Pidilite Industries Limitedimages.moneycontrol.com/static-mcnews/2020/08/...Investment ka mazboot jod Powered by Sharekhan’s 3R Research Philosophy Pidilite Industries Limited. August

Stock IdeaAugust 07, 2020Sector: Building Materials

Investment ka mazboot jod

Powered by Sharekhan’s 3R Research Philosophy

Pidilite Industries Limited

August 07, 2020 2

Company details

Market cap: Rs. 69,964 cr

52-week high/low: Rs. 1,710/1,186

NSE volume: (No of shares)

6.5 lakh

BSE code: 500331

NSE code: PIDILITIND

Free float: (No of shares)

15.1 cr

Shareholding (%)

Promoters 70.2

FII 11.2

DII 8.1

Others 10.5

Sto

ck Id

ea

Price performance

(%) 1m 3m 6m 12m

Absolute -1.6 1.8 -11.7 6.8

Relative to Sensex

-5.3 -19.1 -4.1 3.1

Sharekhan Research, Bloomberg

Reco/View

Reco: Buy

CMP: Rs. 1,377

Price Target: Rs. 1,645

Valuation (Consolidated) Rs cr

Particulars FY19 FY20 FY21E FY22E FY23E

Revenue 7,078 7,294 6,677 8,204 9,054

OPM (%) 19.3 21.6 22.6 23.4 23.7

Adjusted PAT 946 1,177 1,032 1,376 1,572

% YoY growth -2.0 24.4 -12.4 33.4 14.3

Adjusted EPS (Rs.) 18.6 23.2 20.3 27.1 31.0

P/E (x) 73.9 59.4 67.8 50.8 44.5

P/B (x) 16.9 15.7 13.5 11.2 9.4

EV/EBIDTA (x) 45.4 39.9 41.9 32.1 27.9

RoNW (%) 24.5 27.4 21.4 24.1 23.0

RoCE (%) 22.6 22.7 18.3 20.5 19.6Source: Company; Sharekhan estimatesNote: We now convert Pidilite into a Stock Idea; it was earlier a ‘Viewpoint’ under our coverage

Price chart

Building Materials Sharekhan code: PIDILITIND Initiating Coverage

+ Positive = Neutral - Negative

Pidilite is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions industry in India. Its flagship brands - Fevicol and M-Seal have a market share of ~70% each in the domestic market. With a slew of new launches under existing brands and entry into consumer-centric categories, supported by adequate media activities, Pidilite has transitioned its target market from industrial users to consumers through effective communication, which has helped the company to register itself in customers’ minds. This helped Pidilite post consistent performance, with revenues and PAT growing by ~12% and 18% over FY2015-20. Though FY2021 is expected to be lull, affected by COVID-19, growth is expected to come back on track in FY2022, driven by a recovery in refurbishment of houses and construction activities (especially in rural markets and tier-III towns). Further, expected increase in demand for adhesive products in global markets such as South East Asia, Europe, North America and Latin America would add to overall revenues in FY2022 and FY2023. A fall in prices of key inputs such as Vinyl Acetate Monomer (VAM), in line with the fall in crude oil prices, which is a blessing in disguise amid the pandemic, as it will support margins. With a stable working capital cycle which improved to 34 days in FY2020, Pidilite’s free cash flows (FCF) stood at Rs. 827 crore in FY2020. This will take care of major costs during an uncertain business environment in FY2021.

Our CallView - Initiate with Buy recommendation and price target of Rs. 1,645: With a strong portfolio of brands, Pidilite has a monopoly in the domestic adhesives market. Opportunities generated through initiatives such as ‘Make in India’, lower imports of Chinese products, revival in the rural economy and opening up of other international markets would act as key revenue drivers in the medium term. The stock is currently trading at 50.8x its FY2022E earnings (discount of ~10% its last three years average multiple). A monopoly in the adhesives market, strong brand recognition and a sturdy balance sheet justify a premium valuation. However in an uncertain environment it is prudent to invest in quality stocks with a strong balance sheet and healthy return profile of over 20%. We initiate our coverage on Pidilite with a Buy recommendation and price target (PT) of Rs. 1,645 (valuing the stock at 60x its FY2022E earnings).

Key riskIf the COVID-19 global pandemic takes time to get under control, the recovery in the business environment will take more time, which will continue to affect the financial performance of Pidilite in the near term.

3R MATRIX + = -

Right Sector (RS) ü

Right Quality (RQ) ü

Right Valuation (RV) ü

Summary

We initiate coverage on Pidilite Industries Limited (Pidilite) with Buy recommendation and assigning a price target of Rs. 1,645.

Pidilite leads domestic market for adhesives, sealants and construction chemicals. Strong brands (including Fevicol, Dr.Fixit and Fevikwik) give it a competitive edge over peers.

FY2021 will be affected by impact of Covid-19 spread resulting into a wash-out Q1FY21. With recovery started flowing in (especially in tier-III and IV towns), FY2022 is expected to witness strong bounceback. Fall in VAM prices would help margins continue rise.

Launch of premium products in core categories, foray into new categories (largely consumer-centric), wider distribution reach and expansion into international markets remain key growth drivers in the medium to long term.

Powered by the Sharekhan 3R Research Philosophy

Pidilite Industries LimitedInvestment ka mazboot jod

1150

1350

1550

1750

Aug-

19

Dec

-19

Apr-

20

Aug-

20

August 07, 2020 3

Sto

ck Id

ea

Powered by the Sharekhan3R Research Philosophy

Executive Summary

3R Research Positioning Summary

n Right Sector: Low penetration of construction chemicals and adhesives in India provides huge scope of growth.

n Right Quality: Strong product portfolio and leadership positioning will help to stay ahead of competition.

n Right Valuation: Monopoly in the construction chemicals market and sturdy balance sheet will keep valuation at a premium.

Valuation and return potential

Strong demand for construction chemicals, sustained innovation in portfolio and share gain will aid Pidilite to achieve double earning growth over FY2020-23.

The stock has corrected ~10% in last one half month factors in the washout performance in Q1.

The stock is currently trading at valuation of 51x its FY2022E EPS.

Earnings and Balance sheet highlights

Consistent earnings growth: Pidilite’s revenues and PAT clocked a CAGR of ~9% and 18% over FY2015-20.

Key segment: Consumer Bazaar division contributes ~85% of revenues and has EBIT margins of around 22%.

Sturdy balance Sheet: Zero Debt Company with stable work capital and strong cash flows (FCF stood at Rs. 827crore in FY20).

Strong return profile: RoE and RoCE standing above 20% each.

Catalysts

Long-term triggers Government regulations to improve quality

of construction.

‘Make in India’ initiatives and opening up of international markets will provide long term growth opportunities.

Sustained new product launches to remain competitive in the market.

Medium Term Triggers Recovery in rural and tier-3 markets.

Correction in VAM prices will mitigate the risk of lower sales in the near term.

Key Risks: If opening of economy takes time it will be key risk to earnings estimates due to lower demand.

Source: Company, Sharekhan Research

August 07, 2020 4

Sto

ck Id

ea


Table of Contents PagesRight Sector - Why we like construction chemicals industry

Overview of construction chemical market in India 5 Key drivers for construction chemical and adhesives industry in India 7 Indian furniture market is expected to grow at a CAGR of 10-12% over FY2019-24 11 Usage of adhesives in other industries 12

Right Quality - Why we like Pidilite Strong competitive moat and near-monopoly in adhesives and sealants 14 Pidilite has a strong product portfolio 15 Pre-COVID-19 growth at 8% CAGR; FY2021 will be a one off year; significant recovery

expected in FY2022/2318

Correction in input prices to drive margins in the near term 19 Strong manufacturing capacity and robust distribution reach 20 Inorganic initiatives and expansion of international business to support growth going ahead 20 Investments made by Pidilite to enhance innovation and understand consumer trends 22 Strong cash flows, consistent dividend payout 22 Production scaled-up; gradual recovery witnessed post easing of lockdown 23

Financials in charts 24

Q1FY2021 was wash-out quarter; recovery since June 25

Key conference call highlights 25

Q1FY2021 Result tables 26

Right Valuation Outlook - Pandemic to affect FY2021, recovery likely in FY2022 27 Valuation 27 One-year forward P/E band 27 One-year forward P/BV (x) band 28 One-year forward EV/EBIDTA (x) band 28 Peer comparison 28

Key financials P/L account 29 Balance Sheet 29 Cash Flow Statement 30 Key Ratios 30

Pidilite snapshot Company background 31 Investment theme 31 Key risks 31 Key management personnel 31 Top 10 shareholders 31

3R Philosophy definitions 32

August 07, 2020 5

Sto

ck Id

ea


Why we like construction chemicals industry

India’s construction chemicals industry is at a nascent stage with a market size of ~Rs. 6,500-7000 crore, which is just 4-5% of the global construction chemicals market. Increase in construction and infrastructure activities with a strong adherence to quality will drive demand for construction chemicals in the near to medium term. Further, the growing adoption of green-building concept and increasing government regulations pertaining to the use of high-quality waterproofing systems with low volatile organic compounds (VOC) and insulation would result shift to products with brand recognition in the medium to long term.

Source: Industry reports, Sharekhan Research

Concrete ad-mixtures

Flooring Compounds

Repair & Rehabilitation

MiscellaneousWater Proofing

Ligno-basedEpoxy & floor

hardenersCementitous repair mortar

Polyurethane based

SNF & SMF based

Polyurethane coating

Polymer repair mortar

GroutsBitumen based

PCE basedPolyurea

basedEpoxy based resin mortar

AdhesivesPolymer-SBR,

Acrylic

Sealants

Construction Chemicals

Overview of construction chemical market in India

The Indian construction chemicals market clocked strong growth of ~16% over CY2007-17 due to growing

urbanisation, construction boom and growing awareness in the industry for better quality product. Though

the market has registered strong growth it is just 4-5% (stood at~ Rs. 6,175 crore in CY2017) of the global

construction chemicals market providing huge scope of growth for large companies in the space. With

sustenance of good growth in the construction activities and innovation through higher quality products, the

construction chemical is expected to grow at CAGR of 15% over CY2017-25 (CY2020 is expected to be one-off

year due to spread of COVID-19).

August 07, 2020 6

Sto

ck Id

ea


Construction Chemical market grew @ CAGR of 15% over CY2007-17E

India’s construction chemical market composition



The market is largely driven by concrete admixtures, which accounted for 42% of overall market in 2013 while

water-proofing and flooring segments accounted for 14% each. We believe the contribution of water-proofing

must have increased in recent times due to strong adherence to quality of construction and it provide benefit

for longer time compared to temporary source of stopping leakages. Share of ad-mixtures is high in Indian

market as compared with global markets. India has a low penetration of tiling, sealants and water-proofing

products. More than 70% of business for construction chemicals comes from new real-estate and construction

projects built However, with the Indian government initiatives of Housing for All, providing pucca house and

tier3 and 4 towns rapidly developing the penetration of construction chemicals will improve substantially in

the coming years.

1400

2100

3600

6175

0

1000

2000

3000

4000

5000

6000

7000

CY2007 CY2010 CY2013 CY2017E

Construction Chemical (Rs cr.)

Ad-mixtures, 42%

Flooring , 14%

Waterproofing, 14%

Repair & Rehab, 12%

Adhesives & Sealants, 18%

August 07, 2020 7

Sto

ck Id

ea


Global construction chemical market composition

Urbanisation rising (%)



Key drivers for construction chemical and adhesives industry in India

Rapid urbanization, Housing for all to drive demand for construction chemicals: Rapid urbanisation and various government projects like smart cities/housing for all will drive the growth for construction

chemicals. Further demand for affordable and mid-segment housing is gaining strong traction in the major

cities. Government is also focusing on providing ‘pucca’ houses for population in India (especially in rural)

with proper sanitisation, hygiene and water services.

11

2930

34

0

5

10

15

20

25

30

35

40

CY1901 CY2001 CY2011 CY2017

(%)

Urbanisation (as per Census)

Ad-mixtures, 26%

Waterproofing, 40%

Adhesives & Sealants, 28%

Others, 6%

August 07, 2020 8

Sto

ck Id

ea


Housing for all - GOI initiative (Lakh units)

(% growth)

Consistent increase in the pucca housing (%)

Affordable and mid-segment housing growing in India

Source: Government of India, Sharekhan Research

Source: NSSO survey, Sharekhan Research

Source: Industry, Sharekhan Research

7.316.8

41.6

80.3

103.0

9.917.5

36.0

52.760.0

7.3 11.019.4

26.232.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY16 FY17 FY18 FY19 FY20

Sanctioned Grounded Completed

32

4855

667774

88 9294 96

0

20

40

60

80

100

120

1993 2002 2009 2012 2018

Rural pucca house (%) Urban pucca house (%)

Big opportunity lies in rural market

0

20

40

60

80

100

120

Bangalore Chennai Delhi NCR Hyderabad Kolkata Mumbai Pune India

Q1CY19 Q1CY20

August 07, 2020 9

Sto

ck Id

ea


Global waterproofing market by application (%)

Trend in cement demand in India

Source: Industry, Sharekhan Research

Source: Sharekhan Research

Higher demand for quality and high durable products: Cement is widely used as a binding material in construction. It is mixed with crushed rock, sand and water in a specific proportion to produce concrete.

Chemical ad-mixtures are mixed to reduce water content in concrete and to increase compressive strength

and durability parameter of concrete. Hence demand for ad-mixture will sustain, in line with the growth in

the construction activities.

Waterproofing segment is at nascent stage: The global waterproofing market has been propelled by growing infrastructure and construction sectors along with a growing demand for waterproofing in end-

use sectors like water and wastewater management. Innovations in liquid membranes along with R&D

undertakings to decrease their production costs will further help the waterproofing products market.

Waterproofing market in India currently in a nascent stage compared with global market. The Asia Pacific

region leads the global waterproofing market due to the rising demand for high-quality construction and

expanding wastewater management industry. Government backed initiatives will further augment the

market growth.

271 283 280298

337 350

3.8 4.4

-1.1

6.4

13.1

3.9

-2

0

2

4

6

8

10

12

14

0

50

100

150

200

250

300

350

400

FY15 FY16 FY17 FY18 FY19 FY20

Cemend demand (Mn tonne) Y-o-Y growth

Roofing and wall, 34.02

Landfills & tunnels, 9.01Building structure , 22.9

Water managment , 14.05

Others, 20.02

August 07, 2020 10

Sto

ck Id

ea


Sustained innovations: Stringent regulations in construction and real estate sectors have pushed several companies towards improving their existing product line. The major focus will be laid on service-life

performance of protective coatings, introduction of multipurpose and hybrid coatings and eco-friendly

advanced products such as nano-coatings, green coatings, etc.

Changing regulatory environment: Increase in regulatory policies led to strong demand for construction chemicals in India.

§ Current regulatory guidelines incentivises energy-efficient and green buildings

§ Compulsory usage of ready mix concrete in metro rail projects in cities such as Mumbai, Delhi and Bangalore, etc.

§ With an increase in foreign investments in infrastructure projects more focus with be given on the quality of the construction.

§ Under RERA guidelines, it is necessary to get project certified from engineer who supervises the work to ensure the quality of materials being used in the project. Form-2A denotes Engineer Certificate for

Quality assurance.

Increase in awareness: India’s awareness of chemical construction products is less as compared to other countries. Once awareness about product and methodology of usage of products increases demand for

construction chemicals will increase in the domestic market.

Global waterproofing market to grow @CAGR of 10%


1375

3000

0

500

1000

1500

2000

2500

3000

3500

CY2017 CY2024

Waterproofing market (Rs billion)

August 07, 2020 11

Sto

ck Id

ea


Home & Living market in India (Rs. billion)

Furniture constitutes bulk of H&L market (%)



Indian furniture market is expected to grow at CAGR of 10-12% over FY2019-24

The Home & Living (H&L) market in India is expected to grow at a CAGR of 10-12% to reach ~Rs. 3,750 billion

by FY2024 from Rs. 2,100billion in FY2019. Furniture constitutes bulk of home & living market constituting

60% of the overall H&L market in India. Key categories such as beds, wardrobes, sofas etc are dominated

by unorganised and unbranded players while branded players constitute just ~12% of H&L market in India.

Government has proposed to introduce production linked incentive scheme for furniture industry to boost the

domestic production and reduce imports of furniture in near future. Rise in furniture production in India would

result in consequential demand for allied products such as adhesives in near to medium term.

1430

2100

3750

0

500

1000

1500

2000

2500

3000

3500

4000

FY17 FY19 FY24

Furniture, 60

Home furnishing , 40

August 07, 2020 12

Sto

ck Id

ea


Furniture is highly unorganized market in India (%)



1. Population growth

2. Nuclearisation in families

3. Urbanisation & increase in disposable income

4. Increase in institutional infrastructure

* Housing segment

* Hospitality segment

* Healthcare segment

Demand

Drivers

Usage of adhesives in other industries

Growing Packaging Industry to provide huge scope for adhesive consumption: Increase in use of e-Commerce channels and online food deliveries have been driving growth of the packaging industry,

which is another large consumer of adhesives and sealants. As of 2018, per capita packaging consumption

of India is significantly low at 8.7 kg, compared to countries, such as Taiwan and Germany, where it

was 19 kg and 42 kg, respectively, thereby making a huge space for the packaging industry to grow, in

turn boosting adhesives and sealants market growth rate in the packaging sector. Growing demand for

flexible packaging in the food & beverages sector that offers higher shelf life as compared to traditional

packaging is likely to result in increased demand for adhesives in the packaging industry.

Organised, 15

Unorganised, 85

August 07, 2020 13

Sto

ck Id

ea


India’s ecommerce industry to grow @CAGR of 41% over CY2016-20


Usage of adhesives in various other industries: Footwear manufacturing involves transformation and assembly of various components made up of several materials where different adhesives play a key

role, in the absence of which, the shoe would lack shape and structure. India is the second largest

footwear producer and exports only 10% of footwear produced. There is huge scope as India is still an

underpenetrated market with a per capita consumption of only ~1.66 pairs per annum against a global

average of 3 pair and developed countries average 6-7 pair p.a. Adhesives are used to assemble metal,

glass, plastics, rubber, and a variety of other materials during the manufacture of automobiles. This lowers

a car’s weight, improving fuel efficiency along with reducing the likelihood of corrosion. Adhesive joints

can show higher strength and stress dispersion than other attachment methods in automobiles.

30

120

0

20

40

60

80

100

120

140

2016 2020

$ bl

iion

August 07, 2020 14

Sto

ck Id

ea


Why we like Pidilite - Leadership positioning with top of mind brands and sturdy balance sheet

With a portfolio of renowned brands (Fevicol & Dr.Fixit), Pidilite has strong recognition in the domestic adhesives and construction chemical market in India. It has market share of ~70% in adhesives & sealants. Increasing demand for adhesives and construction chemicals, sustained launch of innovative products and deep foray in the tier-3 and rural markets would help Pidilite to achieve sustainable revenue growth in post pandemic era. Strong cash flows, a sturdy balance sheet and good dividend payout make it a better play in the building material space.

Strong competitive moat and near-monopoly in adhesives and sealants: Pidilite is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India. Fevicol,

a legacy brand, is a generic name in the adhesive category while Dr.Fixit has strong brand recognition in

the construction chemicals industry in India. Currently, flagship brands such as Fevicol and M-Seal have

a market share of ~70% each in the domestic market. Pidilite has transitioned its target markets from

industrial users to intermediaries and to consumers through effective communication, which has helped

the company gain a strong imprint in customers’ minds. Not only did the company create a strong brand

equity but also a robust feedback loop from the influencers to continuously refine its products (in the

form of product innovations) and processes in order to deliver consistently strong results. For widening

its presence across geographies, company has acquired companies and established manufacturing

facilities in international as well as domestic markets.

Furniture is highly unorganized market in India


• 57 years old brand, carpenters favourite• No.3 most trusted brand in household care• 70% market share in the adhesives space

•Best in class waterproofing solutions•98% top of mind awarness

•Market leader with 60% market share

•Sealant with 4 applications – sealing, joining, fixing & building

•Market leader with 70% market share

•One drop instant adhesive; fixes in 5 seconds•Available in 3.6million outlets

August 07, 2020 15

Sto

ck Id

ea


Pidilite has a strong product portfolio: Pidilite’s product portfolio is categorised into two key segments: 1) consumer and bazaar (C&B) products such as adhesives and sealants, construction/paint chemicals and

art/craft materials and 2) business to business (B2B) products which include industrial resins, construction

chemicals, industrial adhesives and pigment and preparations. The C&B products constitute ~80% of the

total revenue with adhesives and sealants contributing the highest at 52.6%. Products such as Fevicol and

Dr. Fixit have 98% top of the mind awareness among consumers. Consistent innovation of new products or

variants has helped the company to fill in the gaps in its product portfolio and also has further strengthened

its presence in the adhesive industry. The company has launched products such as Steelgrip, a self-

adhesive PVC electrical insulation tape, Fevicol Exee spray for convenience and Fevicreate Kits to help

foster creativity through crafting in FY2019. Pidilite has launched various innovative and regional media

campaigns/communications for Fevicol and other key products. The company is also exploring untapped

potential in the tiling and stone solutions market (invested around Rs. 80 crore in Tenax India Stone

Products).

Categories under C&B products (%)

Categories under B2B products (%)



Adhesives & Sealants, 52.6%

Construction & Paint Chemicals, 19.2%

Art &Craft materials, 8.1%

Industrial Resins & Construction Chemicals,

6.4%

Industrial Adhesives, 6.1%

Pigment & Preparations, 6.2%

August 07, 2020 16

Sto

ck Id

ea


Most products under the Fevicol brand fall under the economy to mid-premium segment


Key products by Pidilite

Source: Company

§Fevicol Ezee Spray

Price range (Rs./litre): 800-1200

§Fevicol SR §Fevicol HeatX§Fevicol Probond §Fevicol Hardener C


§Fevicol SH §Fevicol Marine §Fevicol Hi-Per §Fevicol SpeedX §Fevicol Floorfix §Fevicol Foam fix

§Fevicol MR §Fevicol Fast Tack


Premium/mid-premium range

Economy range

August 07, 2020 17

Sto

ck Id

ea


Waterproofing portfolio of Pidilite

Products Description UsagePrice per litre/kg

Dr. Fixit Pidiproof LW+ Super Anti-corrosion waterproofing

Roof

155

Dr. Fixit Pldicrete URP SBR latex for waterproofing and repairs 215

Dr. Fixit Roofseal Flex Acrylic polymer waterproofing coating 350

Dr. Fixit Newcoat UV resistant waterproofing 145

Dr. Fixit Krystalline Wet surface waterproofing without protective plaster requirement 370

Dr. Fixit Powercrete Hard wearing waterproofing for industrial and commercial buildings 110

Dr. Fixit Repellin WR Ready to use, brushable or spray applied waterproofing 175

Dr. Fixit Crack X Shrinkfree For fiding cracks and better wall finishInternal wall

430

Dr. Fixit Dampguard Classic Eco-friendly coating that is safe for potable water contact 400

Dr. Fixit Raincoat Classic External wall waterproofingExternal wall

450

Dr. Fixit Primeseal Primer waterproofing 280

Dr. Fixit Pidifin 2K Elastomeric coating that resists water ingressBathroom

160

Dr. Fixit Tile Grout Easy to use product to fill joints 90

Dr. Fixit Bitufix To resist the attack of salts like chlorides & sulphates Below-ground 100


Pidilite has a vast range of waterproofing products with multiple uses at attractive price points.

Waterproofing portfolio of peers

Products CategoryPrice per litre/kg

Products CategoryPrice per litre/kg

Pidilite Asian Paints

Dr. Fixit Tile Grout

Economy

90 White Multipurpose Tile AdhesiveEconomy

50

Dr. Fixit Bitufix 100 SmartCare Damp Sheath Interior 250

Dr. Fixit Krystalline 110 SmartCare Damp Proof

Mid-premium

255

Dr. Fixit Roofseal Flex 145 Damp Proof Advance 270

Dr. Fixit Waterproof LW+ 155 SmartCare Textured Crack Filler 285

Dr. Fixit Pidifin 2K 160 SmartCare Crackshield 300

Dr. Fixit Powercrete 175 SmartCare Crack Seal 350

Dr. Fixit Pidiproof LW+ Super 215 SmartCare Tile Grout 380

Dr. Fixit Primeseal

Mid-premium

280 SmartCare Epoxy TriBlock

Premium

500

Dr. Fixit Repellin WR 340 SmartCare Instant Leak Stop 600

Dr. Fixit Pldicrete URP 350 SmartCare Roof Tapes 700

Dr. Fixit Newcoat 370 Damp Sheath Exterior 725

Dr. Fixit Dampguard Classic 400

Dr. Fixit Crack X Shrinkfree 430

Dr. Fixit Raincoat Classic 450


Pidilite has a wide range of offerings in the premium, mid-premium as well as economy categories in the

waterproofing portfolio as compared to its peers such as Asian Paints that have limited offerings in the

waterproofing segment.

August 07, 2020 18

Sto

ck Id

ea


Pre-COVID-19 growth at 8% CAGR; FY2021 will be a one off year; significant recovery expected in FY2022/23: Pidilite offers products like adhesives, sealants, organic pigments and more whose growth rate is driven by demand for construction, repair and maintenance activities. Pidilite reported a consistent

revenue growth with revenue CAGR of 8% over FY2016-20 with good growth in all years except FY2018,

which was affected by GST implementation and FY2020, which was affected by a slowdown and the

COVID-19 pandemic in the last few days of Q4FY2020. Lockdown affected the performance in Q1FY2021.

April was a complete washout, while a partial recovery was seen in May with 50% of outlets opening.

June saw significant recovery with 80% of outlets opening post unlocking in most part of the country.

Construction chemical witnessed double digit revenue growth in the month of June and July with strong

recovery in tier-3 and rural markets. With threat of virus receding in major markets such as New Delhi and

Mumbai and construction activities slowly gaining momentum we expect Q2FY2021 to be much better

than Q1 and consequently q-o-q consistent improvement is visible. Though revenues are expected to

remain low in FY2021, we expect a strong recovery in FY2022/23 as government infrastructure activities

will resume, real estate development will get into reset mode and home improvement activities will gain

pace. Launching of new products in the core categories, entry into new categories, improving penetration

of some of the new product launches, expanding the distribution reach and growing in the international

markets are some of the key growth levers for Pidilite in the near to medium term. Further, with global

customers likely to shift from China to other South Asian countries (such as Vietnam, Indonesia and India),

demand for industrial products might increase in the near to medium term.

Consistent growth in key business vertical prior Covid-19 (Rs. crore)

Source: Company, Sharekhan Research*FY2020 revenues for Consumer Bazaar business is lower due to restructure of segment composition

4023.1

4805.45132.3 5274.1

6050 5880.9

869.2 946 963.4 994.8 1065.61476.7

0

1000

2000

3000

4000

5000

6000

7000

FY2015 FY2016 FY2017 FY2018 FY2019 FY2020

Consumer Bazaar Industrial products

August 07, 2020 19

Sto

ck Id

ea


Business is on recovery mode (%)

Correction in VAM prices

Source:Company, Sharekhan Research


Correction in input prices to drive margins in the near term: Vinyl Acetate Monomer (VAM), a crude oil derivative, is one of the key inputs for Pidilite (constituting 35-40% of Pidilite’s overall raw material

cost along with packaging material). With a fall in crude oil prices, VAM prices have seen consistent fall

and in Q1FY2021 it stood at average $825 per tonne as against $965 per tonne in Q1FY2020 ($850 per

tonne in Q4FY2020). This led to a significant expansion in gross margins by 264 bps y-o-y in FY2020.

The gross margin expansion sustained and it improved by 209 bps in Q1FY2021. VAM prices have fallen

further to $650-700 per tonne in the recent times. The same is not expected to sustain at current levels

in the near term. However, y-o-y, they are expected to remain stable. The management expects larger

benefit of significant improvement in the VAM prices would be seen in H2FY2021. This should also help

the company to post higher margins at operating level with consolidated OPM expected to stand at 22.6%

in FY2021 (as against 21.6% in FY2020).

0

50

80

0

20

40

60

80

100

April May June

Recovery in Q1

1325 1325 1300

1100980

901 875 850 825

12001200

1000 950

875 890 850 845700

0

200

400

600

800

1000

1200

1400

Q1F

Y19

Q2F

Y19

Q3F

Y19

Q4F

Y19

Q1F

Y20

Q2F

Y20

Q3F

Y20

Q4F

Y20

Q1F

Y21

$ pe

r ton

ne

consumption price spot price

August 07, 2020 20

Sto

ck Id

ea


Strong manufacturing capacity and robust distribution reach: Pidilite operates 26 plants in India along with 25 co-manufacturers. Nearly 12 more plants are expected to be added by 2022 to create a seamless

manufacturing and supply chain network across the country. The company also has manufacturing plants

in the US, Thailand, Dubai, Singapore, Bangladesh, Sri Lanka, Brazil and Egypt with a specific focus on

growing business in Bangladesh, Sri Lanka and Egypt. It has 30 warehouses in India along with nine

regional offices and two R&D centres. It sells more than 5,200 SKUs of over 500 products through over

5,000 distributors. Pidilite has a strong distribution reach across India. The company sells its products

through 13 different channels like Mom & Pop grocery shops, paan shops, stationary shops, hardware

shops, automotive spare part shops and wood marts. Fevikwik is sold through four million outlets, and

the company has presence across 3 lakh wholesalers. It is the second-most penetrated company in paint

shops after Asian Paints and is available at 40,000 dealers out of the 60,000 outlets universe. The ‘Pidilite

ki Duniya’ initiative is launched to access deep rural markets and targets opening merchandised outlets

in towns with smaller population. Out of 0.6 million towns covered under the initiative, Pidilite has a direct

reach of 23,000. Moreover, Pidilite is the only company in India which has a strong influence across users:

§ B2C business: Stationery (including hobby ideas and Fevicryl) and general purpose adhesives (Fevicol, Fevikwik, Fevistik, etc);

§ B2I business: Most core products – Fevicol, M-seal, Steelgrip, etc. – are dependent on intermediaries.

§ B2B business: Industrial and specialty chemicals division is largely a B2B business wherein clients are real-estate developers or manufacturers of products such as footwear and other industries.

Thus, a strong distribution reach not only helps the company to have inventory days in control, it also

helps its innovative products to reach the market with minimum incremental cost.

Inorganic initiatives and expansion of international business to support growth going ahead: Pidilite had acquired two companies in the recent past namely Percept Waterproofing Services Limited (Percept)

& Nina Waterproofing Systems Private Limited (Nina), both catering to the waterproofing segment and

now which is merged to form Nina Percept Private Ltd, to expand in the high growth waterproofing market.

The current penetration level of waterproofing products (~15% of overall construction chemical market)

Gross margins expanded significantly in last three quarters


-360

-618

-179

198

340

655

507

209

-800

-600

-400

-200

0

200

400

600

800

Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21

GPM

exp

ansi

on (b

ps)

August 07, 2020 21

Sto

ck Id

ea


Performance of international subsidiaries


is low as compared to other countries such as China and USA, largely on account of lack of awareness

about the product and its applications. This provides immense opportunity for companies like Pidilite to

scale up the business by improving overall penetration of the category. Further, acquisitions such as CIPY

Polyurethanes (floor painting in India) and ICA Pidilite provide levers in tapping new segments. In terms of

international business, Pidilite is targeting markets with high headroom for growth. The company’s major

international subsidiaries are in the US, Brazil, Thailand, Egypt, Dubai and Bangladesh. Pidilite is currently

the market leader in Bangladesh and the company recently opened its second factory in the country. The

company has also set up a new plant in Sri Lanka. Pidilite’s US subsidiary plans to increase its focus on

retail and e-commerce whereas various initiatives are being taken to improve sales and margins in Brazil.

The company’s specific focus would be on growing business in Bangladesh, Sri Lanka and Egypt.

105

82

99

63

35 32

101

114

88

119

61

4235

110

0

20

40

60

80

100

120

North America South America Bangladesh Thailand Sri Lanka Egypt UAE

Rs. i

n cr

ore

FY2019 FY2020

Performance of domestic subsidiaries


305

168155

64

268

186

121

61

0

50

100

150

200

250

300

350

Nina Percept ICA Pidilite Cipy Polyurethane Others

Rs. i

n cr

ore

FY2019 FY2020

August 07, 2020 22

Sto

ck Id

ea


Decline in working capital days


Investments made by Pidilite to enhance innovation and understand consumer trends: In Q4FY2020, Pidilite, through its subsidiary Madhumala Ventures Private Limited invested Rs. 71.5 crore in Trendsutra

Platform Services Private Limited (Pepperfry - online furniture marketplace) to understand consumer trends

for innovation purposes and to increase use of company’s products and services. Moreover, the company

had also entered into a definitive agreement with Tenax SPA Italy for acquiring 70% of the share capital

of Tenax India Stone Products Private Limited for cash consideration of Rs. 80 crore as Tenax Italy is a

leading manufacturer of adhesives, coatings, surface treatment chemicals and abrasives for the marble,

granite and stone industry.

Strong cash flows, consistent dividend payout: With a stable working capital cycle which improved to 34 days in FY2020 from 43 days in FY2017, Pidilite’s cumulative free cash flows (FCF) stands at Rs. 2,125

crore over FY2018-20. This will take care of any major cost element during the lockdown in FY2021. Thus,

we expect the company to remain debt-free with minimum stress on the balance sheet. The liquidity

position remains strong with operating cash flows improving from Rs. 910.3 crore in FY2019 to Rs. 1,374.2

crore in FY2020. The company has been a consistent dividend payer with an average dividend payout

standing at 37.6% during FY2017-20. Pidilite’s return profile is also strong with a return-on-equity (RoE) and

return on capital employed (RoCE) in the upwards of 20% at 27.4% and 22.7%, respectively, in FY2020.

38

43

37

44

34

30

35

40

45

50


Days

Working Capital Days

August 07, 2020 23

Sto

ck Id

ea


Strong return ratios


Production scaled-up; gradual recovery witnessed post easing of lockdown: Pidilite’s operations were affected as a result of nationwide lockdown in the last 10 days of March 2020 amid COVID-19 pandemic.

Post the relaxation of the lockdown, operations at factories and warehouses have started in a phased

manner with all requisite safety protocols. Most facilities are capable to function at 75-80% capacity

utilisation. However, production is expected to increase with a recovery in demand. April 2020 was a

complete washout while gradual recovery was witnessed in May and June with the relaxation of lockdown

norms. Rural and semi-urban areas (30-35% of portfolio) are recovering faster than urban geographies.

Moreover, recovery in the South and East is faster than North and West. Products used for in-house/do-it-

yourself (DIY) consumption such as Fevikwik, M-seal, and Fevicol are recovering faster. Further, demand

for waterproofing products has also increased with the onset of monsoons. However, demand from new

construction will take a while to recover. The company is in a comfortable position to meet its near-term

obligations.

30.6

28.327.4

24.5

27.4

28.2

25.5 25.0

22.6 22.7

15

20

25

30

35


(%)

RoE (%) RoCE (%)

August 07, 2020 24

Sto

ck Id

ea



Revenue growth of key categories


GPM to expand due to lower input costs

Highest contribution to revenue by C&B products


Financials in charts

Revenue & PAT CAGR of 8% & 12% over FY16-20


Cumulative Free cash flows stood at Rs. 2,125 crore over FY18-20


Dividend payout ratio maintained


5,3616,062 6,219

7,078 7,294

744 863 966 9461,177

0

2,000

4,000

6,000

8,000


Rs. i

n cr

ore

Revenue Adjusted Profit

21.9 20.8 21.6 19.3 21.6 22.623.4

51.8 49.1 51.3 49.353.4 56.0 55.8

0

10

20

30

40

50

60

FY16

FY17

FY18

FY19

FY20

FY21

E

FY22

E

(%)

OPM GPM

14.0

19.0

7.0

3.0

15.0

7.09.0

2.03.0

7.0

0

5

10

15

20

FY15

FY16

FY17

FY18

FY19

(%)

Consumer & Bazaar Products Industrial Products

Consumer & Bazaar (C&B)

Products, 79.9%

Business to Business

(B2B) Products,

18.7%

Others, 1.4%

614 622 640 658

828

0

200

400

600

800

1,000


Rs. i

n cr

ore

Free Cash Flows

34.4 34.0

38.042.0

36.4

20

30

40

50


(%)

Dividend Payout Ratio (%)

August 07, 2020 25

Sto

ck Id

ea


Q1FY2021 was wash-out quarter; recovery since June: Pidilite’s consolidated revenue declined by 56.5% y-o-y to Rs. 877.8 crore as sales volumes and mix declined by 58.3% (largely in-line with our and the street expectation of 60%). Volumes and mix of the C&B and IP segments declined by 58.6% and 53.7%, respectively. C&B segment has seen faster recovery especially in rural areas and semi-urban towns. Gross margins improved by 209 bps mainly on account of lower raw material prices (largely of VAM). However, lower operating leverage led to sharp decline in OPM to 7.6% (slightly ahead of our and street expectation of 6%). Standalone (~87% of overall business) OPM stood at 12.4%. Consolidated operating profit declined by 85% y-o-y to Rs. 66.4 crore. A considerably lower other income and higher depreciation charges resulted in ~93% decline in profit before tax. Adjusted PAT was down by 94.6% y-o-y to Rs. 15.8 crore in Q1FY2021 as against Rs. 294.4 crore in Q1FY2020.

Key conference call highlights

Green shoots visible:

§ Gradual store opening: April was a wash-out month as no stores were open during the month. Around 50% of stores were opened in the month of May resulting partial recovery in the performance while 80% of stores were opened in June. In July about 90% outlets have opened.

§ Emerging India saw faster recovery: Emerging India, including rural markets and tier 3 and 4 towns (constitute ~30% of Pidilite domestic revenues) saw faster recovery and grew in strong double digits. The construction activities have resumed in rural markets and tier 3 towns which led to increase in demand for construction chemicals.

§ Construction chemical and DIY categories revived: Retail construction chemical and Do-it-yourself (DIY) categories witnessed strong double digit growth in the month of June on account strong demand from emerging markets. The double digit growth sustained in the month of June. Do-it-yourself (including adhesives and sealants) saw pick-up in demand post with gradual unlocking of economy.

§ Capacity utilisation has improved to 75-80%: Pidilite’s all plants are operating at capacity utilization of 75-80%. The company is keeping lesser units with the dealers, which as per its historical policy. Hence there is no case of higher inventory piling up with the dealers/distributors.

What is key for revival in growth in short span?

§Recovery northern and western regions (50% of overall domestic revenues) which are badly affected by virus spread.

§ Significant resumption of construction, real estate and development activities in key metros (such as Mumbai and Delhi) and tier 2 towns (such as Ahmedabad and Pune), which constitutes around 70% of Pidilite’s overall revenues.

§Strong recovery into B2B products; Subsidiaries such as Nina and Percept focus on large construction waterproofing segment.

§On the international front, recovery in some of the key market such as SAARC and MENA region.

Key focus areas of the company to drive growth:

§Invest a lot in digital connect to improve awareness about its various products amongst consumer.

§Educate contractors/end-users the importance of hygiene and sanitisation to improve business.

§Continuously adding new products under various categories to remain competitive in the market.

§Continue to invest behind supply chain to add-on to the efficiencies.

§No major capital expenditure in the current fiscal; large focus will be on optimum capacity utilisation to drive growth in the near term.

August 07, 2020 26

Sto

ck Id

ea


Result Table (Consolidated) Rs cr

Particulars Q1FY21 Q1FY20 y-o-y (%) Q4FY20 q-o-q (%)

Total Revenue 877.8 2016.6 -56.5 1544.7 -43.2

Raw Material Cost 408.5 980.5 -58.3 689.5 -40.8

Employee Cost 215.7 243.6 -11.5 213.1 1.2

Other Expenses 187.3 348.8 -46.3 341.2 -45.1

Total Operating Cost 811.5 1572.9 -48.4 1243.8 -34.8

Operating Profit 66.4 443.7 -85.0 300.9 -77.9

Other Income 20.0 39.9 -49.8 14.0 43.3

Interest & Other Financial Cost 9.1 7.3 23.6 9.8 -7.4

Depreciation 46.1 37.7 22.2 50.1 -8.0

Profit Before Tax 31.2 438.5 -92.9 255.0 -87.8

Tax Expense 15.9 144.4 -89.0 73.8 -78.5

Adjusted PAT before MI 15.4 294.1 -94.8 181.1 -91.5

Minority Interest (MI) 0.5 0.3 62.1 0.1 -

Adjusted PAT after MI 15.8 294.4 -94.6 181.2 -91.3

Exceptional Items 0.0 0.0 - 24.7 -

Reported PAT 15.8 294.4 -94.6 156.5 -89.9

Adj. EPS (Rs) 0.3 5.8 -94.6 3.6 -91.3

Margins bps bps

GPM (%) 53.5 51.4 209 55.4 -190

OPM (%) 7.6 22.0 - 19.5 -

Source: Company; Sharekhan Research

Result Table (Standalone) Rs cr


Total Revenue 772.4 1778.9 -56.6 1318.6 -41.4

Operating Profit 95.4 418.0 -77.2 285.2 -66.5

Profit Before Tax 76.9 426.2 -81.9 262.3 -70.7

Adjusted PAT before MI 56.7 287.6 -80.3 187.4 -69.7

Exceptional Items 0.0 0.0 - 27.8 -

Reported PAT 56.7 287.6 -80.3 159.6 -64.5

Adj. EPS (Rs) 1.1 5.7 -80.3 3.7 -69.7

Margins bps bps

GPM (%) 54.5 51.6 294 55.9 -141

OPM (%) 12.4 23.5 - 21.6 -


Standalone segmental performance Rs cr


Consumer & Bazaar 702.0 1574.3 -55.4 1124.4 -37.6

Business to Business 188.2 459.2 -59.0 441.1 -57.3

Others 1.8 23.3 -92.2 15.1 -88.0

Total revenue 892.1 2056.9 -56.6 1580.6 -43.6

Consumer & Bazaar 130.5 442.3 -70.5 278.7 -53.2

Business to Business -22.0 65.3 - 73.2 -

Others -3.5 -1.2 - -1.1 -

Total PBIT 105.0 506.4 -79.3 350.9 -70.1


August 07, 2020 27

Sto

ck Id

ea


Business Monopoly, strong portfolio and sturdy balance sheet justifies premium valuation

Pidilite is currently trading at ~51 its FY2022E EPS which is at premium to some of the chemicals and adhesives companies. Strong monopoly with top of mind portfolio of brands, sturdy balance sheet and good dividend payout will continue to keep valuation at premium.

Outlook: Pandemic to affect FY2021, recovery likely in FY2022

Pidilite’s consolidated revenue and PAT grew at a CAGR of 8% and 12%, respectively, over FY2016-20. Fag-

end of Q4FY2020 and Q1FY2021 was affected by lockdown post spread of corona virus in the domestic

market. Gradual opening up of markets (especially in tier-3 and rural markets, etc) led to strong recovery in

June and July. If intensity of virus spread recedes in the coming months significant recovery is anticipated

in the remaining fiscal. Lower input prices would help in posting better margins in the near to medium term.

Strong cash flows and a stable balance sheet would help the company to stay ahead of competition in the

tough times. FY2022 is expected to see strong double-digit revenue growth driven by strong pent-up demand

in the categories.

Valuation

View - Initiate with Buy recommendation and price target of Rs. 1,645: With a strong portfolio of brands, Pidilite has a monopoly in the domestic adhesives market. Opportunities generated through initiatives such

as ‘Make in India’, lower imports of Chinese products, revival in the rural economy and opening up of other

international markets would act as key revenue drivers in the medium term. The stock is currently trading

at 50.8x its FY2022E earnings (discount of ~10% its last three years average multiple). A monopoly in the

adhesives market, strong brand recognition and a sturdy balance sheet justify a premium valuation. However

in an uncertain environment it is prudent to invest in quality stocks with a strong balance sheet and healthy

return profile of over 20%. We initiate our coverage on Pidilite with a Buy recommendation and price target (PT)

of Rs. 1,645 (valuing the stock at 60x its FY2022E earnings).


One-year forward P/E (x) band

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

Mar

-14

Aug-

14

Dec-

14

Apr-

15

Aug-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

Jun-

17

Oct

-17

Feb-

18

Jun-

18

Nov

-18

Mar

-19

Jul-1

9

Nov

-19

Apr-

20

Aug-

2070x

60x

50x

40x

30x

August 07, 2020 28

Sto

ck Id

ea




One-year forward P/BV (x) band

One-year forward EV/EBITDA (x) band

45x

40x

35x

30x

25x

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0

Mar

-14

Aug-

14

Dec-

14

Apr-

15

Aug-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

Jun-

17

Oct

-17

Feb-

18

Jun-

18

Nov

-18

Mar

-19

Jul-1

9

Nov

-19

Apr-

20

Aug-

20

14x

12x

10x

8x

250.0

450.0

650.0

850.0

1050.0

1250.0

1450.0

1650.0

Mar

-14

Aug-

14

Dec-

14

Apr-

15

Aug-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

Jun-

17

Oct

-17

Feb-

18

Jun-

18

Nov

-18

Mar

-19

Jul-1

9

Nov

-19

Apr-

20

Aug-

20

Peer Comparison

ParticularsP/E (x) EV/EBIDTA (x) RoCE (%)

FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E

Asian Paints 62.3 67.0 50.9 38.7 40.3 31.9 22.2 19.1 22.0

Astral Poly Technik 63.9 69.0 45.5 35.8 39.2 27.1 21.4 16.6 22.5

Pidilite Industries 59.4 67.8 50.8 39.9 41.9 32.1 22.7 18.3 20.5

Source: Company, Sharekhan estimates

August 07, 2020 29

Sto

ck Id

ea


Financials

Statement of Profit and Loss Rs cr


Total Revenue 7078.0 7294.5 6676.7 8204.2 9054.1

Raw Material Cost 3586.6 3402.5 2937.7 3630.4 3983.8

Employee Cost 836.7 927.2 927.2 1094.1 1203.5

Other Expenses 1286.5 1388.7 1302.0 1558.8 1720.3

Total Operating Cost 5709.8 5718.5 5166.9 6283.3 6907.6

Operating Profit 1368.2 1576.0 1509.8 1920.9 2146.5

Other Income 146.6 149.4 112.3 177.0 234.6

Interest & Other Financial Cost 26.1 33.6 47.9 42.9 42.9

Depreciation 132.7 169.9 189.7 207.0 226.0

Profit Before Tax 1356.0 1521.9 1384.5 1848.0 2112.3

Tax Expense 413.2 347.7 355.8 474.9 542.9

Adjusted PAT before MI 942.8 1174.2 1028.7 1373.1 1569.4

Minority Interest (MI) 3.6 3.0 3.0 3.0 3.0

Adjusted PAT 946.4 1177.2 1031.7 1376.1 1572.4

Exceptional Items 18.0 55.2 0.0 0.0 0.0

Reported PAT 928.4 1122.1 1031.7 1376.1 1572.4

Source: Company; Sharekhan estimates

Balance Sheet Rs cr


Equity Capital 50.8 50.8 50.8 50.8 50.8

Reserves & Surplus 4097.3 4404.8 5131.6 6177.5 7419.7

Net Worth 4148.1 4455.6 5182.4 6228.3 7470.5

Non-controlling Interest 207.2 215.7 218.7 221.7 224.7

Deferred Tax Liabilities (Net) 109.4 69.3 73.4 77.7 82.3

Total Borrowings 111.1 280.6 280.6 280.6 280.6

Non-Current liabilities 129.9 59.2 62.2 65.3 68.5

Capital Employed 4705.6 5080.4 5817.3 6873.6 8126.6

Net Block 1262.6 1622.7 1733.4 1809.3 1895.3

Capital WIP 242.1 259.3 100.0 100.0 100.0

Goodwill 185.0 184.0 184.0 184.0 184.0

Investment 1547.7 1186.2 1909.5 2634.0 3359.7

Current Assets 2666.4 3270.5 3301.0 3751.8 4333.2

Inventories 934.5 929.5 841.4 1034.0 1141.1

Sundry Debtors 1056.0 1088.5 1006.1 1236.2 1364.3

Cash and Bank Balance 190.4 703.3 836.5 788.0 1047.4

Loans & Advances 128.5 167.5 187.9 211.2 237.7

Other Current Assets 356.9 381.8 429.0 482.4 542.7

Less: Current Liab. & Provisions 1198.2 1442.4 1410.6 1605.5 1745.6

Trade Payables 580.6 621.0 523.2 646.5 709.4

Other Current Liabilities 597.7 799.8 863.7 932.8 1007.5

Provisions 19.8 21.6 23.7 26.1 28.7

Net Current Assets 1468.2 1828.1 1890.4 2146.3 2587.6

Net Assets 4705.6 5080.4 5817.3 6873.6 8126.6


August 07, 2020 30

Sto

ck Id

ea


Key Ratios


Margins (%)

GPM 49.3 53.4 56.0 55.8 56.0

OPM 19.3 21.6 22.6 23.4 23.7

NPM 13.4 16.1 15.5 16.8 17.4

Tax rate 30.5 22.8 25.7 25.7 25.7

As a percentage of revenue (%)

Raw Material Cost 50.7 46.6 44.0 44.3 44.0

Employee Cost 11.8 12.7 13.9 13.3 13.3

Other Expenses 18.2 19.0 19.5 19.0 19.0

Financial ratios

Debt / Equity (x) 0.0 0.1 0.1 0.0 0.0

Inventory days 48 47 46 46 46

Debtor days 54 54 55 55 55

Payable days 59 67 65 65 65

Working capital cycle 44 34 36 36 36

Adjusted EPS (Rs.) 18.6 23.2 20.3 27.1 31.0

Cash EPS (Rs.) 21.2 26.5 24.0 31.2 35.4

Dividend Per Share (Rs.) 6.5 7.0 6.0 6.5 6.5

Dividend Payout Ratio 42.0 36.4 29.5 24.0 21.0

Book Value Per Share (Rs.) 81.7 87.7 102.0 122.6 147.1

RoNW (%) 24.5 27.4 21.4 24.1 23.0

RoCE (%) 22.6 22.7 18.3 20.5 19.6

Valuation ratios

CMP (Rs.) 1377.0 1377.0 1377.0 1377.0 1377.0

P/E (x) 73.9 59.4 67.8 50.8 44.5

Mcap (Rs. crore) 69952 69952 69952 69952 69952

Market cap / Sales (x) 9.9 9.6 10.5 8.5 7.7

Enterprise Value (Rs. crore) 68721 68809 67976 67325 66365

EV / Sales (x) 9.7 9.4 10.2 8.2 7.3

EV / EBIDTA (x) 45.4 39.9 41.9 32.1 27.9

Price / Book value (BV) 16.9 15.7 13.5 11.2 9.4

Dividend Yield (%) 0.5 0.5 0.4 0.5 0.5

Growth ratios (%)

Revenue 13.8 3.1 -8.5 22.9 10.4

Operating profit 2.0 15.2 -4.2 27.2 11.7

Profit before tax 0.1 12.2 -9.0 33.5 14.3

Adjusted PAT -2.0 24.4 -12.4 33.4 14.3

EPS -2.1 24.4 -12.4 33.4 14.3


Cash Flow Statement Rs cr


Operating cash flow before working capital changes 1079.2 1347.2 1221.4 1583.1 1798.4

Changes in working capital -150.9 82.2 74.0 -301.4 -178.5

Cash flow from operating activities 928.3 1429.3 1295.4 1281.7 1619.9

Cash flow from investing activities -559.2 -187.0 -864.4 -1007.3 -1037.7

Cash flow from financing activities -342.2 -729.5 -297.7 -322.9 -322.7

Net change in cash and cash equivalents 26.8 512.8 133.3 -48.5 259.5

Opening cash balance 163.6 190.4 703.3 836.5 788.0

Closing cash balance 190.4 703.3 836.5 788.0 1047.4

Free Cash Flows 657.7 827.9 1154.3 998.9 1307.9

Free Cash Flow to Equity (FCFE) 646.2 997.5 1154.3 998.9 1307.9


August 07, 2020 31

Sto

ck Id

ea


About company

Pidilite is a leading manufacturer of adhesives and sealants, construction chemicals, crafts products, DIY (Do-It-Yourself) products and polymer emulsions in India. Pidilite has divided its business into two segments; Consumer & Bazaar Product segment (C&B; includes adhesives, sealants, art and craft material and others, construction and paint chemicals) and Industrial Product segment (IP; includes industrial adhesives, synthetic resins, organic pigments, pigment preparations and surfactants). C&B accounts for ~84% of Pidilite’s standalone revenue while balance is contributed by IP segment. The company’s brand name Fevicol has become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in the country. Some of the other major brands are M-Seal, Fevikwik, Fevistik, Roff, Dr. Fixitand Fevicryl.

Investment theme

Pidilite has monopoly in the domestic adhesive market on account of its strong product portfolio. Over the years it has transformed itself from B2B to B2C players by consistently introducing consumer centric product in the domestic market. Though FY2021 will be affect the by the pandemic situation, its long term growth prospects are intact as the company is continuously launching new products under core brands, entering into new categories, expanding into neighbouring countries and enhancing the domestic distribution reach. Strong cash flows, lean balance sheet and decent payout makes it safest better in the volatile market environment. Key Risks

Sustenance of pandemic situation: If global pandemic situation takes time to get under control, the recovery in the business environment will take more time, which will continue affect the financial performance of Pidilite in the near term.

Increase in competition: Any increase in competition from established players would act as a key risk to the earnings estimates in the near to medium.

Additional Data

Key management personnel

Madhukar Parekh Chairman

Bharat Tilakraj Puri Managing Director

Apurva Narendrakumar Parekh Executive Director

Pradip Menon Chief Financial Officer

Puneet Bansal Company SecretarySource: Company website

Top 10 shareholders

Sr. No. Holder Name Holding (%)

1 Genesis Indian Investment Co Ltd 5.0

2 Life Insurance Corporation Of India 3.4

3 Axis Asset Management Co Ltd 2.5

4 Axis Equity Advantage Fund 2.3

5 Vanguard Group 0.9

6 Blackrock Inc 0.7

7 Norges Bank 0.7

8 UTI Asset Management Company 0.4

9 Capital Group Cos Inc 0.3

10 Principal Financial Group Inc 0.3Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

August 07, 2020 32

Sto

ck Id

ea


Understanding the Sharekhan 3R Matrix

Right Sector

Positive Strong industry fundamentals (favorable demand-supply scenario, consistent

industry growth), increasing investments, higher entry barrier, and favorable

government policies

Neutral Stagnancy in the industry growth due to macro factors and lower incremental

investments by Government/private companies

Negative Unable to recover from low in the stable economic environment, adverse

government policies affecting the business fundamentals and global challenges

(currency headwinds and unfavorable policies implemented by global industrial

institutions) and any significant increase in commodity prices affecting profitability.

Right Quality

Positive Sector leader, Strong management bandwidth, Strong financial track-record,

Healthy Balance sheet/cash flows, differentiated product/service portfolio and

Good corporate governance.

Neutral Macro slowdown affecting near term growth profile, Untoward events such as

natural calamities resulting in near term uncertainty, Company specific events

such as factory shutdown, lack of positive triggers/events in near term, raw

material price movement turning unfavourable

Negative Weakening growth trend led by led by external/internal factors, reshuffling of

key management personal, questionable corporate governance, high commodity

prices/weak realisation environment resulting in margin pressure and detoriating

balance sheet

Right Valuation

Positive Strong earnings growth expectation and improving return ratios but valuations

are trading at discount to industry leaders/historical average multiples, Expansion

in valuation multiple due to expected outperformance amongst its peers and

Industry up-cycle with conducive business environment.

Neutral Trading at par to historical valuations and having limited scope of expansion in

valuation multiples.

Negative Trading at premium valuations but earnings outlook are weak; Emergence of

roadblocks such as corporate governance issue, adverse government policies

and bleak global macro environment etc warranting for lower than historical

valuation multiple.Source: Sharekhan Research

Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.

The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of the company at the end of the month immediately preceding the date of publication of the research report nor have any material conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve months in connection with the research report.

Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.

Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: [email protected];

For any queries or grievances kindly email [email protected] or contact: [email protected]

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst: INH000006183;

Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Know more about our products and services

For Private Circulation only

Documents

Pidilite Industries Limitedimages.moneycontrol.com/static-mcnews/2020/08/...Investment ka mazboot jod Powered by Sharekhan’s 3R Research Philosophy Pidilite Industries Limited. August