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Pidilite: Robust bonding

Feb 9, 2005

Performance Summary
Adhesives bellwether, Pidilite, recently announced its December quarter (3QFY05) numbers. The company posted a solid 33% YoY bottomline growth backed by a buoyant 24% topline growth. Although other income was up by 88%, as compared to the corresponding quarter last year, it was not the sole reason for the strong bottomline momentum. The company finished 9mFY05 with a 19.1% revenue growth and around 15% bottomline growth.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 1,665 2,067 24.2% 5,028 5,987 19.1%
Other income 12 22 88.2% 60 77 28.9%
Expenditure 1,423 1,750 23.0% 4,126 4,931 19.5%
Operating profit (EBDITA) 242 317 31.0% 901 1,057 17.2%
Operating profit margin (%) 14.5% 15.3%   17.9% 17.6%  
Interest 4 4 5.1% 14 12 -10.3%
Depreciation 64 72 13.0% 186 204 9.2%
Profit before tax 186 263 41.4% 761 918 20.6%
Tax 60 95 58.9% 248 328 32.4%
Profit after tax 127 168 33.1% 513 590 14.9%
Net profit margin (%) 7.6% 8.1%   10.2% 9.8%  
No. of Shares (m) 25.2 25.2   25.2 25.2  
Diluted earnings per share* (x) 20.0 26.7   27.1 31.1  
P/E ratio (x)         13.0  
(* annualised)            

What is the company's business?
Since its inception in 1959, Pidilite has been a pioneer and 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, car care, etc. segments. For the less contributive industrial product range, it has products in the 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, M-seal, etc.

What has driven performance in 3QFY05?
Dual fillip: The company registered an overall growth of 23% in volumes. Consumer & bazaar products, which have grown at a consistent CAGR of 18% in the past 5 years, continued in the same view in 9mFY05 as well. The adhesives and sealant market, is estimated at Rs 7 bn and has been growing at 15% plus over the last few years. Pidilite is among the few companies that have continued to grow in buoyant double digits. What's more, the industrial division too has had an equally buoyant FY05 so far. Industrial recovery, as well as the company's focused push to this business has yielded results.

Segment revenue and margin snapshot
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Consumer & bazaar products 1,417 1,750 23.5% 4,323 5,106 18.1%
PBIT margin (%) 19.6% 19.0%   22.3% 21.8%  
% of segment revenue 71.6% 71.8%   72.0% 71.9%  
Industrial products 562 687 22.1% 1,685 1,996 18.4%
PBIT margin (%) 3.0% 6.5%   7.3% 8.2%  
% of segment revenue 28.4% 28.2%   28.0% 28.1%  
Total segment revenue 1,979 2,437 23.1% 6,008 7,101 18.2%
PBIT margin (%) 14.8% 15.5%   18.1% 18.0%  
Less : Inter segment revenue 50 42 -16.1% 191 174 -8.9%
Net segment revenue 1,929 2,395 24.1% 5,817 6,927 19.1%

Industrial products gathering momentum: The company's consumer and bazaar products division, which constitutes 72% of revenues, saw margins decline by 60 basis points to 19%. However, on the other hand industrial products, which account for 28% of the company's revenues, saw a growth of 350 bps in its PBIT margins. Overall, the company reported an increase of 80 bps in profit margins from 14.5% in 3QFY04 to 15.3% in 3QFY05. The most encouraging aspect of this performance was the increased profitability of the industrial products segment, which has improved the company's overall profitability.

Cost break-up
as a % of net sales 3QFY04 3QFY05 9mFY04 9mFY05
Total Cost of goods 42.1% 44.6% 37.8% 40.3%
Staff Cost 8.4% 7.8% 8.2% 8.1%
Advertisement & Promotion 10.9% 11.3% 11.7% 12.1%
Other Expenditure 24.1% 20.9% 24.4% 21.9%
Total Expenditure 85.5% 84.7% 82.1% 82.4%

Over the last five quarters
Over the past few quarters, consumer and bazaar segment has continued to perform well. The industrial business too has started picking up and is showing some consistency in growth. Pidilite has managed to grow its bazaar business at over 18% 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. In continuation of this strategy, Pidilite has incorporated a wholly owned subsidiary under the banner "Pidilite International Pte Ltd" in Singapore in 3QFY05 for company's international operations including acquisitions of overseas company's and joint ventures. It recently acquired "Chemson Asia Pte., Ltd", an existing company in Singapore, which is in the business of manufacturing of waterproofing coating and emulsion paints. The aim is to expand revenues from international markets.
  3QFY04 4QFY04 1QFY05 2QFY05 3QFY05
Sales growth (YoY) 6.3% 21.1% 15.8% 18.5% 24.2%
OPM (%) 14.5% 13.9% 22.5% 15.4% 15.3%
Net profit growth (YoY) -28.0% 58.4% 13.7% 10.3% 33.1%
Consumer & bazaar products growth (YoY) 9.6% 23.7% 11.7% 19.5% 23.5%
Industrial products growth (YoY) 4.4% 12.6% 23.1% 11.5% 22.1%

What to expect?
At Rs 405, the stock trades at a P/E of 13x 9mFY05 annualised earnings and market cap. to sales of 1.3x. The company's continued double digit performance on the revenue front enthuses us. The industrial chemicals division too is performing better. The only concern is low liquidity, as promoters hold 72% stake in the company.

We had rated the stock a BUY in July 2004 with a target price of Rs 425. The stock is very near those levels. We believe that the company has the strength to continue its revenue growth performance over the next couple of years. As such, the stock is likely to be further re-rated. We are working on the numbers and once we get a little more clarity from the management, we will again revisit Pidilite.

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