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Pidilite: Good year!
May 24, 2007

Performance summary
Adhesive major, Pidilite, has announced its 4QFY07 and full year FY07 results. During the quarter, the company has reported a topline growth of 29% YoY, while the bottomline grew by 83.6% YoY. The operating margins have remained stable. For the full year though, there has been a marginal contraction in operating margins in FY07. The bottomline growth at 35% YoY has come in at a higher rate than the topline growth of 27% YoY.

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Net sales 2,065 2,666 29.1% 9,075 11,544 27.2%
Expenditure 1,821 2,343 28.6% 7,598 9,731 28.1%
Operating profit (EBDITA) 244 323 32.5% 1,477 1,813 22.8%
EBDITA margin (%) 11.8% 12.1%   16.3% 15.7%  
Other income 37 82 121.6% 175 190 8.6%
Interest 4 18 350.0% 15 63 320.0%
Depreciation 71 83 16.9% 275 303 10.2%
Profit before tax 206 304 47.7% 1,362 1,637 20.2%
Extraordinary item/expense - -   2 2 0.0%
Donations - 15   47 96 104.3%
Tax 74 47 -36.5% 426 343 -19.5%
Profit after tax/(loss) 132 242 83.6% 887 1,196 34.9%
Net profit margin (%) 6.4% 9.1%   9.8% 10.4%  
No. of shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share (Rs)*         4.7  
Price to earnings ratio (x)         26.6  
* 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 FY07?
Show continues: With both the segments ie consumer and bazaar products and the industrial products registering a 23% YoY growth for the year, the company witnessed a 27% YoY increase in the topline performance for FY07. Pidilite is benefiting from strong trends in end user industries such as paints, construction, chemicals etc. It must be noted that Pidilite enjoys a loyal following for its products such as adhesives, sealants, fabric paints and construction chemicals. On the international front, the company is seeing significant market opportunities in places like Africa, South East Asia, Middle East and the US. We believe the topline performance is likely to be strong going forward as demand from these industries continues to be robust.

Segment-wise performance
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Consumer & bazaar products 1,706 2,143 25.6% 7,893 9,750 23.5%
PBIT margin (%) 14.0% 13.0%   19.7% 18.2%  
% of revenue 71.4% 71.1%   73.8% 73.8%  
Industrial products 684 873 27.6% 2,806 3,470 23.7%
PBIT margin (%) 13.9% 13.5%   10.9% 11.8%  
% of revenue 28.6% 28.9%   26.2% 26.2%  
Total revenues* 2,390 3,016 26.2% 10,699 13,220 23.6%
PBIT margin (%) 13.9% 13.2%   17.4% 16.5%  
* Excludes inter-segment revenue

Margins – A small hit: The company’s operating margins have contracted by 60 basis points during the full year. In terms of cost heads, it is mainly the higher raw material expenses that have put pressure on margins. On a segment-wise basis, PBIT margins of the consumer and bazaar products division contracted from 19.7% in FY06 to 18.2% in FY07. Industrial products business witnessed a PBIT margin expansion of 90 basis points. Importantly, the company’s revenue mix is gradually getting skewed towards the consumer products business. This is a positive, considering the superior margin profile of this segment vis-ŕ-vis the industrial segment.

Cost break-up
As a % of net sales 4QFY06 4QFY07 FY06 FY07
Total Cost of goods 50.7% 53.0% 52.0% 52.8%
Staff Cost 10.2% 9.0% 8.9% 8.2%
Other Expenditure 27.4% 25.8% 22.8% 23.3%

Lower taxes aid bottomline: Significantly lower tax outgo (effective tax rate has fallen from 31% in FY06 to 21% in FY07) has helped the company’s bottomline grow at a faster pace than the topline inspite of higher interest costs. With its fourth unit in Himachal Pradesh getting operational the company benefited from the tax breaks. In 4QFY07, the company witnessed 84% YoY growth in the bottomline led by higher other income and lower tax outgo.

What to expect?
At the current price of Rs 126, the stock is trading at a price to earnings multiple of 26.6 times its trailing 12-month earnings. Along with its focus on the domestic markets, Pidilite is investing significantly in the international markets of Africa, Middle East, Indonesia, Malaysia and the US viewing the rich market potential of these regions. Margins could however witness some pressure as the sales and distribution costs are higher at these locations. On the domestic front competition in the adhesives and sealants business could increase with the entry of Huntsman Advanced Materials. However Pidilite typically keeps up a steady stream of new product launches/product extensions. We believe that the company will continue working to de-risking its portfolio through such new product launches and international forays.

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