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Pidilite: Bonding power
Jan 24, 2007

Performance summary
Adhesives major, Pidilite has announced a decent set of numbers for the third quarter and nine months ended December 2006. The revenues have grown by 20% YoY during 3QFY07 led by the strong growth across its consumer and bazzar products. The company has witnessed an increase in the operating margins during the quarter due to fall in raw material prices. The bottomline has grown in line with the topline.

Financial performance snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 2,362 2,837 20.1% 7,010 8,878 26.6%
Expenditure 2,075 2,466 18.9% 5,825 7,470 28.2%
Operating profit (EBDITA) 287 371 29.3% 1,185 1,408 18.8%
EBDITA margin (%) 12.1% 13.1%   16.9% 15.9%  
Other income 66 42 -35.9% 138 108 -21.6%
Interest 5 23 400.0% 11 45 308.1%
Depreciation 71 75 6.6% 204 220 7.7%
Profit before tax 277 315 13.6% 1,108 1,252 12.9%
Extraordinary item/expense 1 1 0.0% 2 2 0.0%
Tax 75 73 -2.4% 339 296 -12.8%
Profit after tax/(loss) 202 241 19.6% 771 954 23.8%
Net profit margin (%) 8.5% 8.5%   11.0% 10.7%  
No. of shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share (Rs)*         4.3  
Price to earnings ratio (x)         28.1   
* On a trailing 12-months earnings            

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. 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 3QFY07?
Topline picture: The company registered an overall growth of 20% YoY in revenues during the quarter. Consumer products division (up 16% YoY) has yet again continued with its strong growth momentum. Its contribution to the total sales improved marginally from 74.4% in 3QFY06 to 74.7% in 3QFY07. As for the industrial products segment, which supplies adhesives, resins and pigments to industries, revenues have grown by 14.8% YoY in 3QFY07. Strong capital expenditure being incurred across industries and the key role that sealants, chemicals and adhesives play in these has seemingly aided growth during the third quarter.

Segment-wise performance
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Consumer & bazaar products 2,064 2,403 16.4% 6,187 7,607 22.9%
PBIT margin (%) 17.7% 16.4%   21.2% 19.7%  
% of revenue 74.4% 74.7%   74.5% 74.6%  
Industrial products 710 815 14.8% 2,122 2,597 22.4%
PBIT margin (%) 12.0% 11.2%   9.9% 11.2%  
% of revenue 25.6% 25.3%   25.5% 25.4%  
Total revenues* 2,774 3,218 16.0% 8,309 10,204 22.8%
PBIT margin (%) 16.2% 15.1%   18.3% 17.5%  
* Excludes inter-segment revenue

Stable margins: Pidilite managed increase its operating margins by a marginal 10 basis points led by a fall in the input cost (as percentage of sales). The staff cost and the other expenses remained more or less constant. On a segmental basis, the industrial products division reported a fall in the PBIT margins during the quarter, mainly due to weaker bargaining power owing to higher competition and limited exposure to this market. Consumer products also saw a margin decline of 130 basis points. The company’s revenue mix is changing and is getting more skewed towards consumer products, which is a positive as margins are much higher in this segment.

Cost break-up
As a % of net sales 3QFY06 3QFY07 9mFY06 9mFY07
Total Cost of goods 54.1% 53.0% 52.4% 52.7%
Staff Cost 8.2% 8.5% 8.6% 7.9%
Other Expenditure 25.6% 25.4% 22.2% 23.5%

Profits inline with topline: Strong topline growth along with a marginal increase in the margins has helped Pidilite’s bottomline grow by 19.6% YoY despite lower other income and higher interest costs. Further, lower tax outgo (the effective tax rate has declined from 27.1% in 3QFY06 to 23.3% in 3QFY07) has also helped matters. With its fourth unit in Himachal Pradesh getting operational in this quarter, the company benefited from the tax breaks.

What to expect?
At the current price of Rs 121, the stock is trading at a price to earnings multiple of 28.1 times its trailing 12-month earnings. The company has continued with its strong growth momentum with its strategy of new product launches and line extensions, apart from a wider retail foray and inorganic growth initiatives. Also, its global ventures will continue to do well going forward. However, the behaviour of crude prices (as it impacts the company’s cost of sales) will be a critical factor for determining its profitability.

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