Pidilite Industries Limited Investment Ka Majboot Jod Viewpoint
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Pidilite Industries Limited Investment ka majboot jod Viewpoint Pidilite Industries Limited (Pidilite) is India’s market leader in adhesives and Sector: Consumer Goods sealants, construction chemicals, hobby colours and polymer emulsions New Idea 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 Change existing brands and entry into consumer-based categories well supported by adequate media activities, Pidilite has transitioned its target markets View: Positive from industrial users to consumers through effective communication, which has helped the company to register itself in the minds of all its customers. CMP: Rs. 1,476 Revenues grew at a CAGR of 10% over FY2015-19. Though FY2021 is Upside potential: 18-20% expected to be lull affected by Covid-19 pandemic, the growth is expected to come back on track in FY2022 driven by recovery in refurbishment of house/ á Upgrade No change â Downgrade construction activities. Further, expected increase in demand for adhesive products in global markets such as South East Asia, Europe, North America and Latin America post the normalisation of business environment would Company details add to overall revenues in FY2022 and FY2023. A fall in prices of key inputs such as Vinyl Acetate Monomer (VAM) by ~30% in last three quarters will Market cap: Rs. 74,982 cr be a blessing in disguise amid the pandemic. Gross margins have improved by 377 bps in 9MFY2020 to 52.8% and if VAM prices continue to correct in 52-week high/low: Rs. 1710/1090 line with fall in crude oil prices, we expect gross margins to remain high in the near term. NSE volume: (No of 6.5 lakh shares) Strong cash flows, consistent dividend payer: With a stable working capital cycle, Pidilite’s cumulative free cash flows (FCF) stand at close to Rs. 2,000 BSE code: 500331 crore over FY2017-19. This will take care of any major cost element during the lockdown in FY2021. Thus, we expect the company to remain debt-free with NSE code: PIDILITIND minimum stress on the balance sheet. The company has been a consistent dividend payer with an average dividend payout standing at 36.3% during Sharekhan code: PIDILITIND FY2016-19. Pidilite’s return profile is also strong with a return-on-equity (RoE) and return on capital employed (RoCE) standing at above 20% each in FY2019. Free float: (No of 15.3 cr shares) Our Call View - Initiate with Positive view assigning an 18-20% upside: With a strong portfolio of brands, Pidilite has a monopoly in the domestic adhesives market. Shareholding (%) This along with strong cash flows would enable Pidilite to witness an early recovery in performance after the pandemic situation eases. The stock is Promoters* 70.0 currently trading at 49.1x its FY2022E earnings. Its leadership positioning in adhesives, strong cash flows and decent dividend payout would keep FII 11.3 valuation at a premium. The opening of global market with some international clients expected to shift from China to other South East Asian players provides DII 8.3 a huge growth opportunity in the long run. Thus, current volatility in the stock market provides good opportunity to accumulate quality stocks with sturdy Others 10.5 balance sheet and strong growth prospects. We initiate viewpoint on Pidilite with positive view and assign an upside of 18-20% from current levels. Price chart Key Risks If the COVID-19 global pandemic takes time to get under control, the recovery 1700 1600 in the business environment will take more time, which will continue to affect 1500 the financial performance of Pidilite in the near term. 1400 1300 1200 Valuation (Consolidated) Rs cr 1100 Particulars FY19 FY20E FY21E FY22E FY23E 19 19 20 19 - - - - Revenue 7,079 7,296 6,825 8,662 9,547 Apr Apr Dec Aug OPM (%) 19.3 21.8 22.0 23.1 23.3 Adjusted PAT 944 1,212 1,138 1,525 1,721 Price performance % YoY growth -2.2 28.3 -6.1 34.1 12.8 (%) 1m 3m 6m 12m Adjusted EPS (Rs.) 18.6 23.9 22.4 30.0 33.9 P/E (x) 79.4 61.8 65.9 49.1 43.6 Absolute -2.4 3.6 9.3 17.0 P/B (x) 18.1 15.0 13.0 10.8 9.1 EV/EBIDTA (x) 49.4 41.8 42.0 31.7 27.8 Relative to -8.2 27.4 28.1 35.1 Sensex RoNW (%) 24.5 26.5 21.2 24.0 22.6 RoCE (%) 22.2 22.0 18.5 20.9 19.7 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates April 21, 2020 2 Viewpoint Investment Argument 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 in India. Currently, the flagship brands such as like 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, the company has acquired companies and established manufacturing facilities in international as well as domestic markets. Pre-Covid-19 growth at 10% 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 10% over FY2015-19 with good growth in all years except FY2018, which was affected by GST implementation. The COVID-19 outbreak has affected demand in the last few days on Q4FY2020. No sales are expected in Q1FY2021 as a result of a complete stoppage of construction activities amid the nation-wide lockdown. Thus, we expect H1FY2021 to remain subdued while some recovery is anticipated in H2FY2021 once the pandemic normalises. Though revenues are expected to remain low in FY2021, we expect strong recovery in FY2022/23. 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 drivers 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. Correction in input prices to driver margins in the near term: Vinyl acetate monomer (VAM), a crude derivative, is one of the key inputs for Pidilite (constituting around 35-40% of Pidilite’s overall raw material cost along with packaging material). With a fall in the crude oil prices, VAM prices corrected to $875 in Q3FY2020 from $1200 in Q2FY2019. This led to a significant expansion in the gross margins by 377 bps y-o-y basis in 9MFY2020. VAM prices currently stands at $835 and with a sharp fall in crude prices we expect VAM prices to correct further. Thus, we expect gross margin expansion to continue in FY2021. However with a decline in revenues and lower operating leverage, operating margins remain stable in FY2021. We should expect margins to get back in shape from FY2022 after revenues recover. Correction in VAM prices Gross margins expanded significantly in last two quarters 1325 1325 800 1400 1300 655 1200 1200 1200 1100 600 1000 950 980 1000 901 875 400 315 340 875 890 850 800 198 200 600 $ per tonne 0 400 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 -200 200 -179 GM expansionGM (BPS) -400 0 -360 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 -600 -618 consumption price spot price -800 Source: Company, Sharekhan Research Source: Company, Sharekhan Research April 21, 2020 3 Viewpoint Strong manufacturing capacity and robust distribution reach: Pidilite operates 23 plants in India along with 25 co-manufacturers. 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. It has 30 warehouses in India along with 8 regional offices and 2 Research & Development 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 4 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: o B2C business: Stationery (including hobby ideas and Fevicryl) and general purpose adhesives (Fevicol, Fevikwik, Fevistik, etc); o B2I business: Most of its core products – Fevicol, M-seal, Steelgrip, etc.