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Pidilite: Glued to growth! - Views on News from Equitymaster
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Pidilite: Glued to growth!
Oct 18, 2005

Introduction to results
Adhesives major, Pidilite, announced its second quarter and half yearly results late yesterday. The company has reported a decent topline growth aided by the demand from the housing sector. However, the bottomline growth has outpaced the growth in topline owing to a significant expansion in margins, which is commendable considering strong crude prices.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 1,997 2,322 16.3% 3,920 4,648 18.6%
Expenditure 1,690 1,898 12.3% 3,181 3,750 17.9%
Operating profit (EBDITA) 307 424 38.2% 739 899 21.6%
Operating profit margin (%) 15.4% 18.3%   18.8% 19.3%  
Other income 41 28 -31.6% 55 72 32.0%
Interest 4 3 -25.6% 8 7 -18.5%
Depreciation 68 68 -0.4% 132 133 1.2%
Profit before tax 275 381 38.4% 654 831 27.1%
Tax 94 120 27.5% 233 264 13.2%
Profit after tax 181 261 44.1% 421 567 34.7%
Net profit margin (%) 9.1% 11.2%   10.7% 12.2%  
No. of Shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share* (x) 2.9 4.1   3.3 4.5  
P/E ratio (x)         16.7  
(* annualised)            

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 2QFY06?
Topline show continues: The company registered an overall growth of 16% YoY in revenues during the quarter. Consumer products, which have grown at a consistent CAGR of 18% in the past 5 years, continued their strong growth momentum and registered a 22% YoY growth in 2QFY06. 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 15% plus over the last few years. This has seemingly aided the growth of this business segment. Pidilite is among the few FMCG companies that have continued to grow in buoyant double digits over the last few years. However, the case for the industrial division has been different and it has registered a paltry growth of 2% YoY during the quarter.

Segment revenue and margin snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Consumer & bazaar products 1,690 2,062 22.0% 3,356 4,123 22.8%
PBIT margin (%) 21.3% 21.7%   23.3% 23.0%  
% of revenue 70.6% 74.2%   71.9% 74.5%  
Industrial products 705 718 1.8% 1,309 1,413 7.9%
PBIT margin (%) 4.5% 8.6%   9.1% 8.9%  
% of revenue 29.4% 25.8%   28.1% 25.5%  
Total revenues 2,395 2,780 16.1% 4,665 5,535 18.7%
PBIT margin (%) 16.4% 18.3%   19.3% 19.4%  
Less : Inter segment revenue 85 92 8.4% 132 156 17.7%
Gross revenues 2,310 2,688 16.3% 4,532 5,380 18.7%

Industrial products aid margin expansion: As far as margins are concerned, the industrial products division recorded a commendable 410 basis points expansion in PBIT margins during the quarter, which greatly aided the bottomline growth. Although, while we saw a margin expansion in the quarter in the industrial products segment, the same is likely to decline going forward, mainly due to weaker bargaining power owing to higher competition and limited exposure to this market.

Consumer products (74% of revenues) saw margin expansion of only 40 basis points, owing to firm crude prices. The company’s revenue mix is changing and is getting more skewed towards the consumer products, which is a positive as margins are much higher in this segment.

Cost break-up
% of net sales 2QFY05 2QFY06 1HFY05 1HFY06
Total Cost of goods 40.5% 37.2% 37.8% 38.9%
Staff Cost 8.1% 8.8% 8.3% 8.8%
Advertisement & Promotion 12.5% 13.3% 12.5% 12.6%
Other Expenditure 23.6% 22.5% 22.7% 20.4%
Total Expenditure 84.6% 81.7% 81.2% 80.7%

Stock benefit: During the quarter under review, the company had an increase in stock to the tune of Rs 158 m, which greatly benefited the bottomline, and is visible in the table above, in cost of goods as a percentage of net sales. If we take out this effect, total expenditure has actually risen to 88%. Also, advertising expenditure and staff cost has marginally increased in the quarter.

Over the past few quarters
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY) 18.5% 24.2% 13.0% 21.0% 16.3%
OPM (%) 15.4% 15.3% 11.4% 20.4% 18.3%
Net profit growth (YoY) 10.3% 33.1% 57.3% 27.8% 44.1%
Consumer & bazaar products growth (YoY) 19.5% 23.5% 12.0% 23.8% 22.0%
Industrial products growth (YoY) 11.5% 22.1% 17.9% 15.3% 1.8%

What to expect?
At the current price of Rs 75, the stock is trading at a price to earning multiple of 16.7 times our estimated FY07 earnings. While the topline has been almost in line with our FY06 estimates, the operating level performance, despite record high crude prices, has been encouraging. Having said that, although we are enthused by the company’s 2QFY06 performance, high crude prices continues to remain our key cause of concern. We had recommended a ‘Buy’ on the stock in March 2005, with the price target of Rs 58, which has been breached. We believe that the company has the strength to continue its robust performance over the next couple of years. However, at the current juncture, the stock seems adequately valued.

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