INITIATING COVERAGE

PIDILITE INDUSTRIES Adhesive growth: Ties that bind

India Equity Research| Consumer Goods

Pidilite (PIDI ) is a high quality niche consumption play imbued with strong EDELWEISS 4D RATINGS

brand equity in under penetrated and high growth categories. The Absolute Rating BUY company has sustained its dominant position (Fevicol, M-seal have ~70% Rating Relative to Sector Performer market share) by virtue of direct reach to influencers/end users, Risk Rating Relative to Sector Medium successful brand extensions, innovation spurred by robust R&D, out-of- Sector Relative to Market Overweight

the-box and catchy ads, acquisitions (ROFF, Mseal, Sargent Art, Hobby Ideas), limited competition and widespread distribution. Key risk/concerns are performance of its international portfolio (especially MARKET DATA (R: PIDI.BO, B: PIDI IN) Brazil) and the Elastomer project. We expect 17% revenue CAGR with CMP : INR 294 Target Price : INR 357 robust 20% PAT CAGR over FY14-16E. We initiate coverage with ‘BUY’. 52-week range (INR) : 304 / 206 Share in issue (mn) : 509.8 Consumer business will continue to sizzle M cap (INR bn/USD mn) : 151 / 2,425 Robust growth across segments spurred PIDI’s consumer & bazaar products (CBP) and Avg. Daily Vol.BSE/NSE(‘000) : 280.0 industrial chemicals segments to post 19% and 14% CAGR, respectively, over FY08-13.

Though we expect the CBP business to maintain growth momentum, the industrial SHARE HOLDING PATTER N (%)

chemicals business may grow at a slower pace (11.5% CAGR) over FY14-16E due to the Current Q1FY14 Q4FY13

economic slowdown. Overseas business (has been a drag) margins are likely to improve Promoters * 70.1 70.1 70.1

riding sales pick up (Bangladesh, Thailand fastest growth engines), effective MF's, FI's & BK’s 5.3 5.4 5.6 management changes, price hikes and mix improvement. FII's 13.7 13.9 13.6 Others 10.9 10.6 10.7

Direct connect, distribution and innovation key strengths * Promoters pledged shares : Nil (% of share in issue) PIDI directly reaches out to influencers/end users (furniture makers, plumbers,

architects) via Dr. Fixit Institute, Fevicol Furniture Book and workshops which also PRICE PERFORMANCE (% ) enables it to introduce new products imbibing their feedback. Successful brand Stock over Sensex Stock extensions (Marine Fevicol, Speedex), acquisitions (Suparshva) and low-priced SKUs Sensex amidst limited MNC competition provide it the bandwidth to outpace regional players. 1 month (1.9) 11.1 13.0 3 months 11.6 32.3 20.7 Outlook and valuations: Positive; initiate with ‘BUY’ 12 months 7.1 39.2 32.1

We are positive on PIDI and expect re-rating to sustain. We value PIDI at 25x FY16E EPS and arrive at TP of INR357. At CMP, the stock is trading at 24.5x FY15E and 20.6x FY16E. We initiate coverage with ‘ BUY/Sector Performer’ recommendation/ rating.

Financials Abneesh Roy Year to March FY13 FY14E FY15E FY16E +91 22 6620 3141 [email protected] Revenues (INR mn) 36,781 42,997 50,600 58,960 Rev. growth (%) 17.6 16.9 17.7 16.5 Click on image to view video EBITDA (INR mn) 5,990 7,358 8,712 10,145 Pooja Lath Net profit (INR mn) 4,240 5,070 6,149 7,326 +91 22 6620 3075 Shares outstanding (mn) 510 510 510 510 [email protected]

Diluted EPS (INR) 8.2 9.9 12.0 14.3 Tanmay Sharma EPS growth (%) 32.9 20.1 21.3 19.1 +91 22 4040 7586 Diluted P/E (x) 35.7 29.7 24.5 20.6 [email protected]

EV/EBITDA (x) 24.4 19.6 16.3 13.7 ROAE (%) 28.3 27.8 28.1 27.8 November 28, 2013 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Consumer Goods

Investment Rationale

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

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

- M B Parekh, 24,500

Chairman & MD mn) (INR

16,500

8,500 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

Source: Company, Edelweiss research

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

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

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

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

2 Edelweiss Securities Limited Pidilite

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

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

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

Chart 2: Robust growth across categories 30.0

“It is the efforts that we put in to create demand, which would 25.0 drive the sales growth for our products.” 20.0

- Sandeep Batra,

(% YoY) (% 15.0 Director Finance

10.0

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

Chart 3: EBIT margins strong in both categories especially in CBP 30.0

26.0

22.0 (%) 18.0

14.0

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

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Chart 4: Consumer & bazaar products’ sales split 100.0

80.0

60.0 (%) 40.0

20.0

0.0 FY08 FY09 FY10 FY11 FY12 FY13 Adhesives & Sealants Construction/Paint Chemical Art materials & others

Source: Company, Edelweiss research

Chart 5: Speciality industrial chemical sales split 100.0

80.0

60.0 (%) 40.0

20.0

0.0 FY08 FY09 FY10 FY11 FY12 FY13 Industrial resins Industrial adhesives Organic pigments and preparations

Source: Company, Edelweiss research

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

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

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

4 Edelweiss Securities Limited Pidilite

Table 1: Low competitive intensity creating a strong entry barrier Segment Pidilite brands Competition brands Use Adhesive & Sealant Fevicol, Fevistik, Fevikwik, Mseal, Jivanjor, Carpenter, Woodwork, Flooring, Upholstery, Steelgrip, Feviquick Araldite, Dendrite Footwear, Plumbing, electrical and decorative purposes Construction chemical ROFF, Dr. Fixit, Fevimate Sika, Fosroc Waterproofing, Admixture, Tile fixing, Floor hardening, Sealants, Heat reduction coating Art material & stationery Fevicryl, Hobby Idea, Fevicraft, Camlin, Faber Castle Education, Publication, Painting Sargent Art Fabric care Ranipal Ujala Cloth brightner, Stain removal Automotive Cyclo, Motomax Castrol Lubricant, Engine Oil, Maintenance, Polishing Decorative paints Wudfin, Piditint Asian Paints, Berger Wood finishing, Interior coating and wall finishing Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol, Henkel, Huntsman, Packaging and converting, cigarette, book Pidiprimer, Kondicryl Sika, 3M, HB fuller binding, stickers, lamination and labelling, Footwear Textile Chemical Texcron, Dopcron, Pidifinish, BASF, Jubiliant Pigment dispersion, Pigment printing Pidicryl Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubiliant Waterbased decorative paint, Industrial paint, Coatings and Construction chemical Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic Masterbatches, Textile Dispersions, Rubber, Dry Colours Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubiliant Fungicide, Bactericide, Degreasing agent, Binder Source: Company, Edelweiss research

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

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

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

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

Chart 6: A&P— helps build strong brands 5.0

4.4

3.8

3.2 (as % of sales) of % (as

2.6

2.0 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company, Edelweiss research

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

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

6 Edelweiss Securities Limited Pidilite

Table 2: Promotional activities Activities Purpose Fevicol Furniture Book Publishing magazines for 300,000 carpenters every quarter showcasing furniture designs with illustrations, measurements, etc aimed to enlighten carpenters on the recent trends and styles Fevicol Champion's Club ~45000 member club that provides a platform for carpenters to increase their social contacts and to make them a part of the social network Different courses Courses aimed for housewives for the effective use of art material Dr Fixit Institute Knowledge centre aimed to help Indian construction experts interact with the international experts in the field of waterproofing and building repairs Fevicol science project challenge Initiated an inter school contest in 2011 tp promote its hobby ideas products reaching over 330 schools across India and over 55,000 students

Source: Company, Edelweiss research

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

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

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

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

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

7 Edelweiss Securities Limited Consumer Goods

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

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

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

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

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

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

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

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

53.0

48.0 (%) 43.0

38.0

33.0 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company, Edelweiss research

Chart 8: EBITDA margin stable despite rising crude prices 7,000 25.0

6,000 20.0

5,000 15.0 (%) 4,000 10.0 (INR/barrel) 3,000 5.0

2,000 0.0

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

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

9 Edelweiss Securities Limited Consumer Goods

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

0.48

0.46

0.44

(as % of sales) of % (as 0.42

0.40 FY10 FY11 FY12 FY13

Source: Company, Edelweiss research

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

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

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

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

Source: Company, Edelweiss research

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

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

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

- Sandeep Batra, Director Finance

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Sensitivity analysis: Impact of INR depreciation

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

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

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

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

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

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

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Valuation

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

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

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

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

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

350 30x

280 25x

20x 210 15x (INR) 140 10x 70

0 08 09 09 10 10 11 11 12 12 13 13 ------Nov Nov Nov Nov Nov Nov May May May May May Source: Edelweiss research

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Key Risks

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

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

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

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

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

15 Edelweiss Securities Limited Consumer Goods

Porter’s 5 Forces Analysis

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

Threat of substitutes: Low It faces low competition from substitutes.

Bargaining power of customers: Low Being market leader, PIDI commands strong pricing power with competitors following suit.

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

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

Fig. 1: SWOT analysis

Strength Weakness

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

Opportunities Threats

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

Source: Edelweiss research

16 Edelweiss Securities Limited Pidilite

Company Description

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

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

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

Consumer and Bazaar Industrial speciality products (81%) products (19%)

Adhesives and Industrial sealants (51%) adhesives (7%)

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

Art Material and Organic pigments and stationery (10%) preparation (6%)

Source: Edelweiss research

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

17 Edelweiss Securities Limited Consumer Goods

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

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

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

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

18 Edelweiss Securities Limited Pidilite

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

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

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

Table 7: Industrial products’ segmentation Industrial products Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol, Henkel, Huntsman, Packaging and converting, cigarette, book Pidiprimer, Kondicryl Sika, 3M, HB fuller binding, stickers, lamination and labelling, Footwear Textile Chemical Texcron, Dopcron, Pidifinish, BASF, Jubiliant Pigment dispersion, Pigment printing Pidicryl Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubiliant Waterbased decorative paint, Industrial paint, Coatings and Construction chemical Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic Masterbatches, Textile Dispersions, Rubber, Dry Colours Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubiliant Fungicide, Bactericide, Degreasing agent, Binder Source: Company, Edelweiss research

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

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

Organic pigments and preparation : Pioneer in manufacturing Pigment Violet 23 in India. Market leader in pigment dispersions for textile segment, segment contributes to around 6% to total revenue.

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

19 Edelweiss Securities Limited Consumer Goods

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

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

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

Awards: • Fevicol was ranked as India’s 45th Most Trusted Brand in 2012 in Brand Equity’s Most Trusted brands survey

• Fevicol was also ranked 3rd Most Trusted Brand in the Household Care Category

• Fevicol was ranked amongst the Most Trusted Brands list for 5 consecutive years

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

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

20 Edelweiss Securities Limited Pidilite

Key Management Personnel

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

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

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

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

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

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

21 Edelweiss Securities Limited Consumer Goods

Financial Outlook

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

Chart 11: Revenues to continue strong growth trend 60,000 25.0

50,000 20.0

40,000 15.0 (%) 30,000 10.0 (INR mn) (INR

20,000 5.0

10,000 0.0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Total revenues % growth YoY

Source: Company, Edelweiss research

EBITDA margin likely to be stable over FY14-16 With expected A&P spends to return to earlier level of ~3.5% of sales cushioning EBITDA margin. The company has effected price hikes in the past to offset input cost inflation and being the market leader in the category it is present in, we expect margin to be sustainable over the long term.

Chart 12: EBITDA margin stable 12,000 20.0

9,600 16.0

7,200 12.0 (%)

(INR mn) (INR 4,800 8.0

2,400 4.0

0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E EBITDA EBITDA Margin

Source: Company, Edelweiss research

22 Edelweiss Securities Limited Pidilite

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

Chart 13: Strong PAT growth 8,000 14.0

6,400 11.2

4,800 8.4 (%)

(INR mn) (INR 3,200 5.6

1,600 2.8

0 0.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E PAT PAT margins

Source: Company, Edelweiss research

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

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

23 Edelweiss Securities Limited Consumer Goods

Financial Statements

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

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

24 Edelweiss Securities Limited Pidilite

Balance sheet (INR mn) Cash flow metric As on 31st March FY13 FY14E FY15E FY16E Year to March FY13 FY14E FY15E FY16E Share capital 513 513 513 513 Operating cash flow 5,175 5,180 5,663 6,768 Reserves 16,003 19,293 23,284 28,038 Financing cash flow (3,395) (2,767) (2,108) (2,539) Shareholders' funds 16,515 19,806 23,796 28,551 Investing cash flow (1,890) (1,120) (1,300) (1,100) Minority 10 12 16 20 Change in cash (109) 1,294 2,255 3,128 Long term borrowings 0 92 127 162 Capex (1,045) (1,120) (1,300) (1,100) Short term borrowings 510 52 72 92 Dividends paid (1,559) (1,779) (2,158) (2,572) Current maturities of long term debt602 118 163 208 Borrowings 1,112 262 362 462 Ratios Deferred tax liability 499 499 499 499 Year to March FY13 FY14E FY15E FY16E Sources of funds 18,136 20,579 24,673 29,532 ROAE (%) 28.3 27.8 28.1 27.8 Tangible assets 5,656 6,090 6,358 6,564 ROACE (%) 34.1 40.1 40.0 38.3 Intangible assets 812 812 812 812 Debtor days 40 40 40 40 Capital work in progress 4,280 4,200 4,400 4,400 Inventory days 89 89 89 89 Total net fixed assets 10,747 11,101 11,570 11,776 Payable days 41 42 42 42 Non current investments 85 85 85 85 Cash conversion cycle (days) 88 87 87 87 Current investments 2,846 2,846 2,846 2,846 Current ratio 2.0 2.2 2.6 3.0 Cash and cash equivalents 1,506 2,800 5,055 8,183 Debt/EBITDA 0.2 0.0 0.0 0.0 Inventories 5,236 5,728 6,757 7,902 Debt/Equity 0.1 0.0 0.0 0.0 Sundry debtors 4,305 4,787 5,622 6,552 Adjusted debt/equity 0.1 0.0 0.0 0.0 Loans and advances 914 914 914 914 Interest coverage (x) 24.8 39.7 93.4 84.6 Other assets 113 113 113 113 Total current assets (ex cash) 10,568 11,543 13,406 15,482 Operating ratios Trade payable 2,501 2,680 3,173 3,724 Year to March FY13 FY14E FY15E FY16E Other current liab. & provisions 5,115 5,115 5,115 5,115 Total asset turnover 2.1 2.2 2.2 2.2 Total current liab. & provisions 7,616 7,796 8,288 8,839 Fixed asset turnover 5.8 6.4 7.2 8.1 Net current assets (ex cash) 2,951 3,747 5,118 6,642 Equity turnover 2.5 2.4 2.3 2.3 Uses of funds 18,136 20,579 24,673 29,532 BV (INR) 32.4 38.9 46.7 56.0 Valuation parameters Year to March FY13 FY14E FY15E FY16E Free cash flow (INR mn) Diluted EPS (INR) 8.2 9.9 12.0 14.3 Year to March FY13 FY14E FY15E FY16E Y-o-Y growth (%) 32.9 20.1 21.3 19.1 Net profit 4,240 5,070 6,149 7,326 CEPS (INR) 6.5 7.5 9.0 10.5 Add: Non cash charge 860 906 885 966 Diluted P/E (x) 35.7 29.7 24.5 20.6 Depreciation 686 766 831 894 Price/BV (x) 9.1 7.6 6.3 5.3 Others 174 140 53 72 EV/Sales (x) 4.0 3.4 2.8 2.4 Gross cash flow 5,099 5,976 7,033 8,293 EV/EBITDA (x) 24.4 19.6 16.3 13.7 Less:Changes in WC (604) (796) (1,371) (1,525) Dividend yield (%) 0.9 1.0 1.2 1.5 Cash from operations 4,495 5,180 5,663 6,768 Less: Capex 1,045 1,120 1,300 1,100 Free cash flow 3,451 4,061 4,363 5,668

25 Edelweiss Securities Limited Consumer Goods

Additional Data

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

Auditors - M/s Deloitte Haskins & Sells - Chartered Accountants *as per last annual report

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

Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available

*in last one year

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No data available

*in last one year

26 Edelweiss Securities Limited RATING & INTERPRETATION

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

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

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

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

Stock return < 1.25 x Sector return

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

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

RELATIVE RISK RATING

Ratings Criteria

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

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

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

Risk ratings are based on Edelweiss risk model

SECTOR RATING

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

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

27 Edelweiss Securities Limited Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400 , Email : [email protected] Vikas Khemani Head Institutional Equities vikas.khemani@edel weissfin .com +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare, United Spirits

Recent Research

Date Company Title Price (INR) Recos

26 -Nov -13 United High on W&M potential stake 2,622 Buy Spirits Sale; Edelflash 22 -Nov -13 Consumer Margins Healthy, Volumes Goods divergent; Result Review 18 -Nov -13 ITC Forays into nicotine gums ; 314 Buy EdelFlash

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 127 44 8 180 Buy appreciate more than 15% over a 12-month period * 1 stocks under review Hold appreciate up to 15% over a 12-month period > 50bn Between 10bn and 50 bn < 10bn

Reduce depreciate more than 5% over a 12 -month period Market Cap (INR) 112 54 14

28 Edelweiss Securities Limited Pidilite

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