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Pidilite: Tax saves the day! - Views on News from Equitymaster
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Pidilite: Tax saves the day!
Jan 23, 2006

Introduction to results
Adhesives major, Pidilite, announced its December quarter results on Saturday. The company has reported a decent topline growth aided by the demand from the housing sector. Margin contraction during the quarter by 180 basis points, resulted in the company growing by a mere 1% at the operating level. However, the bottomline growth has outpaced the growth in topline mainly due to lower tax outgo, as the company recently set up a plant in ‘Baddi’, a tax haven and also because of higher other income. The abnormal rise in extraordinary expenses is due to donations made by the company to the tune of Rs 34 m.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 2,067 2,362 14.2% 5,987 7,010 17.1%
Expenditure 1,749 2,041 16.6% 4,927 5,778 17.3%
Operating profit (EBDITA) 318 321 1.0% 1,060 1,232 16.3%
Operating profit margin (%) 15.4% 13.6%   17.7% 17.6%  
Other income 22 66 193.3% 77 138 78.9%
Interest 4 5 9.8% 12 11 -9.0%
Depreciation 72 71 -1.8% 204 204 0.1%
Profit before tax 264 312 17.9% 921 1,155 25.4%
Tax 95 75 -20.8% 328 339 3.4%
Extraordinary Expenses 2 35 2220.0% 5 49 854.9%
Profit after tax 168 202 20.1% 588 767 30.5%
Net profit margin (%) 8.1% 8.5%   9.8% 10.9%  
Effective tax rate 35.9% 24.1%   35.6% 29.4%  
No. of Shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share* (Rs)         3.7  
P/E ratio (x)         23.8  
(* Trailing 12 months)            

What is the company’s business?
Pidilite is the market leader in craftsmen products, DIY (Do-it-Yourself) products and industrial specialty chemicals. The product range can be broadly classified into two main categories – consumer products and speciality industrial products. On the consumer side, it has products under art materials, publications, adhesives and sealants, fabric care and car care segments. For the less contributive industrial product range, it has products in industrial adhesives, industrial pigments, leather chemicals and textile resins to offer. It has a diverse portfolio in both these segments and its offerings include renowned brands like Fevicol, Steelgrip, Acron and M-seal.

What has driven performance in 3QFY06?
Respectable topline performance: The company registered an overall growth of over 14% YoY in revenues during the quarter. Consumer products, which have grown at a consistent CAGR of 18% in the past 5 years, continued their strong growth momentum and clocked an 18% YoY growth in the December quarter. It must be noted that within the consumer products category, the adhesives and sealant market, which is estimated at Rs 7 bn, has been growing at 15% plus over the last few years. This has seemingly aided the growth of this business segment. Pidilite is among the few FMCG companies that have continued to grow in buoyant double digits over the last couple of years. However, the industrial division has registered a paltry growth of 3% YoY during the quarter.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Consumer & bazaar products 1,750 2,064 18.0% 5,106 6,187 21.2%
PBIT margin (%) 19.0% 17.7%   21.8% 21.2%  
% of revenue 71.8% 74.4%   71.9% 74.5%  
Industrial products 687 710 3.3% 1,996 2,122 6.3%
PBIT margin (%) 6.5% 12.0%   8.2% 9.9%  
% of revenue 28.2% 25.6%   28.1% 25.5%  
Total revenues 2,437 2,774 13.8% 7,101 8,309 17.0%
PBIT margin (%) 15.5% 16.2%   18.0% 18.3%  
Less : Inter segment revenue 42 58 37.8% 174 213 22.5%
Gross revenues 2,395 2,716 13.4% 6,927 8,096 16.9%

Margins – a mixed bag: As far as margins are concerned, the industrial products division recorded a commendable 550 basis points expansion in PBIT margins during the quarter, which aided the bottomline growth to some extent. However, we believe that this is likely to decline going forward, mainly due to weaker bargaining power owing to higher competition and limited exposure of the company to this market.

Cost break-up
as a % of net sales 3QFY05 3QFY06 9mFY05 9mFY06
Total Cost of goods 44.6% 42.3% 40.3% 40.1%
Staff Cost 7.8% 8.2% 8.1% 8.6%
Packaging material 11.3% 11.8% 12.1% 12.3%
Other Expenditure 20.9% 24.1% 21.9% 21.5%
Total Expenditure 84.6% 86.4% 82.3% 82.4%
On the other hand, consumer products (75% of revenues) saw margin’s contract by 140 basis points, owing to firm crude prices, which adversely affected the overall margin picture, and inturn profitability. The company’s revenue mix is changing and is getting more skewed towards the consumer products, which is positive, as the margins are much higher in this segment.

Over the past few quarters…

  3QFY05 4QFY05 1QFY06 2QFY06 3QFY06
Sales growth (YoY) 24.2% 13.0% 21.0% 16.3% 14.2%
OPM (%) 15.3% 11.4% 20.4% 18.3% 13.6%
Net profit growth (YoY) 33.1% 57.3% 27.8% 44.1% 20.1%
Consumer & bazaar products growth (YoY) 23.5% 12.0% 23.8% 22.0% 18.0%
Industrial products growth (YoY) 22.1% 17.9% 15.3% 15.3% 3.3%

As can be seen in the above table, the consumer and bazaar segment has continued to perform well. The industrial business too had started to show some consistency in growth, but failed to keep momentum in the current quarter. Pidilite has managed to grow its bazaar business at over 15% CAGR in the last 4-5 years led by product innovations and acquisitions of small brands that fit its folio. The company has then worked on growing these brands.

What to expect?
At the current price of Rs 89, the stock is trading at a price to earnings multiple of 15.3 times our estimated FY08 earnings. Although we are satisfied with the company’s 3QFY06 performance, high crude prices continue to remain our key cause of concern. We had recommended a ‘Buy’ on the stock in March 2005 at Rs 43 with a price target of Rs 58, which has been breached cunningly. We believe that the company has the strength to continue its robust performance over the next couple of years. However, at the current juncture, the stock seems fairly valued.

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