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Pidilite: ‘Tax’ing times! - Views on News from Equitymaster
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Pidilite: ‘Tax’ing times!
May 25, 2006

Introduction to results
Adhesives major, Pidilite, announced decent results for the fourth quarter and full year ended March 2006. For FY06, on a standalone basis, revenues and net profits are up 18% YoY and 22% YoY respectively. The company has also managed to maintain margins at FY05 levels. Higher other income and lower interest has aided the growth in bottomline. The board has recommended a dividend of Rs 1.25 per share (dividend yield of 1.2%).

Financial snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 1,708 2,065 21.0% 7,695 9,075 17.9%
Expenditure 1,513 1,821 20.3% 6,438 7,599 18.0%
Operating profit (EBDITA) 194 244 25.8% 1,257 1,477 17.5%
Operating profit margin (%) 11.4% 11.8%   16.3% 16.3%  
Other income 23 37 62.6% 101 175 73.6%
Interest 5 4 -20.0% 17 15 -12.0%
Depreciation 66 71 6.9% 270 275 1.8%
Profit before tax 146.2 206.8 41.5% 1,071 1,362 27.1%
Tax 4 74 1797.4% 332 426 28.2%
Extraordinary Expenses (1) (1)   (10) (49)  
Profit after tax 142 132 -6.8% 730 887 21.5%
Net profit margin (%) 8.3% 6.4%   9.5% 9.8%  
Effective tax rate 2.7% 35.8%   31.0% 31.3%  
No. of Shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share (Rs)         3.5  
P/E ratio (x)         29.0  

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 FY06?
Consumer products lead topline growth: Growth in Pidilite’s FY06 revenues has mainly been a result of the 22% YoY growth in revenues from the consumer and bazaar products segment. This segment contributed to 74% of revenues in FY06 (71% in FY05). 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 over 15% rate over the past few years. This has probably aided Pidilite’s growth in the fiscal. As for the industrial products segment, which supplies adhesives, resins and pigments to industries, revenues have grown by 7% YoY in FY06. Pidilite has outperformed our FY06 revenue estimates by 2%.

Segment-wise performance
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Consumer & bazaar products 1,385 1,706 23.2% 6,491 7,893 21.6%
PBIT margin (%) 16.4% 13.9%   20.7% 19.6%  
% of revenue 69.2% 71.4%   71.3% 73.8%  
Industrial products 617 684 10.9% 2,612 2,806 7.4%
PBIT margin (%) 4.6% 13.9%   7.3% 10.9%  
% of revenue 30.8% 28.6%   28.7% 26.2%  
Total revenues 2,002 2,390 19.4% 9,103 10,699 17.5%
PBIT margin (%) 12.7% 13.9%   16.8% 17.4%  

Margins maintained: Pidilite has managed to maintain operating margins at FY05 levels, despite a rise in raw material expenses (as % of sales). Savings in staff and other expenses has helped margin stability. On a segment-wise basis, PBIT margins of the consumer and bazaar products division contracted from 20.7% in FY05 to 19.6% in FY06. This seems mainly due to the firm global crude prices, whose derivatives are used by Pidilite as its key inputs. Industrial products business witnessed a PBIT margin expansion of 360 basis points to 10.9%. Importantly, the company’s revenue mix is gradually getting skewed towards the consumer products business. This is a positive considering the higher margins from this segment vis-à-vis the industrial segment.

Tax effect impacts bottomline: Stable operating margins, higher other income and lower interest costs have helped Pidilite post a superior bottomline growth vis-à-vis the growth in topline during FY06. But for a higher extraordinary expenditure owing to higher donations, the net profit growth would have been higher. As for 4QFY06, a tax write-back in the corresponding quarter of the previous fiscal and its absence in this year’s performance, has led to the bottomline recording a decline.

What to expect?
At the current price of Rs 102, the stock is trading at a price to earnings multiple of 17.4 times our estimated FY08 earnings. The FY06 performance, but for the higher tax impact, has almost been in line with our estimates. However, high crude prices and the subsequent impact in profitability continue to be our main concern. We believe that the company has the strength to continue its robust performance over the next couple of years.

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