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Pidilite: On a sticky wicket
Sep 8, 2009

Pidilite is one of the leading FMCG companies in India and it is the market leader in craftsmen products, DIY (Do-it-Yourself) products and industrial specialty chemicals. The product range can be broadly classified into three main categories – Branded Consumer and Bazaar Products, industrial products and others segment. On the consumer side, it has products under art materials, adhesives, sealants, fabric care and car care segments. For the industrial product range, it has products in industrial adhesives, industrial pigments, leather chemicals and textile resins. The others segment consists of Vinyl Acetate Monomer (VAM) which finds use in adhesives, coatings, paints, films and textile. The company's major subsidiaries are in USA, Brazil, UAE and Thailand. On a consolidated basis, Pidilite gross sales grew by 14%, while net profit declined by 35.5%. This decline has been due to the rising cost of raw material and the slowing demand. Overseas subsidiaries incurred higher losses in the current year due to the difficult economic scenario for most part of the year.

Branded Consumer and Bazaar Products
This segment contributes 73% of the total sales of the company. While this segment has grown by 20% CAGR over the last 5 years, it grew by 13.6% YoY in FY09. Sales of branded Adhesives and Sealants which contribute 50% of the total sales of the company grew by 10.8%, while the sale of construction and paint chemicals grew by 24.3%. Art materials and other products grew by 11%. The growth of this division was affected by the slowdown in demand. Exports of Consumer and Bazaar products which have been growing at 44% CAGR over the last 5 years grew by 16% YoY to Rs 854 m in FY09. Earnings before interest and tax for the Consumer and Bazaar segment grew by 3.8%.

Speciality Industrial Chemicals
This segment contributed 22% to the total sales of the company and grew by 13.8%. Exports of Speciality Industrial Chemicals grew by 39% to Rs 977 m. The company achieved this growth due to new product development, focused activities and application development. Earnings before interest and tax for the Speciality Industrial Chemicals segment grew by 5.36%.

Others (VAM)
Sales of VAM declined by 10.6% YoY to Rs.1 bn while earnings before interest and tax declined by 45.5%. This was due to the rising raw material costs during the year.

New Products
The company during the year launched new products under its adhesives and sealants segment. The range has been expanded to include adhesives for fixing tiles, marble, granite, etc. on various surfaces, adhesives for fixing wall papers and adhesive for laying wooden floors. The company also launched new products under its waterproofing segment such as products for sealing construction joints in RCC structure, bituminous waterproofing products for terraces and for internal waterproofing of the walls of potable water tanks. A new product launched during the year was Fevicol Glue Drop which is a double sided instant bond glue in a dot form. This product finds use in households, offices and handicraft segment.

Balance Sheet Analysis:
Debt to equity ratio of the company has increased from 0.4 in FY08 to 0.7 in FY09 while the return on capital has fallen from 25.6 to 14.1 during the same period. This reflects additional debt of Rs.1.6 bn taken by the company in the form of FCCBs during the year and lower net profit during the year. However, the balance sheet looks comfortable as the interest coverage ratio is 4.5 times. The current ratio is a comfortable 2.4 showing adequate liquidity in the short term while inventory turnover days have reduced from 64 to 51 days showing better inventory management by the company. The return on assets has fallen from 28% in FY08 to 16% in FY09, reflecting lower profit for the year. Net fixed assets, adjusting for intangibles make up 42% of the total assets signifying that the company is invested in hard assets.

What to expect?
At a price of Rs. 148, the company is trading at 19.8 times its trailing twelve months earnings. Although the operating margins are expected to improve during the current year due to reduction in input cost, the economic slowdown in India and abroad is likely to affect Pidilite’s outlook in the short term. However, due to the wide portfolio of products and good market share in many segments, the company is expected to perform reasonably well in the long run.

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