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Pidilite: 'Stick'ing to growth

Aug 3, 2004

Performance summary
Adhesives and sealants major, Pidilite, reported a strong 16% topline growth during the June quarter. However, despite an improvement in operating margins, the company could report only a 14% bottomline growth. Higher taxes and lower other income were key reasons for this.

(Rs m) 1QFY04 1QFY05 Change FY04 Change
Net sales 1,661 1,923 15.8% 6,538 14.0%
Other income 19 14 -26.1% 90 57.0%
Expenditure 1,300 1,491 14.7% 5,436 17.2%
Operating profit (EBDITA) 362 432 19.6% 1,102 0.1%
Operating profit margin (%) 21.8% 22.5%   16.9%  
Interest 4 4 -13.6% 19 -38.7%
Depreciation 60 64 5.6% 255 13.2%
Profit before tax 316 379 20.0% 919 1.8%
Tax 105 139 32.2% 302 -2.2%
Extraordinary items 0 -1 - -2 -
Profit after tax 210 239 13.7% 614 3.5%
Net profit margin (%) 12.7% 12.4%   9.4%  
No. of Shares (m) 25.2 25.2   25.2  
Diluted earnings per share* (x) 33.3 37.9   24.3  
P/E ratio (x)   7.3      
(* annualised)          

What is the company's business?
Established in 1961, Pidilite Industries is the leader in the field of adhesives and sealants in India. It also manufactures a number of other products like art materials, construction and paint chemicals, industrial and textile resins and organic pigments. Consumer products account for 75% of total revenues of Rs 7.6 bn. In both FY03 and FY04, this segment has grown at nearly 18%. While both the industrial and bazaar product segments continue to be fragmented, Pidilite has in a sense, been a pioneer in providing an element of branding in these segments (Fevicol, Fevi Kwik etc).

What has driven performance in 1QFY05?
Industrial chemical surprise:  The key contributor to revenues, consumer and bazaar segment (Fevicol, art materials, construction/paint chemicals etc.) clocked nearly 12% topline growth, which in itself is enthusing. However, its so-called laggard business, industrial chemicals, outperformed with over 23% revenue growth. Consequently, its contribution to total revenues creeped up to nearly 27% during the quarter. The restructuring of this business, as well as an uptick in industrial adhesives and resins demand seems the key reason for this. The topline performance in the first quarter of FY05 was much better than even FY04, where the company had reported 14% YoY growth.

Segment revenue and margin snapshot
(Rs m) 1QFY04 1QFY05 Change FY04
Consumer & bazaar products 1,492 1,666 11.7% 5,560
PBIT margin (%) 25.6% 25.3%   21.1%
% of segment revenue 75.3% 73.4%   71.6%
Industrial products 490 603 23.1% 2,208
PBIT margin (%) 9.7% 14.4%   8.4%
% of segment revenue 24.7% 26.6%   28.4%
Total segment revenue 1,982 2,270 14.5% 7,767
PBIT margin (%) 21.7% 22.4%   17.4%
Less : Inter segment revenue 44 48 7.0% 210
Net segment revenue 1,938 2,222 14.7% 7,558

Restructuring benefits:  The company managed to more or less maintain its PBIT margins in the bazaar segment. However, restructuring helped it improve profitability of the industrial business significantly (see table). Consequently, overall operating margins too improved. Had it not been for a dip in other income and a rise in effective tax rate, the company's bottomline would have outpaced topline growth.

Cost break-up
as a % of net sales 1QFY04 1QFY05
Total cost of goods 35.3% 34.9%
Staff cost 8.2% 8.5%
Advertisement & promotion 11.9% 12.4%
Other expenditure 22.9% 21.7%

Over the last four quarters
Over the past few quarters, consumer and bazaar segment has continued to perform well. The industrial business too, has started to show some consistency in growth. Pidilite has managed to growth in bazaar business at over 15% CAGR over 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 acquired Roffe/Roff brand (pertaining to construction chemicals business) for a consideration of around Rs 140 m in July 2004.

  2QFY04 3QFY04 4QFY04 1QFY05
Sales growth (YoY) 16.7% 6.3% 21.1% 15.8%
OPM (%) 16.8% 14.5% 13.9% 22.5%
Net profit growth (YoY) 5.7% -28.0% 58.4% 13.7%
Consumer & bazaar products growth (YoY) 14.5% 9.6% 23.7% 11.7%
Industrial products growth (YoY) 22.6% 4.4% 12.6% 23.1%

What to expect?
At Rs 276, the stock trades at an attractive P/E of 7.3x 1QFY05 earnings and market cap. to sales of 0.9x. Though the company has shown some signs of tapering growth in consumer and bazaar segment, a 12% growth is still by no means insignificant. We are positively surprised by the industrial chemicals division performance. The only concern is low liquidity, as promoters hold 72% stake in the company.

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