depreciation % change
Sales (inc 9% exports) 36,781 36,781 37,112
Imported RM (35% COGS) 7,028 7,731 7,731
Other 13,053 13,053 13,053
Total COGS 20,081 20,784 20,784
Other costs 10,710 10,710 10,710
EBITDA 5,990 5,287 (11.7) 5,618 (6.2)
Depreciation 686 686 686
Other income 705 705 705
EBIT 6,009 5,306 5,637
Interest costs 214 214 214
PBT 5,795 5,092 5,423
Taxes 1,595 1,595 1,595
Core profit 4,200 3,497 (16.7) 3,828 (8.9)
Source: Edelweiss research

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Table 5: Peer comparison table CAGR


Company Market Mcap EPS P/E( x) EV/EBITDA(x) ROAE (%) Div yield(%) (%)
Price (INR) (INR bn) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY13-15E
Pidilite 294 151 9.9 12.0 29.7 24.5 19.6 16.3 27.8 28.1 1.0 21.0
ITC 314 2,451 11.3 13.2 27.8 23.7 18.2 15.4 36.4 38.2 2.5 17.3
Hindustan Unilever 590 1,275 16.6 18.6 35.6 31.7 26.4 23.0 104.5 87.6 1.9 9.2
Nestle* 5,224 504 121.1 146.8 43.1 35.6 23.9 20.4 56.2 52.6 1.3 15.1
Asian Paints 505 484 14.3 18.2 35.4 27.8 22.2 18.2 36.5 38.1 1.4 25.1
United Spirits 2,628 331 41.0 58.3 64.2 45.1 28.6 24.3 9.5 10.5 0.3 NM
Dabur 163 284 5.3 6.5 30.8 25.0 23.1 18.4 38.7 37.7 1.4 21.9
Godrej Consumer 904 307 23.6 28.9 38.3 31.3 26.8 21.7 22.5 23.7 1.0 21.4
GSK Consumer 4,340 182 160.6 150.2 27.0 28.9 18.3 19.5 43.8 33.4 1.4 20.3
Colgate 1,238 168 38.9 45.2 31.8 27.4 23.0 19.5 100.3 101.9 2.7 11.3
Marico 212 130 7.8 9.2 27.1 23.0 18.1 14.9 22.9 22.1 0.4 27.7
Emami 489 74 17.3 20.8 28.2 23.6 24.1 20.0 46.4 46.8 1.5 21.2
Bajaj Corp 233 34 12.8 14.5 18.2 16.0 15.1 13.0 37.1 38.0 2.8 13.6
FMCG - Mean 37.0 41.7 33.6 28.0 22.1 18.8 44.8 43.0 1.5 18.8
* CY numbers
Source: Edelweiss research

Over the past two years the entire Consumer pack has seen re-rating due to sustained
robust performance (on a relative basis) despite macro-economic slowdown which has
affected most other sectors. PIDI has also been a party to this re-rating phenomenon.

13 Edelweiss Securities Limited


Consumer Goods

Valuation

PIDI’s broad product portfolio provides a good play in the consumer and specialty chemicals
space by virtue of its strong presence in under-penetrated and high-growth categories. We
are enthused by the company’s strong earnings growth, increasing market share, robust
volume growth and pricing power. Its strong brand equity with undisputed leadership and
sustained high volume growth reinforces our belief in the company’s high growth potential.
However, we will closely monitor the performance of its international operations, raw
material inflation (mainly due to INR depreciation) and development in the Elastomer
project.

We assign a target multiple of 25x to FY16E EPS arriving at a target price of INR357, based
on our strong conviction of sustained dominant position in various categories it operates by
virtue of direct reach to influencers/end users, successful brand extensions, innovation
spurred by robust R&D, out-of-the-box ads, acquisitions (ROFF, Mseal, Sargent Art, Hobby
Ideas), limited competition and widespread distribution. We have valued the stock at a
discount to Asian Paints (owing to PIDI’s smaller size) and other single product MNC
companies like Colgate and GSK Consumer who are also clear leaders in the categories they
operate in.


PIDI’s earnings are expected to grow at 20% CAGR over FY14 16E. Strong cash generation
and better visibility of its earnings over the next two years are an added attraction. We
expect current multiples to sustain due to strong earnings growth.

Hence, we initiate coverage on the stock with a ‘BUY’ recommendation. On relative return
basis, the stock is rated ‘Sector Performer’.

Chart 10: 1 year forward PE band; re-rating to sustain

350
30x

280 25x

20x
210
(INR)

15x
140
10x
70

0
Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

May-12

Nov-12

May-13

Nov-13

Source: Edelweiss research

14 Edelweiss Securities Limited


Pidilite

Key Risks

Competition getting stiffer in some segments


The rapidly expanding sector is luring new players. Also, competitors are aggressively
innovating and enhancing efforts to increase contribution from this segment. PIDI will,
therefore, need to drive its resources towards augmenting A&P to back up sales and
maintain brand loyalty. Also, failure to develop new products or to successfully implement
productivity and cost-reduction initiatives may harm the company’s competitive position.

Rupee depreciation has a bearing on margins


A rise in crude oil price and INR depreciation could hurt PIDI’s margin as VAM and packaging
costs form 30-35% of total raw material costs. EBIT margins may come under pressure
unless product mix improves or commensurate price hikes are taken (price hikes seem to be
a challenging task amidst current macro economic slowdown).

Synthetic Elastomer project a drag


Construction work on the synthetic Elastomer project remains suspended as PIDI is
evaluating various alternatives regarding the project’s future. The company is looking for
strategic investors for this project. It has spent INR3.6bn on the project and any negative
development (write-off of entire capex) on this project may have a bearing on PIDI.

International operations remain subdued


Losses in international business continue. Brazilian operations remain the key issue.

Economic slowdown
With urban areas contributing significantly to sales, a slowdown in economic growth may
negatively affect the company’s business. Slowdown is sharper in discretionary segment
against directly consumer related segments.

15 Edelweiss Securities Limited


Consumer Goods

Porter’s 5 Forces Analysis

Threat of new competition: Low


PIDI has established strong market leadership in categories it operates in owing to strong
brand equity, focus on R&D, robust distribution network and differentiated and well-
targeted advertising.

Threat of substitutes: Low


It faces low competition from substitutes.

Bargaining power of customers: Low


Being market leader, PIDI commands strong pricing power with competitors following suit.

Bargaining power of suppliers: Medium


30-35% of its raw material is imported and thus has a bearing of INR depreciation. PIDI
needs to take commensurate price hikes to counter raw material inflation.

Competitive rivalry: Low


The company operates in niche categories where there is limited competition from large
multinationals and it can easily exploit small regional players with its existing brand equity
and creative marketing.

Fig. 1: SWOT analysis

Strength Weakness

Differentiated products Uncertainty on


Strong brand equity Elastomer project
Smart advertising and Weak international
educating decision makers business performance
Relevant acquisitions

Opportunities Threats

Premiumization focus Entry of paint players


Ability to spot in the water-proofing space
opportunities in Weakness in Indian rupee
commodity play Global geopolitical
(terminator, etc.) uncertainties

Source: Edelweiss research

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Pidilite

Company Description
PIDI is the pioneer in consumer and specialties chemicals in India, with diverse product
range that includes adhesives and sealants, construction and paint chemicals, automotive
chemicals, art materials, industrial adhesives, industrial and textile resins and organic
pigments and preparations. Most of its products have been developed through strong in-
house R&D. The company is the market leader in adhesives and sealants, construction
chemicals, hobby colours and polymer emulsions in India. Brand Fevicol has become
synonymous with adhesives to Indian consumers and is ranked amongst the most trusted
brands in the country. Pidilite is also growing its international presence through acquisitions
and setting up manufacturing facilities and sales offices in important regions around the
world.

Pidilite faces limited competition as in most of its segments there are only a few large
companies with national presence. A large number of small size companies are active
regionally.

Business mix
Fig. 2: Consumer Bazaar dominates the business mix

Pidilite

Consumer and Bazaar Industrial speciality


products (81%) products (19%)

Adhesives and Industrial


sealants (51%) adhesives (7%)

Construction
Industrial resins (6%)
chemicals (20%)

Art Material and Organic pigments and


stationery (10%) preparation (6%)

Source: Edelweiss research

Consumer & bazaar products


Consumer & bazaar products account for 81% of the company’s revenue. It includes various
segments like adhesives and sealants, construction chemicals, art materials and stationery
and others like fabric care, automotive and decorative segments. These products are widely
used by carpenters, painters, plumbers, mechanics, households, students, offices, etc.

17 Edelweiss Securities Limited


Consumer Goods
Table 6: Consumer and Bazaar product segmentation
Segment Pidilite brands Competition brands Use
Consumer & Bazaar
Adhesive & Sealant Fevicol, Fevistik, Fevikwik, Mseal, Jivanjor, Carpenter, Woodwork, Flooring, Upholstery,
Steelgrip, Feviquick Araldite, Dendrite Footwear, Plumbing, electrical and
decorative purposes
Construction chemical ROFF, Dr. Fixit, Fevimate Sika, Fosroc Waterproofing, Admixture, Tile fixing,
Floor hardening, Sealants, Heat reduction
coating
Art material & stationery Fevicryl, Hobby Idea, Fevicraft, Camlin, Faber Castle Education, Publication, Painting
Sargent Art
Fabric care Ranipal Ujala Cloth brightner, Stain removal
Automotive Cyclo, Motomax Castrol Lubricant, Engine Oil, Maintenance,
Polishing
Decorative paints Wudfin, Piditint Asian Paints, Berger Wood finishing, Interior coating and wall
finishing
Source: Company, Edelweiss research

Adhesive and sealants: The organised adhesive market in India is estimated at ~INR 10 bn
with Pidilite being a major player, garnering 70% market share. Pidilite has established
leadership position in adhesives and sealants segment with it contributing 51% to
company’s revenue. The company offers extensive range of products under this segment
used in woodworking, upholstery & flooring, footwear, automotive aftermarket, plumbing
and electrical and for decorative purposes. Brand Fevicol has become synonymous with
adhesives to millions in India and a huge entry barrier for other competing products. The
closest competitor is Jubilant Organosys with its Jivanjor brand. Huntsman's brand Araldite
is the leader in the epoxy resin segment, piping Pidilite's Fevitite into second place, although
its white glue brand, Carpenter, has not been successful. The company faces competition
from various local brands. This industry is expected to post 10-12% in the long term. Fevicol
is marketed in 54 countries worldwide. In India alone it is available at over 50,000 stores
across the country.

Construction chemicals: These are materials that are added to a building structure to
increase its life and provide stability and used during pre-construction and post-construction
stages. These include extensive range of products like waterproofing material, admixtures,
tile fixing solution, floor hardener, sealants, grouts, heat reduction coatings. Current market
size of this segment is estimated to be INR ~18 bn. It contributes ~20% to total revenue. This
segment has delivered 30-35% CAGR over the past five years and is expected to be the
company’s growth driver and post CAGR of more than 25%. Pidilite owns two well known
brands under this category viz., Dr. FIXIT and ROFF used for varied application in
waterproofing, sealing, flooring, concrete treatment & plastering. The Sika Group, based in
Switzerland, with significant presence in construction chemicals poses stiff competition.

Art Material and stationery: Pidilite has an extensive range of art material catering to
education, hobby and fine art segments. Products under this segment are complemented
with books, videos and training material to make them popular among the targeted end
user segment. The company’s position in this segment was strengthened with the
acquisition of Traistar Colman brand in India and The Sargent Art brand by its subsidiary in
the US. Various products manufactured under this product portfolio are tempera colours,
crayons, chalks, markers, poster paints, water colours, clay, fabric colours, glass colours,

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Pidilite

ceramic colours, moulding putty, brushes, hobby kits, hobby books, etc. This segment
contributes around 10% to the company’s total revenue. This segment is expected to grow
at 10-12% in long term. This product range is dominated by competitiors Camlin and Faber
Castle.

Others: This includes a wide range of products like fabric care, car care and decorative
paints. Pidilite acquired Cyclo brand in June 2006; its product range includes maintenance,
performance and appearance products for DIY (Do-it-Yourself) and professional car care
segment. Cyclo products are sold in US and over 50 other countries. Ranipal has a good
market presence in the fabric care segment. Main competitor in fabric care segment is
Jyothy Lab’s Ujala.

Industrial specialty products


Industrial specialty accounts for 19% of the company’s revenue. This segment has lower
margins vis-à-vis consumer and bazaar segment. The Henkel Group has presence in this
industry and poses severe competition.

Table 7: Industrial products’ segmentation


Industrial products
Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol, Henkel, Huntsman, Packaging and converting, cigarette, book
Pidiprimer, Kondicryl Sika, 3M, HB fuller binding, stickers, lamination and
labelling, Footwear
Textile Chemical Texcron, Dopcron, Pidifinish, BASF, Jubiliant Pigment dispersion, Pigment printing
Pidicryl
Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubiliant Waterbased decorative paint, Industrial
paint, Coatings and Construction
chemical
Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic
Masterbatches, Textile Dispersions,
Rubber, Dry Colours
Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubiliant Fungicide, Bactericide, Degreasing agent,
Binder
Source: Company, Edelweiss research

Industrial adhesives: Being market leader, Pidilite provides extensive range of products
catering to packaging, cigarettes, stock labels, stickers, footwear, etc. This segment
contributes 7% to company’s revenue.

Industrial resins: It contributes 6% to total revenue. The company produces polymers and
co-polymers for industries like paints, non-woven and flocked fabrics and leather.

Organic pigments and preparation: Pioneer in manufacturing Pigment Violet 23 in India.


Market leader in pigment dispersions for textile segment, segment contributes to around
6% to total revenue.

International business
Pidilite exports to more than 80 countries and has 14 overseas subsidiaries (four direct and
10 step-down subsidiaries) operating across various geographies in the world. The
company’s overseas subsidiaries, including US, Brazil, Thailand, Singapore, Dubai, Egypt and
Bangladesh, contribute ~11% to consolidated sales. However, most subsidiaries are loss

19 Edelweiss Securities Limited


Consumer Goods
making mainly due to small scale of operation, geopolitical issues, cost pressure and strong
competition. The company has taken major initiative to curtail overseas losses by shutting
down unviable subsidiaries and changing the management in the nonperforming
geographies. The benefits from appointment of new CEO in December 2012 to flow in
coming years which is expected to help sustain a better international business performance.

Table 8: Snapshot of international subsidiaries’ performance


(INR mn) Revenues Profit/(Loss)
International subsidiaries Country FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13
Pidilite Speciality Chemicals Bangladesh Pvt Ltd Bangladesh NA 40 119 146 231 NA 0 5 6 13
Pulvitec do Brasil Brazil 802 1,141 1,316 1,282 1,263 (200) (8) (88) (217) (416)
Pidilite Industries Trading Co. Ltd China NA NA 3 15 20 NA NA (1) 1 1
Pidilite Industries Egypt SAE Africa NA 16 60 124 146 (2) (27) (20) (23) (15)
PIL Trading LLC Africa NA 28 69 48 50 NA (2) (21) (15) (2)
PT Pidilite Indonesia Indonesia 16 30 4 3 8 (12) 3 (1) (2) (2)
Pidilite Middle East Ltd Middle East 3 NA NA NA NA 3 (0) (242) (30) (1)
Jupiter Chemicals LLC Middle East 194 188 106 154 98 (54) (63) (87) (44) (34)
Pidilite International Pte Ltd Singapore 6 8 12 15 19 (2) (66) (3) (23) 9
Pidilite Innovation Centre Pte Ltd Singapore 25 25 54 79 80 (1) (5) (9) (5) 6
Pidilite Bamco Ltd Thailand 154 170 185 226 316 (27) (4) (6) (1) 9
Bamco Supply and Services Ltd Thailand 5 15 23 42 47 1 1 1 6 5
Pidilite USA USA 1,250 1,114 1,220 1,364 1,604 (90) (47) 14 25 (13)
Pidilite South East Asia Thailand 1.4 0 - 0 - (1) - -
Source: Company, Edelweiss research

Manufacturing facilities: Pidilite has seventeen manufacturing facilities and Research &
Development facility at Kondivita, Mumbai for which it has obtained EMS (Environment
Management System)/OHSAS (Occupational Health & Safety Assessment System)
Certification. In FY13 the Company commissioned a manufacturing unit at Mahad for
producing PVC film. Apart from company owned plants, it contracts third party
manufacturers for a few of its products. Pidilite is the only manufacturer of VAM in India
with an installed capacity of 30,000 MT per annum. Due to the global demand-supply
situation it was unviable to manufacture in house and hence the plant remained shut during
FY13. The company has started manufacturing few speciality acetates at the plant which
have received positive feedback from the markets.

Awards:
• Fevicol was ranked as India’s 45th Most Trusted Brand in 2012 in Brand Equity’s Most
Trusted brands survey
• Fevicol was also ranked 3rd Most Trusted Brand in the Household Care Category
• Fevicol was ranked amongst the Most Trusted Brands list for 5 consecutive years

• Fevicol was a recipient of the Zee Business Brand Excellence Award


• A 40 feet raincoat was installed on a building by Dr. Fixit Raincoat. This won a Gold
award for Madison Media in the Exchange4media Outdoor Awards

20 Edelweiss Securities Limited


Pidilite

Key Management Personnel

Mr. Sushilkumar K. Parekh: Mr. S.K. Parekh is the current Vice Chairman of the company
and is the promoter director. He has served as the non executive Vice Chairman since 1969
with a vast experience of more than 57 years in the industry. He is also a director of Parekh
Marketing, Pidichem, Fevicol, Kalva Marketing and Services, Ruchiket and Pargro
Investments.

Mr. Madhukar B. Parekh: After Mr. Balvant K. Parekh passed away Mr. M.B. Parekh was
made the Chairman of the company w.e.f. May 28, 2013. He is also Managing Director of
the company and has served as the Director of the company since 1972. He also serves as
the Managing Director of Vinyl Chemicals India and has been an Independent Non Executive
Director of Excel Industries since March 25, 2005. Mr. Parekh holds a Bachelor's Degree in
Chemical Engineering from UDCT and an M.S in Chemical Engineering from University of
Wisconsin, US. He has more than 38 years of experience in the industry.

Mr. Narendrakumar K. Parekh: Mr. N.K. Parekh is the Joint Managing Director and
Executive Director of the company. He is also a Director of Vinyl Chemicals (India), Fevicol
Company, Parkem Dyes and Chemicals and holds senior position in other companies as well.
He is a qualified Technologist for Dyes and Intermediates and a qualified Chemical Engineer
[B.Sc., B.Sc. (Tech), M.S.Chem Engg (U.S.A)] and has experience in the industry for over 44
years.

Mr. Apurva N. Parekh: Mr. A.N. Parekh is the Whole Time Director of the company since
July 2005. He is a promoter director of the company and has been working with PIDI since
1996. Mr. Parekh is a Chemical Engineer with qualification of B.S. Chem. Engg. (U.S.A.) and
has total business experience of 17 years.

Mr. Ajay B. Parekh: Mr. A. B. Parekh is the Whole Time Director of the company since 1985.
He is B.Chem (Engg.), Masters of Business Administration (U.S.A.). He is also the director of
Vacuum Forming, Ishijas Chemicals, Vapkon Finance & Investment and has experience of
over 25 years.

Mr. Sandeep Batra: Mr. Sandeep Batra, Director – Finance of the Company, was appointed
as a Wholetime Director with effect from 1 April 2007. Mr. Batra joined the ICI Group in
1988. He is a Chartered Accountant and has held a variety of finance, commercial and
business roles.

21 Edelweiss Securities Limited


Consumer Goods

Financial Outlook
Revenue expected to post 17% CAGR over FY14-16E
With increased consumption and discretionary spending, recovery in real estate and
construction sector picking up, PIDI is set to achieve a top line CAGR of ~17% over FY14-16E.

Chart 11: Revenues to continue strong growth trend


60,000 25.0

50,000 20.0

40,000 15.0
(INR mn)

(%)
30,000 10.0

20,000 5.0

10,000 0.0
FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Total revenues % growth YoY
Source: Company, Edelweiss research

EBITDA margin likely to be stable over FY14-16


With expected A&P spends to return to earlier level of ~3.5% of sales cushioning EBITDA
margin. The company has effected price hikes in the past to offset input cost inflation and
being the market leader in the category it is present in, we expect margin to be sustainable
over the long term.

Chart 12: EBITDA margin stable


12,000 20.0

9,600 16.0

7,200 12.0
(INR mn)

(%)
4,800 8.0

2,400 4.0

0 0.0
FY14E

FY15E

FY16E
FY08

FY09

FY10

FY11

FY12

FY13

EBITDA EBITDA Margin


Source: Company, Edelweiss research

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Pidilite

PAT likely to post 20% CAGR over FY14-16E


EBITDA margin expansion to aid PAT growth of 20% CAGR over FY14-16E. With new product
launches and sustained brand equity, long-term PAT growth prospect remains intact.

Chart 13: Strong PAT growth


8,000 14.0

6,400 11.2

4,800 8.4

(INR mn)

(%)
3,200 5.6

1,600 2.8

0 0.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E
PAT PAT margins
Source: Company, Edelweiss research

Strong balance sheet fuel for further acquisitions, expansions


With negligible debt on its books (debt is for working capital needs; on an overall basis it is
expected to end at a net cash level of ~INR5.4bn in FY14E), PIDI is in a comfortable position
with room for further acquisitions and expansions.

Robust return ratios


Return ratios will emulate PAT margin and growth trend. However, further delay and
additional capital infusion for the Elastomer project may have an adverse impact on return
ratios.

23 Edelweiss Securities Limited


Consumer Goods

Financial Statements

Assumptions Income statement (INR mn)


FY13 FY14E FY15E FY16E Year to March FY13 FY14E FY15E FY16E
GDP(Y-o-Y %) 5.0 4.8 6.0 6.5 Net revenues 36,781 42,997 50,600 58,960
Inflation (Avg) 7.4 6.0 6.0 6.0 Cost of goods sold 20,081 23,557 27,821 32,571
Repo rate (exit rate) 7.5 8.3 7.3 6.0 Gross profit 16,700 19,440 22,779 26,388
USD/INR (Avg) 54.5 62.0 60.0 60.0 Staff costs 3,746 4,386 5,111 5,925
Company Assumptions Advertisement & sales costs 1,473 1,634 1,771 2,005
Sales growth assumptions Other expenses 5,492 6,063 7,185 8,313
Consumer & Bazaar 20.7 19.0 19.7 18.2 EBITDA 5,990 7,358 8,712 10,145
Adhesive & Sealant 17.0 19.0 21.0 19.0 Depreciation & Amortization 686 766 831 894
Construction and Chemicals 20.7 20.5 20.0 18.5 EBIT 5,304 6,592 7,881 9,251
Art Materials and Others 44.8 16.0 12.0 13.0 Other Income 705 580 700 982
Speciality Industrial Chemical 8.5 10.7 12.1 10.9 EBIT including other income 6,009 7,172 8,581 10,233
Industrial Adhesive 0.4 11.0 13.0 10.0 Net finance expense 214 166 84 109
Industrial Resin (0.8) 8.5 12.0 11.0 PBT before exceptionals 5,795 7,005 8,497 10,124
Organic pigments & 34.5 12.5 11.0 12.0 Provision for taxes 1,595 1,962 2,379 2,835
preparation Core profit 4,200 5,044 6,118 7,289
Cost assumptions Extraordinary items 18 - - -
COGS as % of sales 54.6 54.8 55.0 55.2 Minority Interest (2) (3) (4) (4)
Staff costs as % of sales 10.2 10.2 10.1 10.1
Share in profit of associates 24 29 35 41
A&P as % of sales 4.0 3.8 3.5 3.4
Profit after minority interest 4,240 5,070 6,149 7,326
Equity shares outstanding (mn) 510 510 510 510
Financial assumptions
EPS (INR) basic 8.2 9.9 12.0 14.3
Tax rate 27.5 28.0 28.0 28.0
Diluted shares (mn) 510 510 510 510
Debtor days 40 40 40 40
Diluted EPS (INR) 8.2 9.9 12.0 14.3
Inventory days 89 89 89 89
CEPS (INR) 6.5 7.5 9.0 10.5
Payable days 41 42 42 42
DPS 2.6 3.0 3.6 4.3
Cash conversion cycle (days) 88 87 87 87
Dividend payout ratio (%) 31.4 30.0 30.0 30.0
Depreciation as % of gross 5.6 5.7 5.7 5.7
Tax rate 27.5 28.0 28.0 28.0
block
Capex 1,045 1,120 1,300 1,100
Common size metrics (%)
Dividend as % of net profit 31.4 30.0 30.0 30.0
Year to March FY13 FY14E FY15E FY16E
Yield on cash 16.2 14.5 14.0 14.5
Cost of materials 54.6 54.8 55.0 55.2
Interest rate on outstanding 9.9 35.0 25.0 25.0
Employee costs 10.2 10.2 10.1 10.1
debt
Advertising & sales costs 4.0 3.8 3.5 3.4
Other general expenditure 14.9 14.1 14.2 14.1
EBITDA margin 16.3 17.1 17.2 17.2
EBIT margin 14.4 15.3 15.6 15.7
Net profit margin 11.4 11.7 12.1 12.4

Growth metrics (%)


Year to March FY13 FY14E FY15E FY16E
Revenues 17.6 16.9 17.7 16.5
EBITDA 23.8 22.8 18.4 16.4
PBT 33.9 20.9 21.3 19.1
Net profit 30.2 20.1 21.3 19.1
EPS 32.9 20.1 21.3 19.1

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Pidilite
Balance sheet (INR mn) Cash flow metric
As on 31st March FY13 FY14E FY15E FY16E Year to March FY13 FY14E FY15E FY16E
Share capital 513 513 513 513 Operating cash flow 5,175 5,180 5,663 6,768
Reserves 16,003 19,293 23,284 28,038 Financing cash flow (3,395) (2,767) (2,108) (2,539)
Shareholders' funds 16,515 19,806 23,796 28,551 Investing cash flow (1,890) (1,120) (1,300) (1,100)
Minority 10 12 16 20 Change in cash (109) 1,294 2,255 3,128
Long term borrowings 0 92 127 162 Capex (1,045) (1,120) (1,300) (1,100)
Short term borrowings 510 52 72 92 Dividends paid (1,559) (1,779) (2,158) (2,572)
Current maturities of long term debt6 02 118 163 208
Borrowings 1,112 262 362 462 Ratios
Deferred tax liability 499 499 499 499 Year to March FY13 FY14E FY15E FY16E
Sources of funds 18,136 20,579 24,673 29,532 ROAE (%) 28.3 27.8 28.1 27.8
Tangible assets 5,656 6,090 6,358 6,564 ROACE (%) 34.1 40.1 40.0 38.3
Intangible assets 812 812 812 812 Debtor days 40 40 40 40
Capital work in progress 4,280 4,200 4,400 4,400 Inventory days 89 89 89 89
Total net fixed assets 10,747 11,101 11,570 11,776 Payable days 41 42 42 42
Non current investments 85 85 85 85 Cash conversion cycle (days) 88 87 87 87
Current investments 2,846 2,846 2,846 2,846 Current ratio 2.0 2.2 2.6 3.0
Cash and cash equivalents 1,506 2,800 5,055 8,183 Debt/EBITDA 0.2 0.0 0.0 0.0
Inventories 5,236 5,728 6,757 7,902 Debt/Equity 0.1 0.0 0.0 0.0
Sundry debtors 4,305 4,787 5,622 6,552 Adjusted debt/equity 0.1 0.0 0.0 0.0
Loans and advances 914 914 914 914 Interest coverage (x) 24.8 39.7 93.4 84.6
Other assets 113 113 113 113
Total current assets (ex cash) 10,568 11,543 13,406 15,482 Operating ratios
Trade payable 2,501 2,680 3,173 3,724 Year to March FY13 FY14E FY15E FY16E
Other current liab. & provisions 5,115 5,115 5,115 5,115 Total asset turnover 2.1 2.2 2.2 2.2
Total current liab. & provisions 7,616 7,796 8,288 8,839 Fixed asset turnover 5.8 6.4 7.2 8.1
Net current assets (ex cash) 2,951 3,747 5,118 6,642 Equity turnover 2.5 2.4 2.3 2.3
Uses of funds 18,136 20,579 24,673 29,532
BV (INR) 32.4 38.9 46.7 56.0 Valuation parameters
Year to March FY13 FY14E FY15E FY16E
Free cash flow (INR mn) Diluted EPS (INR) 8.2 9.9 12.0 14.3
Year to March FY13 FY14E FY15E FY16E Y-o-Y growth (%) 32.9 20.1 21.3 19.1
Net profit 4,240 5,070 6,149 7,326 CEPS (INR) 6.5 7.5 9.0 10.5
Add: Non cash charge 860 906 885 966 Diluted P/E (x) 35.7 29.7 24.5 20.6
Depreciation 686 766 831 894 Price/BV (x) 9.1 7.6 6.3 5.3
Others 174 140 53 72 EV/Sales (x) 4.0 3.4 2.8 2.4
Gross cash flow 5,099 5,976 7,033 8,293 EV/EBITDA (x) 24.4 19.6 16.3 13.7
Less:Changes in WC (604) (796) (1,371) (1,525) Dividend yield (%) 0.9 1.0 1.2 1.5
Cash from operations 4,495 5,180 5,663 6,768
Less: Capex 1,045 1,120 1,300 1,100
Free cash flow 3,451 4,061 4,363 5,668

25 Edelweiss Securities Limited


Consumer Goods

Additional Data
Directors Data
Shri S K Parekh Promoter/ Vice Chairman/ Non-Executive Director Shri Bansi S Mehta Non Executive Director/ Independent Director
Shri M B Parekh Promoter/ Managing Director/ Executive Director Shri Ranjan Kapur Non Executive Director/ Independent Director
Shri N K Parekh Promoter/ Joint Managing Director/ Executive Director Shri Yash Mahajan Non Executive Director/ Independent Director
Shri A B Parekh Promoter/ Whole Time Director/ Executive Director Shri Bharat Puri Non Executive Director/ Independent Director
Shri A N Parekh Promoter/ Whole Time Director/ Executive Director Shri D Bhattacharya Non Executive Director/ Independent Director
Shri R M Gandhi Non Executive Director/ Independent Director Shri Sanjeev Aga Non Executive Director/ Independent Director

Auditors - M/s Deloitte Haskins & Sells - Chartered Accountants


*as per last annual report

Top 10 holdings
Perc. Holding Perc. Holding
Genesis Indian Inv Co Ltd 7.93 HFDC Asset Management Co Ltd 1.64
Wasatch Advisors Inc 1.33 Templeton Asset Mgmt 1.04
First State Investments Icvc 0.45 Dimensional Fund Advisors Lp 0.24
SBI Funds Management 0.21 Axis Asset Management Co Ltd 0.18
Blackrock Group Limited 0.17 UTI Asset Management Co Ltd 0.17
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No data available
*in last one year

26 Edelweiss Securities Limited


RATING & INTERPRETATION

Company Absolute Relative Relative Company Absolute Relative Relative


reco reco risk reco reco Risk
Asian Paints BUY SP M Bajaj Corp BUY SP M
Colgate HOLD SU M Dabur BUY SO M
Emami BUY SP H GlaxoSmithKline Consumer HOLD SP M
Healthcare
Godrej Consumer BUY SO H Hindustan Unilever HOLD SU L
ITC BUY SO L Marico BUY SP M
Nestle Ltd HOLD SP L United Spirits BUY SO H

ABSOLUTE RATING
Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING


Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVE RISK RATING


Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

27 Edelweiss Securities Limited


Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

Vikas Khemani Head Institutional Equities vikas.khemani@edelweissfin.com +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research nischal.maheshwari@edelweissfin.com +91 22 4063 5476

Nirav Sheth Head Sales nirav.sheth@edelweissfin.com +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods


Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare,
United Spirits

Recent Research
Date Company Title Price (INR) Recos

26-Nov-13 United High on W&M potential stake 2,622 Buy


Spirits Sale; Edelflash
22-Nov-13 Consumer Margins Healthy, Volumes
Goods divergent;
Result Review
18-Nov-13 ITC Forays into nicotine gums; 314 Buy
EdelFlash

Distribution of Ratings / Market Cap


Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 127 44 8 180 Buy appreciate more than 15% over a 12-month period
* 1 stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 112 54 14

28 Edelweiss Securities Limited


Pidilite
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Consumer Goods

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