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Pidilite: ‘Bonded’ to growth - Views on News from Equitymaster
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Pidilite: ‘Bonded’ to growth
Oct 18, 2006

Performance summary
Adhesives major, Pidilite, has announced a decent set of numbers for the second quarter and half year ended September 2006. While revenues have grown by 34% YoY during 2QFY07, net profits are up 28% YoY. The company has, however, witnessed some pressure on operating margins, which have contracted by 320 basis points (3.2%) during the quarter. Weakness in margins has been mainly due to higher input costs. The performance for 1HFY07 has been almost similar with topline and bottomline growing strongly and margins being under pressure.

Financial performance snapshot
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 2,322 3,120 34.4% 4,648 6,040 29.9%
Expenditure 1,898 2,648 39.5% 3,750 4,965 32.4%
Operating profit (EBDITA) 424 472 11.5% 899 1,075 19.7%
EBDITA margin (%) 18.3% 15.1%   19.3% 17.8%  
Other income 28 44 57.7% 72 66 -8.2%
Interest 3 17 425.0% 7 23 245.5%
Depreciation 68 73 8.3% 133 144 8.2%
Profit before tax 381 426 11.9% 831 974 17.3%
Extraordinary item/expense 1 1 0.0% 1 39 3175.0%
Tax 120 93 -22.8% 264 223 -15.7%
Profit after tax/(loss) 260 333 28.0% 568 713 25.5%
Net profit margin (%) 11.2% 10.7%   12.2% 11.8%  
No. of shares (m) 252.4 252.4   252.4 252.4  
Diluted earnings per share (Rs)*         4.2  
Price to earnings ratio (x)         25.0  
* On a trailing 12-months earnings            

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 2QFY07?
All-round growth: Equally good performance from both the business segments, viz. consumer products and industrial products, has helped Pidilite stage a strong growth in its topline during 2QFY07. Incidentally, each of these segments recorded sales growth of 26.2% YoY for the quarter. While details are not provided by the company with respect to the growth drivers for these segments, for the consumer products business particularly, we believe that growth has been backed by the company’s unique positioning and continuous innovation. This, we believe shall help Pidilite sustain strong growth in the future as well. New product launches and line extensions in this segment are also likely to stand the company in good stead over the long run.

Segment-wise performance
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Consumer & bazaar products 2,062 2,626 27.4% 4,123 5,204 26.2%
PBIT margin (%) 21.7% 19.5%   23.0% 21.3%  
% of revenue 74.2% 72.9%   74.5% 74.5%  
Industrial products 718 975 35.8% 1,413 1,782 26.2%
PBIT margin (%) 8.6% 9.5%   8.9% 11.1%  
% of revenue 25.8% 27.1%   25.5% 25.5%  
Total revenues* 2,780 3,601 29.5% 5,535 6,986 26.2%
PBIT margin (%) 18.3% 16.8%   10.2% 10.0%  
* Excludes inter-segment revenue

As far as the industrial products business is concerned, strong capital expenditure being incurred across industries and the key role that sealants, chemicals and adhesives play in these, has seemingly aided growth during the second quarter.

Higher input costs dent margins: Despite the strong performance at the topline level, Pidilite’ operating margins took a 320 basis points hit during 2QFY07. This was mainly brought about by higher raw material costs. As percent of sales, these costs rose from 50.5% in 2QFY06 to 54.8% in 2QFY07. High global crude prices and the consequent effect on its derivatives, one of which (vinyl acetate monomer) is the key raw material for Pidilite, has led to these higher raw material costs. Higher packaging and freight costs have also seemingly aided the increase in costs of goods sold during the quarter. Pressure on margins would have been higher but for staff costs, which declined from 8.8% of sales in 2QFY06 to 7.3% of sales in 2QFY07.

As a % of net sales 2QFY06 2QFY07 1HFY06 1HFY07
Total Cost of goods 50.5% 54.8% 51.5% 52.5%
Staff Cost 8.8% 7.3% 8.7% 7.7%
Other Expenditure 22.5% 22.8% 20.4% 22.0%

Based on segments, while the consumer products segment witnessed a PBIT margin decline, the same expanded for the industrial products business. Relative price elasticities in terms of passing on the cost hike to consumers in the two segments has seemingly borne this effect on their respective PBIT margins.

Strong topline, lower taxes aid bottomline: Apart from the strong growth in topline, and despite the contraction in operating margins, Pidilite ahs reported a strong growth in its bottomline during 2QFY07. This has been aided by lower tax outgo, with the effective tax rate declining from 31.5% in 2QFY06 to 21.7% in 2QFY07. Tax benefits were seemingly due to beginning of operations at the company’s three units in Himachal Pradesh, which has been declared as a tax heaven for budding industries. The company is likely to benefit further from these tax breaks as the fourth unit in the northern state is expected to be operational in 3QFY07.

What to expect?
At the current price of Rs 105, the stock is trading at a price to earnings multiple of 25 times its trailing 12-month earnings. New product launches and line extensions, apart from a wider retail foray and inorganic growth initiatives, have helped Pidilite maintain its growth streak in the second quarter and the half-year period. Even going forward, while we expect benefits of these initiatives and that of a global foray to continue bearing fruit for the company, the way the crude prices behave (as it impacts the company’s cost of sales) will be a determining factor for profitability.

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