Pidilite Industries (PIDI IN)

Rating: HOLD | CMP: Rs1,522 | TP: Rs1,447

January 30, 2020 Demand Tepid, Input costs drive margins

Q3FY20 Result Update Quick Pointers

☑ Change in Estimates | ☑ Target |  Reco . 2Q Consumer & bazaar volumes up 2%, Demand environment remains weak

Change in Estimates . VAM prices at USD850-900/ton down from USD 1300/ton YoY. VAM prices Current Previous expected to remain benign. FY21E FY22E FY21E FY22E Rating HOLD HOLD Target Price 1,447 1,311 We retain our hold rating on the stock given that 1) demand conditions remain Sales (Rs. m) 72,532 81,588 72,938 82,049 subdued with no visibility of green shoots 2) no recovery in construction % Chng. (0.6) (0.6) EBITDA (Rs. m) 17,223 19,534 17,319 19,644 activity as tight liquidity conditions impact sales and 3) limited scope to % Chng. (0.6) (0.6) increase margins from current high levels. Pidilite continues to invest behind EPS (Rs.) 26.8 30.4 26.2 30.0 % Chng. 2.2 1.2 categories of future like 1) waterproofing and construction chemicals 2) Wood coatings 3) Industrial floorings and 4) has acquired stake in Home Vista Key Financials - Standalone Décor. While Benign VAM prices along with steady USD/INR will continue to Y/e Mar FY19 FY20E FY21E FY22E aid margins in the coming quarters as well, significant margin expansion from Sales (Rs. m) 60,947 64,828 72,532 81,588 current levels looks unlikely. We have increased our FY20-22 estimates by 1.3 EBITDA (Rs. m) 12,919 15,009 17,223 19,534 Margin (%) 21.2 23.2 23.7 23.9 -2.8% on higher margins and estimate 16.5% PAT CAGR over FY19-22. We PAT (Rs. m) 9,794 12,016 13,591 15,443 value the stock at 45x FY22 EPS and arrive at SOTP based target price of EPS (Rs.) 19.3 23.7 26.8 30.4 Gr. (%) 2.5 22.7 13.1 13.6 Rs1447 (Rs1311 earlier). Retain HOLD. DPS (Rs.) 6.0 6.5 8.2 9.6 Yield (%) 0.4 0.4 0.5 0.6 Domestic volumes up only 3%: Net sales increased 4.7% to Rs 16.6bn, volumes RoE (%) 25.3 26.2 25.1 24.4 RoCE (%) 30.8 30.1 29.3 28.4 grew by 3% led by 2% growth in consumer bazaar and13% in Industrial volume. EV/Sales (x) 12.5 11.7 10.4 9.2 Gross margins at 54% increased 627bps YoY and 30bps QoQ on benign input cost. EV/EBITDA (x) 58.9 50.4 43.7 38.3 PE (x) 78.9 64.3 56.9 50.1 EBIDTA increased 31.8% to Rs 4.29bn. Margins expanded 530bps to 24% on P/BV (x) 18.5 15.5 13.2 11.4 13.8% increase in employee cost and 5% increase in other expenses. Adj. PAT increased 47% to Rs3.3bn as other income was up 26% and lower tax rate of

Key Data PIDI.BO | PIDI IN 23.8%. 52-W High / Low Rs.1,545 / Rs.1,046 Sensex / Nifty 40,914 / 12,036 Market Cap Rs.773bn/ $ 10,815m Consumer and Bazaar EBIT increased 25.4% to Rs4.52bn as sales increased by Shares Outstanding 508m 4% on 2% decline in Volume and mix. Industrial Products sales increased 10.5%, 3M Avg. Daily Value Rs.1640.4m and EBIT grew by 52% on a 13% growth in volume and mix. Subsidiaries: Imputed sales increased by 1.8% to Rs2.35bn. EBIDTA shot up 211% to Rs 338mn on Shareholding Pattern (%) 860bps expansion in margin. Promoter’s 69.98 Foreign 11.25 Domestic Institution 8.21 Concall Takeaways: 1) Demand conditions continue to remain subdued, however Public & Others 10.56 Promoter Pledge (Rs bn) - worst is behind in many parts of business 2) PIDI has taken price reduction in few categories to drive growth and will continue with pricing action going forward as well Stock Performance (%) to drive growth 3) VAM prices have fallen to $850-$900 levels from $1300 PY and 1M 6M 12M are expected to remain benign going forward 4) Rural growth continues to be more Absolute 8.2 23.9 37.1 Relative 9.9 13.2 19.3 than urban growth 5) Real estate slowdown continues with no signs of recovery visible 6) NINA Percept continue face pressure due to slowdown in construction

activity 7) Ad spends will remain around 3.5% - 4% 8) Premium segment contributes Amnish Aggarwal [email protected] | 91-22-66322233 65% of adhesives market where it is gaining market share 9) tax rate for full year Raj Mehta will be at 23%. 10) ICA Pidilite remains under pressure with no recovery going [email protected] | 91-22-66322381 forward.

January 30, 2020 1 Pidilite Industries

Revenue up 4.7%, EBITDA margins expand 530 bps; Adj. PAT up 47% on lower tax rates Y/e March Q3FY20 Q3FY19 YoY gr. (%) Q2FY20 9MFY20 9MFY19 YoY gr. (%) Net Revenue 16,634 15,892 4.7 15,717 50,142 47,155 6.3 Gross Profit 8,976 7,580 18.4 8,441 26,591 23,231 14.5 Margin % 54.0 47.7 53.7 53.0 49.3 Other Expenditure 4,682 4,321 8.4 4,930 14,607 12,931 13.0 EBITDA 4,294 3,259 31.8 3,510 11,984 10,300 16.3 Margin % 25.8 20.5 22.3 23.9 21.8 Depreciation 318 234 35.6 303 901 700 28.7 Interest 34 16 108.6 36 97 53 83.4 Other Income 391 309 26.4 572 1,353 1,390 (2.6) PBT 4,334 3,318 30.6 3,743 12,339 10,937 12.8 Tax 1,030 1,071 (3.8) 280 2,696 3,574 (24.6) Tax rate % 23.8 32.3 7.5 21.9 32.7 Adj PAT 3,304 2,247 47.0 3,463 9,643 7,362 31.0 Source: Company, PL

C&B volumes and realisations inch up 2% Current VAM prices down 17.7% YoY

Volume Gr. Realisation Gr. 1400 25.0 1300

20.0 23.0 1200 1163 21.0 15.0 1100 1053 1000 10.0 13.4 13.0 USD/MT 10.7 900 941 5.0 2.0 2.9 800 862 1.5 4.7 6.1 0.0 3.9 4.0 3.9 2.0 0.3 2.0 700

-5.0 -2.5 -0.9 600

Jul-17

Jul-18

Jul-19

Oct-16

Apr-17

Oct-17

Apr-18

Oct-18

Apr-19

Oct-19

Jan-17

Jan-18

Jan-19

Jan-20

3QFY18

4QFY18

1QFY19

2QFY19

3QFY19

4QFY19

1QFY20 2QFY20 3QFY20

Source: Company, PL Source: Company, PL

C&B EBIT up 25.4% on 560bps margin expansion; Industrial products EBIT up 52.8%, margins increased 460bps

Segmental 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 3QFY20 Consumer and Bazaar Sales (Rs m) 11337 10050 13628 12751 13312 11042 14987 13001 13841 Growth (%) 10.7 14.5 23.9 11.0 17.4 9.9 10.0 2.0 4.0 EBIT (Rs m) 3630 2680 4219 3744 3607 2931 4493 3848 4523 EBIT Growth % 24.0 2.7 31.0 -4.8 -0.6 9.4 6.5 2.8 25.4 EBIT margin % 32.0 26.7 31.0 29.4 27.1 26.5 30.0 29.6 32.7 Industrial Products Sales (Rs m) 2200 2440 2576 2539 2592 2923 2935 2899 2865 Growth (%) 0.9 15.6 28.6 12.1 17.8 19.8 13.9 14.2 10.5 EBIT (Rs m) 417 470 379 420 309 432 453 525 473 EBIT Growth % 26.2 14.6 3.4 28.6 -25.8 -8.1 19.3 24.9 52.8 EBIT margin % 18.9 19.3 14.7 16.6 11.9 14.8 15.4 18.1 16.5 Source: Company, PL

January 30, 2020 2 Pidilite Industries

Nina, Percept and CIPY face near term challenges

Nina percept and CIPY continue to face challenging market conditions in wake of economic slowdown in Real Estate, Auto and Engineering Industry. Margin improvement was seen across all subsidiaries aided by benign raw material prices.

NINA and Percept sales declined by 4.5% with EBITDA margin of 80 mn.

ICA Pidilite growth was at 8%. EBITDA increased sharply to Rs 78 million.

CIPY revenue declined by 15.9% with margins coming better at 20.1%.

Company through its subsidiary Madhumala Ventures Pvt. Ltd has made investment of Rs.490 mn to acquire stake over 5% in Home Vista Décor and Furnishings Pvt. Ltd (Home Lane).

Margin improvement seen across all subsidiaries Q1FY19 Q2FY19 3QFY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20

NINA & Percept 765 740 824 736 634 557 787 ICA-Pidilite 371 443 438 432 534 459 473

(Rs mn) (Rs

- CIPY 374 356 403 421 318 248 339 Others 160 156 140 183 168 137 151

Sales Sales Total 1670 1695 1805 1772 1654 1401 1750 NINA & Percept 31.0% 58.5% 39.2% -1.9% -17.1% -24.7% -4.5%

ICA-Pidilite 41.6% 32.6% 125.8% 81.5% 43.9% 3.6% 8.0% CIPY 57.7% -15.0% -30.3% -15.9%

(YoY) Others 92.8% 56.0% -8.5% 12.3% 5.0% -12.2% 7.9% Sales Growth Sales Growth Total 79.8% 88.1% 92.2% 25.0% -1.0% -17.3% -3.0% NINA & Percept 101 40 90 97 63 -16 80

ICA-Pidilite 19 -3 12 -17 54 71 78 CIPY

mn) 39 47 58 66 36 24 68 Others 15 9 10 23 23 12 7

EBITDA (Rs (Rs EBITDA Total 174 93 170 169 176 91 233 NINA & Percept 5.4% 10.9% 13.2% 9.9% -2.9% 10.2%

13.2% ICA-Pidilite 5.1% -0.7% 2.7% -3.9% 10.1% 15.5% 16.5% CIPY 10.4% 13.2% 14.4% 15.7% 11.3% 9.7% 20.1%

EBITDA EBITDA

margin % margin Others 9.4% 5.8% 7.1% 12.6% 13.7% 8.8% 4.6% Total 10.4% 5.5% 9.4% 9.5% 10.6% 6.5% 13.3% NINA & Percept 67.5% -11.1% 16.9% -15.7% -37.6% -140.0% -11.1% ICA-Pidilite 533.3% -108.1% -233.3% -34.6% 184.2% -2466.7% 550.0% CIPY 200.0% -7.7% -48.9% 17.2%

EBITDA EBITDA Others 66.7% 12.5% -47.4% 27.8% 53.3% 33.3% -30.0%

growth growth (YoY) Total 140.7% 3.3% 95.4% 31.0% 1.1% -2.2% 37.1% Source: Company, PL

January 30, 2020 3 Pidilite Industries

IBD - broad based profitability improvement

3Q20 International business (IBD) sales increased by 10.3% to Rs 1.5 bn in constant currency terms. EBITDA was at Rs94.2mn as most geographies except middle east reported higher profitability.

North America sales increased 22.6% led by Sargent Art division. EBITDA was at Rs 8mn.South America: Sales increased 12.1% with EBITDA at Rs10mn. Middle East, Africa & Egypt sales increased by 13.1% with EBITDA loss at Rs 0.8mn. Egypt reported good sales growth. SAARC remained robust with 19.6% sales growth. EBITDA margins increased 190bps QoQ. South East Asia also declined 20.5%. EBITDA margin at Rs16mn. Decline in sales was on account of one off large project executed in same period last year.

SAARC and North America leads IBD sales growth Subsidiaries Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Sales (Rs. m) 1,365 1,290 1,429 1,453 1,506 North America 212 261 315 325 260 South America 232 211 210 236 260 Middle East, Africa & Egypt 328 324 343 344 371 SAARC 372 331 406 361 445 South East Asia 195 143 137 165 155 Sales growth (YoY) 1.1 10.2 11.1 15.0 10.3 North America (18.5) 4.4 12.1 18.2 22.6 South America (4.9) (0.5) 6.1 9.8 12.1 Middle East, Africa & Egypt 5.5 14.9 11.4 7.2 13.1 SAARC 11.4 17.4 18.7 18.8 19.6 South & South East Asia 10.2 25.4 0.7 29.9 (20.5) EBITDA (Rs m) 31.0 33.0 87.0 70.9 94.2 North America (16.0) (2.0) 33.0 22.0 8.0 South America 9.0 (9.0) 3.0 11.0 10.0 Middle East, Africa & Egypt (28.0) (6.0) (11.0) (19.1) (0.8) SAARC 47.0 41.0 55.0 41.0 59.0 South East Asia 19.0 12.0 4.0 17.0 16.0 EBITDA (margin %) 2.3 2.6 6.1 4.9 6.3 North America (7.5) (0.8) 10.5 6.8 3.1 South America 3.9 (4.3) 1.4 4.7 3.8 Middle East, Africa & Egypt (8.5) (1.9) (3.2) (5.6) (0.2) SAARC 12.6 12.4 13.5 11.4 13.3 South & South East Asia 9.7 8.4 2.9 10.3 10.3 Source: Company, PL

Pidilite: SOTP Valuation Basis FY22

Business EPS BV/ Sales Basis Multiple (x) Rs/share (Rs) Standalone 30.4 P/E 45.0 1,368 International Business 6,659 EV/ Sales 1.5 19 8,730 EV/ Sales 3.5 60 Value per share 1,447 Source: Company, PL

January 30, 2020 4 Pidilite Industries

Financials

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e Mar FY19 FY20E FY21E FY22E Y/e Mar FY19 FY20E FY21E FY22E Net Revenues 60,947 64,828 72,532 81,588 Non-Current Assets YoY gr. (%) 13.8 6.4 11.9 12.5 Cost of Goods Sold 30,644 30,425 34,408 38,709 Gross Block 17,947 21,172 25,672 30,172 Gross Profit 30,302 34,403 38,125 42,879 Tangibles 15,333 18,333 22,333 26,333 Margin (%) 49.7 53.1 52.6 52.6 Intangibles 2,614 2,839 3,339 3,839 Employee Cost 6,635 7,333 8,062 8,908 Other Expenses 4,804 5,402 5,606 6,299 Acc: Dep / Amortization 9,301 10,492 11,820 13,384 Tangibles 8,656 9,756 10,985 12,433 EBITDA 12,919 15,009 17,223 19,534 Intangibles 645 736 836 951 YoY gr. (%) 0.0 16.2 14.7 13.4 Margin (%) 21.2 23.2 23.7 23.9 Net fixed assets 8,646 10,680 13,851 16,788 Tangibles 6,676 8,576 11,348 13,900 Depreciation and Amortization 998 1,191 1,328 1,563 Intangibles 1,969 2,103 2,503 2,888

EBIT 11,921 13,818 15,894 17,971 Capital Work In Progress 2,291 2,791 3,291 3,791 Margin (%) 19.6 21.3 21.9 22.0 Goodwill 861 861 861 861 Non-Current Investments 10,599 10,785 10,993 11,215 Net Interest 71 105 118 132 Net Deferred tax assets (1,130) (1,199) (1,342) (1,509) Other Income 1,915 1,900 2,357 2,748 Other Non-Current Assets 1,810 1,958 2,190 2,464

Profit Before Tax 13,765 15,613 18,133 20,587 Current Assets Margin (%) 22.6 24.1 25.0 25.2 Investments 11,514 11,514 11,514 11,514 Inventories 7,343 7,335 8,390 9,545 Total Tax 3,970 3,597 4,543 5,144 Trade receivables 7,750 8,170 9,141 10,282 Effective tax rate (%) 28.8 23.0 25.1 25.0 Cash & Bank Balance 1,172 5,881 9,412 13,981 Other Current Assets 1,269 1,426 1,596 1,795 Profit after tax 9,794 12,016 13,591 15,443 Total Assets 53,500 61,699 71,573 82,610 Minority interest - - - - Share Profit from Associate - - - - Equity Equity Share Capital 508 508 508 508 Adjusted PAT 9,794 12,016 13,591 15,443 Other Equity 41,359 49,395 57,964 67,528 YoY gr. (%) 2.5 22.7 13.1 13.6 Total Networth 41,867 49,903 58,472 68,036 Margin (%) 16.1 18.5 18.7 18.9 Extra Ord. Income / (Exp) - - - - Non-Current Liabilities Long Term borrowings - - - - Reported PAT 9,794 12,016 13,591 15,443 Provisions 346 357 399 449 YoY gr. (%) 2.5 22.7 13.1 13.6 Other non current liabilities - - - - Margin (%) 16.1 18.5 18.7 18.9 Current Liabilities Other Comprehensive Income (30) - - - ST Debt / Current of LT Debt - - - - Total Comprehensive Income 9,765 12,016 13,591 15,443 Trade payables 4,492 4,335 4,808 5,303 Equity Shares O/s (m) 508 508 508 508 Other current liabilities 5,206 5,446 6,093 6,853 EPS (Rs) 19.3 23.7 26.8 30.4 Total Equity & Liabilities 53,500 61,699 71,573 82,610 Source: Company Data, PL Research Source: Company Data, PL Research

January 30, 2020 5 Pidilite Industries

Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY19 FY20E FY21E FY22E YearY/e Mar FY19 FY20E FY21E FY22E

PBT 13,765 15,613 18,133 20,587 Per Share(Rs) Add. Depreciation 998 1,191 1,328 1,563 EPS 19.3 23.7 26.8 30.4 Add. Interest 71 105 118 132 CEPS 21.2 26.0 29.4 33.5 Less Financial Other Income 1,915 1,900 2,357 2,748 BVPS 82.4 98.2 115.1 133.9 Add. Other (30) - - - FCF 14.3 17.7 17.4 21.2 Op. profit before WC changes 14,804 16,909 19,579 22,283 DPS 6.0 6.5 8.2 9.6 Net Changes-WC (1,830) (618) (1,182) (1,366) Return Ratio(%) Direct tax (3,970) (3,597) (4,543) (5,144) RoCE 30.8 30.1 29.3 28.4 Net cash from Op. activities 9,004 12,694 13,854 15,773 ROIC 29.2 31.2 31.4 31.5 Capital expenditures (1,754) (3,725) (5,000) (5,000) RoE 25.3 26.2 25.1 24.4 Interest / Dividend Income - - - - Balance Sheet Others (3,248) (175) (183) (193) Net Debt : Equity (x) (0.3) (0.3) (0.4) (0.4) Net Cash from Invt. activities (5,002) (3,900) (5,183) (5,193) Net Working Capital (Days) 63 63 64 65 Issue of share cap. / premium 106 - - - Valuation(x) Debt changes - - - - PER 78.9 64.3 56.9 50.1 Dividend paid (3,643) (3,981) (5,022) (5,879) P/B 18.5 15.5 13.2 11.4 Interest paid (71) (105) (118) (132) P/CEPS 71.6 58.5 51.8 45.5 Others - - - - EV/EBITDA 58.9 50.4 43.7 38.3 Net cash from Fin. activities (3,608) (4,086) (5,139) (6,011) EV/Sales 12.5 11.7 10.4 9.2 Net change in cash 394 4,709 3,531 4,569 Dividend Yield (%) 0.4 0.4 0.5 0.6 Free Cash Flow 7,250 8,969 8,854 10,773 Source: Company Data, PL Research Source: Company Data, PL Research

Quarterly Financials (Rs m) Y/e Mar Q4FY19 Q1FY20 Q2FY20 Q3FY20 Net Revenue 13,787 17,791 15,717 16,634 YoY gr. (%) 8.2 10.6 3.5 4.6 Raw Material Expenses 6,720 8,616 7,277 7,658 Gross Profit 7,067 9,174 8,441 8,976 Margin (%) 51.3 51.6 53.7 54.0 EBITDA 2,619 4,180 3,510 4,294 YoY gr. (%) 2.6 16.9 1.3 31.8 Margin (%) 19.0 23.5 22.3 25.8 Depreciation / Depletion 298 281 303 318 EBIT 2,321 3,899 3,207 3,977 Margin (%) 16.8 21.9 20.4 23.9 Net Interest 19 27 36 34 Other Income 525 390 572 391 Profit before Tax 2,828 4,262 3,743 4,334 Margin (%) 20.5 24.0 23.8 26.1 Total Tax 924 1,387 280 1,030 Effective tax rate (%) 32.7 32.5 7.5 23.8 Profit after Tax 1,903 2,876 3,463 3,304 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 1,903 2,876 3,463 3,304 YoY gr. (%) (0.7) 7.7 41.6 47.0 Margin (%) 13.8 16.2 22.0 19.9 Extra Ord. Income / (Exp) 529 - (222) - Reported PAT 2,432 2,876 3,241 3,304 YoY gr. (%) 2.1 (0.5) 32.5 47.0 Margin (%) 17.6 16.2 20.6 19.9 Other Comprehensive Income 17 (8) - (9) Total Comprehensive Income 2,449 2,868 3,241 3,295 Avg. Shares O/s (m) 508 508 508 508 EPS (Rs) 3.7 5.7 6.8 6.5 Source: Company Data, PL Research

January 30, 2020 6 Pidilite Industries

Price Chart Recommendation History

(Rs) No. Date Rating TP (Rs.) Share Price (Rs.) 1500 1 3-Jan-20 Hold 1,311 1,398

1291 2 14-Nov-19 Hold 1,365 1,344 3 3-Oct-19 Accumulate 1,429 1,393 1082 4 7-Aug-19 Accumulate 1,301 1,290

872 5 4-Jul-19 Accumulate 1,184 1,227 6 15-May-19 Accumulate 1,184 1,154 663

7 5-Apr-19 Accumulate 1,163 1,287

Jul -18 Jul

Jul -19 Jul

Jan -Jan18 Jan -Jan19

Jan -Jan20

Feb -17 Feb Aug -17 Aug

Analyst Coverage Universe Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 Accumulate 1,815 1,779 2 Avenue Supermarts Reduce 1,639 1,877 3 Accumulate 3,433 3,039 4 Colgate Palmolive Reduce 1,257 1,460 5 Crompton Greaves Consumer Electricals BUY 292 241 6 India Hold 452 456 7 Accumulate 359 316 8 Future Retail Under Review - 332 9 GlaxoSmithKline Consumer Healthcare Hold 9,144 8,355 10 India Reduce 567 601 11 Accumulate 2,057 1,927 12 ITC BUY 346 239 13 Jubilant FoodWorks BUY 1,913 1,749 14 Kansai Nerolac Paints Accumulate 546 513 15 Reduce 340 335 16 Nestle India Reduce 12,093 14,594 17 Pidilite Industries Hold 1,311 1,398 18 Hold 1,189 1,140 19 Hold 662 664

PL’s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

January 30, 2020 7 Pidilite Industries

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