Pidilite: Better times ahead

Performance summary

• Topline grows by 4% YoY growth during 1QFY10 led by consumer division sales growth of 12% YoY.
• The operating margins see an improvement of 5% YoY during 1QFY10 led by lower raw material and other expenses as a percent of sales.
• Excluding forex changes and extraordinary items, net profits increase by 37% YoY during the quarter.
• Total revenue from overseas subsidiaries increase by 12.7% YoY. The losses have reduced to Rs.18 m as compared to Rs.47 m for the same period in the previous year.

Financial picture

Rs(m)	1QFY09	1QFY10	(%) Change
Net sales	5,013	5,197	3.7%
Expenditure	4,097	3,985	-2.7%
Operating profit (EBDITA)	916	1,212	32.4%
EBDITA margin (%)	18.3%	23.3%
Other income	3	29	829.0%
Interest	51	76	48.5%
Depreciation	106	114	7.5%
Foreign Exchange Difference	(113)	(62)	-
Profit before tax	649	989	52.4%
Extraordinary item/expense	5	2	-71.7%
Tax	94	140	48.5%
Profit after tax/(loss)	549	847	54.2%
Net profit margin (%)	11.0%	16.3%
No. of shares (m)	253.1	253.1
Diluted earnings per share (Rs)*		7.0
Price to earnings ratio (x)		20.8

* 12 month trailing earnings

What has driven performance in 1QFY10?

• Pidilite reported a topline growth of 4% YoY growth during 1QFY10. While the consumer division sales grew by 12% YoY, industrial products sales were impacted due to the general slow down in the economy. It grew by 5% YoY during 1QFY10. VAM division witnessed a decline of 94% YoY in sales due to the company’s decision to purchase VAM available in the market rather than operate the plant due to pricing. Going forward, with economy expected pick up, the company is likely to witness strong growth.
  Segment-wise performance

  (Rs m)	1QFY09	1QFY10	(%) Change
  Consumer & bazaar products	3,673	4,105	11.8%
  % of revenue	70.6%	77.8%
  Industrial products	1,089	1,145	5.1%
  % of revenue	20.9%	21.7%
  Others	444	25	-94.3%
  % of revenue		0.5%
  Total revenues	5,206	5,276	1.3%

• The operating margins saw an improvement of 5% YoY during 1QFY10 led by lower raw material and other expenses as a percent of sales. The raw material costs stood at 39% as compared to 44% of sales last year, a result of positive impact of lower crude prices on Pidilite’s cost structure. The staff costs however increased by 30%, thereby restricting further expansion in margins.

• Both the division witnessed strong double digit growth at the PBIT levels mainly led by decrease in material cost and control on expenses. The consumer division’s PBIT margins stood at 30% during 1QFY10 (25% during 1QFY09), while industrial division margins were at 17%, up 4.3% from 1QFY09.

• Excluding forex changes and extraordinary items, the net profits increased by 37% YoY during the quarter. Higher margins coupled with higher other income led to the increase.

• The consolidated net sales improved by 5% YoY. Pidilite has 13 overseas subsidiaries. Total revenue from overseas subsidiaries increased by 12.7% YoY. While still in losses, the company has done well to reduce the losses to Rs.18 m as compared to Rs.47 m for the same period in the previous year. Pidilite is taking steps to reduce costs and improve margins going forward. The consolidated net profits grew by 66% YoY

What to expect?

At the current price of Rs 145, the stock is trading at a price to earnings multiple of 20.8 times its trailing 12 month earnings. The lower raw material prices coupled with pickup in demand has aided the company. Further, on account of strong brands, there is a lot of steam left in fast-growing areas like education, home décor and automobiles. While the subsidiaries are still pressuring the balance sheet, the company has indicated of taking steps to improve the margins.