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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) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 1,684 1,997 18.5% 3,363 3,920 16.6%
Other income 29 41 40.2% 48 55 14.2%
Expenditure 1,399 1,690 20.8% 2,716 3,182 17.1%
Operating profit (EBDITA) 286 307 7.4% 647 738 14.1%
Operating profit margin (%) 16.9% 15.4%   19.2% 18.8%  
Interest 5 4 -18.9% 10 8 -16.5%
Depreciation 62 68 8.8% 123 132 7.3%
Profit before tax 247 275 11.4% 563 653 16.1%
Tax 83 94 13.6% 188 233 24.0%
Profit after tax 164 181 10.3% 374 420 12.2%
Net profit margin (%) 9.7% 9.1%   11.1% 10.7%  
No. of Shares (m) 25.2 25.2   25.2 25.2  
Diluted earnings per share* (x) 26.0 28.7   29.7 33.3  
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) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Consumer & bazaar products 1,414 1,690 19.5% 2,906 3,356 15.5%
PBIT margin (%) 21.5% 21.3%   23.6% 23.3%  
% of segment revenue 69.1% 70.6%   72.1% 71.9%  
Industrial products 632 705 11.5% 1,122 1,309 16.6%
PBIT margin (%) 9.1% 4.5%   9.4% 9.1%  
% of segment revenue 30.9% 29.4%   27.9% 28.1%  
Total segment revenue 2,047 2,395 17.0% 4,029 4,665 15.8%
PBIT margin (%) 17.6% 16.4%   19.6% 19.3%  
Less : Inter segment revenue 97 85 -12.6% 141 132 -6.4%
Net segment revenue 1,950 2,310 18.5% 3,888 4,532 16.6%

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 sales 2QFY04 2QFY05 1HFY04 1HFY05
Total Cost of goods 36.5% 40.5% 35.6% 38.0%
Staff Cost 8.7% 8.1% 8.4% 8.3%
Advertisement & Promotion 12.5% 12.5% 12.1% 12.5%
Other Expenditure 25.4% 23.6% 24.6% 22.4%
Total Expenditure 83.1% 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.

  2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
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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