Stock Idea Sector: Building Materials August 07, 2020 Pidilite Industries Limited
Investment ka mazboot jod
Powered by Sharekhan’s 3R Research Philosophy Pidilite Industries Limited Investment ka mazboot jod Stock Idea Stock Powered by the Sharekhan 3R Research Philosophy Building Materials Sharekhan code: PIDILITIND Initiating Coverage
3R MATRIX + = - Summary
Right Sector (RS) ü We initiate coverage on Pidilite Industries Limited (Pidilite) with Buy recommendation and assigning a price target of Rs. 1,645. Right Quality (RQ) ü 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. Right Valuation (RV) ü FY2021 will be affected by impact of Covid-19 spread resulting into a wash- + Positive = Neutral - Negative 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. Reco/View Launch of premium products in core categories, foray into new categories (largely consumer-centric), wider distribution reach and expansion into international Reco: Buy markets remain key growth drivers in the medium to long term.
CMP: Rs. 1,377 Pidilite is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions industry in India. Its flagship brands - Fevicol Price Target: Rs. 1,645 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 Company details from industrial users to consumers through effective communication, which has helped the company to register itself in customers’ minds. This helped Pidilite post Market cap: Rs. 69,964 cr 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 52-week high/low: Rs. 1,710/1,186 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). NSE volume: Further, expected increase in demand for adhesive products in global markets such 6.5 lakh (No of shares) 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 BSE code: 500331 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 NSE code: PIDILITIND 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 Free float: environment in FY2021. 15.1 cr (No of shares) Our Call 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. Shareholding (%) 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 Promoters 70.2 markets would act as key revenue drivers in the medium term. The stock is currently FII 11.2 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 DII 8.1 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 Others 10.5 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).
Price chart Key risk If the COVID-19 global pandemic takes time to get under control, the recovery in the 1750 business environment will take more time, which will continue to affect the financial performance of Pidilite in the near term. 1550
1350 Valuation (Consolidated) Rs cr Particulars FY19 FY20 FY21E FY22E FY23E 1150 Revenue 7,078 7,294 6,677 8,204 9,054 19 20 19 20 - - - - OPM (%) 19.3 21.6 22.6 23.4 23.7 Apr Dec Aug Aug Adjusted PAT 946 1,177 1,032 1,376 1,572 % YoY growth -2.0 24.4 -12.4 33.4 14.3 Price performance Adjusted EPS (Rs.) 18.6 23.2 20.3 27.1 31.0 (%) 1m 3m 6m 12m 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 Absolute -1.6 1.8 -11.7 6.8 EV/EBIDTA (x) 45.4 39.9 41.9 32.1 27.9 Relative to RoNW (%) 24.5 27.4 21.4 24.1 23.0 -5.3 -19.1 -4.1 3.1 Sensex RoCE (%) 22.6 22.7 18.3 20.5 19.6 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates Note: We now convert Pidilite into a Stock Idea; it was earlier a ‘Viewpoint’ under our coverage
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Executive Summary
3R Research Positioning Summary Valuation and return potential n Right Sector: � Strong demand for construction chemicals, Low penetration of construction chemicals sustained innovation in portfolio and share and adhesives in India provides huge gain will aid Pidilite to achieve double scope of growth. earning growth over FY2020-23. n Right Quality: � The stock has corrected ~10% in last Strong product portfolio and leadership one half month factors in the washout positioning will help to stay ahead of performance in Q1. competition. � The stock is currently trading at valuation n Right Valuation: of 51x its FY2022E EPS. Monopoly in the construction chemicals market and sturdy balance sheet will keep valuation at a premium.
Catalysts Earnings and Balance sheet highlights Long-term triggers � Consistent earnings growth: Pidilite’s � Government regulations to improve quality revenues and PAT clocked a CAGR of ~9% of construction. and 18% over FY2015-20. � ‘Make in India’ initiatives and opening up of international markets will provide long � Key segment: Consumer Bazaar division term growth opportunities. contributes ~85% of revenues and has EBIT margins of around 22%. � Sustained new product launches to remain competitive in the market. � Sturdy balance Sheet: Zero Debt Company with stable work capital and Medium Term Triggers strong cash flows (FCF stood at Rs. � Recovery in rural and tier-3 markets. 827crore in FY20). � Correction in VAM prices will mitigate the risk of lower sales in the near term. � Strong return profile: RoE and RoCE standing above 20% each. Key Risks: If opening of economy takes time it will be key risk to earnings estimates due to lower demand.
Source: Company, Sharekhan Research
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Table of Contents Pages Right 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 18 expected in FY2022/23 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
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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.
Construction Chemicals
Concrete Flooring Repair & Miscellaneous ad-mixtures Water Proofing Compounds Rehabilitation
Polyurethane Epoxy & floor Cementitous Ligno-based Sealants based hardeners repair mortar
SNF & SMF Polyurethane Polymer repair Bitumen based Grouts based coating mortar
Polymer-SBR, Polyurea Epoxy based PCE based Adhesives Acrylic based resin mortar
Source: Industry reports, Sharekhan Research
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).
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Construction Chemical market grew @ CAGR of 15% over CY2007-17E
7000 6175 6000
5000
4000 3600
3000 2100 2000 1400
1000
0 CY2007 CY2010 CY2013 CY2017E
Construction Chemical (Rs cr.)
Source: Industry reports, Sharekhan Research
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.
India’s construction chemical market composition
Adhesives & Sealants, 18%
Ad-mixtures, 42%
Repair & Rehab, 12%
Waterproofing, 14%
Flooring , 14%
Source: Industry reports, Sharekhan Research
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Global construction chemical market composition
Others, 6%
Ad-mixtures, 26%
Adhesives & Sealants, 28%
Waterproofing, 40%
Source: Industry reports, Sharekhan Research
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.
Urbanisation rising (%)
40
34 35 30 30 29
25
(%) 20
15 11 10
5
0 CY1901 CY2001 CY2011 CY2017
Urbanisation (as per Census)
Source: Industry reports, Sharekhan Research
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Housing for all - GOI initiative (Lakh units)
120.0 103.0 100.0 80.3 80.0 60.0 60.0 52.7 41.6 36.0 40.0 32.0 17.5 26.2 9.9 16.8 19.4 20.0 7.3 7.3 11.0
0.0 FY16 FY17 FY18 FY19 FY20
Sanctioned Grounded Completed
Source: Government of India, Sharekhan Research
Consistent increase in the pucca housing (%)
120 Big opportunity lies in rural market 100 96 92 94 80 88 74 77 60 66 55 40 48
20 32
0 1993 2002 2009 2012 2018
Rural pucca house (%) Urban pucca house (%) Source: NSSO survey, Sharekhan Research
Affordable and mid-segment housing growing in India (% growth)
120
100
80
60
40
20
0 Bangalore Chennai Delhi NCR Hyderabad Kolkata Mumbai Pune India
Q1CY19 Q1CY20 Source: Industry, Sharekhan Research
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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.
Trend in cement demand in India
400 13.1 14 350 12 350 300 337 10 298 250 271 283 280 8 200 6 6.4 150 4 4.4 100 3.8 3.9 2 -1.1 50 0 0 -2 FY15 FY16 FY17 FY18 FY19 FY20
Cemend demand (Mn tonne) Y-o-Y growth
Source: Sharekhan Research
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.
Global waterproofing market by application (%)
Others, 20.02
Roofing and wall, 34.02
Water managment , 14.05
Building structure , 22.9 Landfills & tunnels, 9.01
Source: Industry, Sharekhan Research
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Global waterproofing market to grow @CAGR of 10%
3500 3000 3000
2500
2000
1500 1375
1000
500
0 CY2017 CY2024
Waterproofing market (Rs billion)
Source: Industry reports, Sharekhan Research
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.
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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.
Home & Living market in India (Rs. billion)
4000 3750
3500
3000
2500 2100 2000 1430 1500
1000
500
0 FY17 FY19 FY24
Source: Industry reports, Sharekhan Research
Furniture constitutes bulk of H&L market (%)
Home furnishing , 40
Furniture, 60
Source: Industry reports, Sharekhan Research
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Furniture is highly unorganized market in India (%)
Organised, 15
Unorganised, 85
Source: Industry reports, Sharekhan Research
1. Population growth 2. Nuclearisation in families 3. Urbanisation & increase in disposable income Demand 4. Increase in institutional infrastructure Drivers * Housing segment * Hospitality segment * Healthcare segment
Source: Industry reports, Sharekhan Research
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.
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India’s ecommerce industry to grow @CAGR of 41% over CY2016-20
140
120 120
100
80
$ bliion $ 60
40 30
20
0 2016 2020
Source: Industry reports, Sharekhan Research
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.
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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
Source: Company, Sharekhan Research
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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 (%)
Art &Craft materials, 8.1%
Construction & Paint Chemicals, 19.2%
Adhesives & Sealants, 52.6%
Source: Company, Sharekhan Research
Categories under B2B products (%)
Pigment & Preparations, 6.2% Industrial Resins & Construction Chemicals, 6.4%
Industrial Adhesives, 6.1%
Source: Company, Sharekhan Research
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Key products by Pidilite
Source: Company
Most products under the Fevicol brand fall under the economy to mid-premium segment
§Fevicol Ezee Spray Price range (Rs./litre): 800-1200
Premium/mid- premium range §Fevicol SR §Fevicol HeatX §Fevicol Probond §Fevicol Hardener C Price range (Rs./litre): 300-700
§Fevicol SH §Fevicol Marine §Fevicol Hi-Per §Fevicol SpeedX §Fevicol Floorfix §Fevicol Foam fix §Fevicol MR §Fevicol Fast Tack Economy range Price range (Rs./litre): 180-300
Source: Company, Sharekhan Research
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Pidilite has a vast range of waterproofing products with multiple uses at attractive price points.
Waterproofing portfolio of Pidilite Price per Products Description Usage litre/kg Dr. Fixit Pidiproof LW+ Super Anti-corrosion waterproofing 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 Roof 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 finish 430 Internal wall Dr. Fixit Dampguard Classic Eco-friendly coating that is safe for potable water contact 400 Dr. Fixit Raincoat Classic External wall waterproofing 450 External wall Dr. Fixit Primeseal Primer waterproofing 280 Dr. Fixit Pidifin 2K Elastomeric coating that resists water ingress 160 Bathroom 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 Source: Company, Sharekhan Research
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.
Waterproofing portfolio of peers Price per Price per Products Category Products Category litre/kg litre/kg Pidilite Asian Paints Dr. Fixit Tile Grout 90 White Multipurpose Tile Adhesive 50 Economy Dr. Fixit Bitufix 100 SmartCare Damp Sheath Interior 250 Dr. Fixit Krystalline 110 SmartCare Damp Proof 255 Dr. Fixit Roofseal Flex 145 Damp Proof Advance 270 Economy Dr. Fixit Waterproof LW+ 155 SmartCare Textured Crack Filler Mid- 285 Dr. Fixit Pidifin 2K 160 SmartCare Crackshield premium 300 Dr. Fixit Powercrete 175 SmartCare Crack Seal 350 Dr. Fixit Pidiproof LW+ Super 215 SmartCare Tile Grout 380 Dr. Fixit Primeseal 280 SmartCare Epoxy TriBlock 500 Dr. Fixit Repellin WR 340 SmartCare Instant Leak Stop 600 Premium Dr. Fixit Pldicrete URP 350 SmartCare Roof Tapes 700 Mid- Dr. Fixit Newcoat 370 Damp Sheath Exterior 725 premium Dr. Fixit Dampguard Classic 400 Dr. Fixit Crack X Shrinkfree 430 Dr. Fixit Raincoat Classic 450 Source: Company, Sharekhan Research
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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)
7000 6050 5880.9 6000 5132.3 5274.1 4805.4 5000 4023.1 4000
3000
2000 1476.7 1065.6 869.2 946 963.4 994.8 1000
0 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020
Consumer Bazaar Industrial products
Source: Company, Sharekhan Research *FY2020 revenues for Consumer Bazaar business is lower due to restructure of segment composition
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Business is on recovery mode (%)
100
80 80
60 50 40
20
0 0 April May June
Recovery in Q1
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).
Correction in VAM prices
1400 1325 1325 1300 1200 1200 1200 1100 1000 950 980 1000 901 875 850 825 875 890 850 845 800 700
600
$ per tonne 400
200
0 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21
consumption price spot price
Source: Company, Sharekhan Research
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Gross margins expanded significantly in last three quarters
800 655 600 507
400 340 198 209 200
0
-200 -179 GPM expansion (bps) -400 -360
-600 -618 -800 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21
Source: Company, Sharekhan Research
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)
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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.
Performance of international subsidiaries
119 114 120 110 105 99 101 100 88 82 80 63 61 60
Rs. in crore 42 40 35 32 35
20
0 North America South America Bangladesh Thailand Sri Lanka Egypt UAE
FY2019 FY2020
Source: Company, Sharekhan Research
Performance of domestic subsidiaries
350 305 300 268
250
200 186 168 155
Rs. in crore 150 121
100 64 61 50
0 Nina Percept ICA Pidilite Cipy Polyurethane Others
FY2019 FY2020
Source: Company, Sharekhan Research
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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.
Decline in working capital days
50
45 43 44
40 38
Days 37
35 34
30 FY16 FY17 FY18 FY19 FY20
Working Capital Days
Source: Company, Sharekhan Research
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Strong return ratios
35
30.6
30 28.3 27.4 27.4
28.2 24.5 25
(%) 25.5 25.0
22.6 22.7 20
15 FY16 FY17 FY18 FY19 FY20
RoE (%) RoCE (%)
Source: Company, Sharekhan Research
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.
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Financials in charts
Revenue & PAT CAGR of 8% & 12% over FY16-20 GPM to expand due to lower input costs
60 53.4 56.0 55.8 51.8 49.1 51.3 49.3 8,000 7,078 7,294 50 6,062 6,219 40 6,000 5,361 30 22.6 23.4 21.9 20.8 21.6 19.3 21.6 4,000 (%) 20
Rs. in croreRs. 10 2,000 1,177 744 863 966 946 0
0 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Revenue Adjusted Profit OPM GPM Source: Company, Sharekhan Research Source: Company, Sharekhan Research
Revenue growth of key categories Highest contribution to revenue by C&B products 20 19.0 Business to Others, 15.0 Business 1.4% 14.0 15 (B2B) Products, 10 9.0 18.7% 7.0 7.0 7.0 (%)
5 3.0 3.0 2.0 Consumer & 0 Bazaar (C&B) FY15 FY16 FY17 FY18 FY19 Products, Consumer & Bazaar Products Industrial Products 79.9% Source: Company, Sharekhan Research Source: Company, Sharekhan Research
Cumulative Free cash flows stood at Rs. 2,125 crore over FY18-20 Dividend payout ratio maintained
1,000 50 828 800 42.0 658 614 622 640 38.0 40 36.4 600 34.4 34.0
400 (%) 30 Rs. in croreRs. 200
0 20 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20
Free Cash Flows Dividend Payout Ratio (%) Source: Company, Sharekhan Research Source: Company, Sharekhan Research
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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.
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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 Particulars Q1FY21 Q1FY20 y-o-y (%) Q4FY20 q-o-q (%) 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 - Source: Company; Sharekhan Research
Standalone segmental performance Rs cr Particulars Q1FY21 Q1FY20 y-o-y (%) Q4FY20 q-o-q (%) 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 Source: Company; Sharekhan Research
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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
1800.0 70x
1600.0 60x 1400.0 50x 1200.0 40x 1000.0 30x 800.0
600.0
400.0
200.0 14 15 19 20 17 15 16 20 18 19 16 18 16 17 14 19 14 17 18 ------Jul Jan Jan Jun - Jun - Oct Apr Apr Sep Feb Dec Aug Aug Aug Nov Nov Mar Mar May
Source: Sharekhan Research
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One-year forward P/BV (x) band
1800.0
1600.0 14x
1400.0 12x 1200.0 10x 1000.0 8x 800.0
600.0
400.0
200.0 16 18 16 17 14 19 14 17 18 14 15 20 19 17 15 16 18 20 19 ------Jul Jan Jan Jun - Jun - Oct Apr Apr Sep Feb Dec Aug Aug Aug Nov Nov Mar Mar May
Source: Sharekhan Research
One-year forward EV/EBITDA (x) band
1650.0 45x 1450.0 40x 1250.0 35x 1050.0 30x
850.0 25x
650.0
450.0
250.0 16 18 16 17 14 19 14 17 18 14 15 20 19 17 15 16 18 20 19 ------Jul Jan Jan Jun - Jun - Oct Apr Apr Sep Feb Dec Aug Aug Aug Nov Nov Mar Mar May
Source: Sharekhan Research
Peer Comparison P/E (x) EV/EBIDTA (x) RoCE (%) Particulars 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
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Financials
Statement of Profit and Loss Rs cr Particulars FY2019 FY2020 FY2021E FY2022E FY2023E 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 Particulars FY2019 FY2020 FY2021E FY2022E FY2023E 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 Source: Company; Sharekhan estimates
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Cash Flow Statement Rs cr Particulars FY2019 FY2020 FY2021E FY2022E FY2023E 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 Source: Company; Sharekhan estimates
Key Ratios Particulars FY2019 FY2020 FY2021E FY2022E FY2023E 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 Source: Company; Sharekhan estimates
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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 Secretary Source: 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 0.3 Source: 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 31 Powered by the Sharekhan 3R Research Philosophy Idea Stock
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
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