Pidilite: Buoyancy tapered by 'crude' jolt - Views on News from Equitymaster

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Pidilite: Buoyancy tapered by 'crude' jolt

Nov 5, 2004

Performance summary
Adhesives and sealants major, Pidilite, reported a strong 18.5% topline growth during the September quarter. However, pressure on operating margins led to the company reporting only 10% bottomline growth. On a half yearly basis, the company reported nearly 17% topline and over 12% bottomline growth.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales1,6841,99718.5%3,3633,92016.6%
Other income294140.2%485514.2%
Expenditure1,3991,69020.8%2,7163,18217.1%
Operating profit (EBDITA)2863077.4%64773814.1%
Operating profit margin (%)16.9%15.4% 19.2%18.8% 
Interest 54-18.9%108-16.5%
Depreciation62688.8%1231327.3%
Profit before tax24727511.4%56365316.1%
Tax839413.6%18823324.0%
Profit after tax16418110.3%37442012.2%
Net profit margin (%)9.7%9.1% 11.1%10.7% 
No. of Shares (m)25.225.2 25.225.2 
Diluted earnings per share* (x)26.028.7 29.733.3 
P/E ratio (x)    9.1 
(* 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 accounted for over 70% of total revenues of Rs 7.6 bn in FY04. 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 2QFY05?
Bazaar picks up speed:  The key contributor to revenues, consumer and bazaar segment (Fevicol, art materials, construction/paint chemicals etc.) clocked nearly 20% topline growth in the quarter (12% in June quarter). However, its industrial chemicals business showed signs of slowing down. The business had reported a strong 23% revenue growth in June quarter. But in the September quarter, this pace of growth slowed down to 11.5% YoY. Nevertheless, the overall revenue performance is enthusing. Pidilite continues to be among the few companies that have continued to grow in buoyant double digits.

Segment revenue and margin snapshot
(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Consumer & bazaar products1,4141,69019.5%2,9063,35615.5%
PBIT margin (%)21.5%21.3% 23.6%23.3% 
% of segment revenue69.1%70.6% 72.1%71.9% 
Industrial products63270511.5%1,1221,30916.6%
PBIT margin (%)9.1%4.5% 9.4%9.1% 
% of segment revenue30.9%29.4% 27.9%28.1% 
Total segment revenue2,0472,39517.0%4,0294,66515.8%
PBIT margin (%)17.6%16.4% 19.6%19.3% 
Less : Inter segment revenue9785-12.6%141132-6.4%
Net segment revenue1,9502,31018.5%3,8884,53216.6%

Industrials under pressure:  The company managed to more or less maintain its PBIT margins in the bazaar segment. However, after an improvement in profitability during June quarter, margins in its industrial products business have almost halved in the September quarter. This seems largely a result of high crude prices, which have led to an inflationary pressure on raw material costs. Consequently, overall operating margins were under pressure. Had it not been for a rise in other income, the company's bottomline would have grown at an even slower pace.

Cost break-up
as a % of net sales2QFY042QFY051HFY041HFY05
Total Cost of goods36.5%40.5%35.6%38.0%
Staff Cost8.7%8.1%8.4%8.3%
Advertisement & Promotion12.5%12.5%12.1%12.5%
Other Expenditure25.4%23.6%24.6%22.4%
Total Expenditure83.1%84.6%80.8%81.2%

Over the last five 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 grow its bazaar business at over 15% CAGR in 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.

 2QFY043QFY044QFY041QFY052QFY05
Sales growth (YoY)16.7%6.3%21.1%15.8%18.5%
OPM (%)16.8%14.5%13.9%22.5%15.4%
Net profit growth (YoY)5.7%-28.0%58.4%13.7%10.3%
Consumer & bazaar products growth (YoY)14.5%9.6%23.7%11.7%19.5%
Industrial products growth (YoY)22.6%4.4%12.6%23.1%11.5%

What to expect?
At Rs 302, the stock trades at an attractive P/E of 9.1x 1HFY05 annualised earnings and market cap. to sales of 1x. The company's continued double digit performance on the revenue front enthuses us. The industrial chemicals division too is performing better, but may continue to be under profitability pressure owing to high crude prices. The only concern is low liquidity, as promoters hold 72% stake in the company.

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