Pidilite Industries is engaged in the manufacture of adhesives and sealants (60% of turnover). Its flagship product ‘Fevicol’ is generic name for adhesives in India and commands 60% market share. The company is backed by a strong R&D base and has pioneered almost 60% of the products it sells. Therefore, its products command a huge price premium (nearly 500%) over competing brands.
Pidilite also manufactures organic pigments and preparations (12% of turnover), industrial and textile resins (11%), construction/paint chemicals (11%) and art materials (3%). The company has over 400 products in its portfolio. It introduces brand extensions of 2 products every year, owing to low market development costs. This is a result of its strong distribution muscle of over 300,000 retail outlets and 5,000 industrial customers.
Currently, Pidilite has over 40 brands in its folio. The company has been shown a keen interest in branding its products. For this, it has been continuously introducing or acquiring new brands. In FY00, Pidilite acquired the ‘M-Seal’ brand, a market leader in the branded in the epoxy sealants segment. In fact, ‘M –Seal’ with sales of Rs 170 m, dominates the Rs 300 m epoxy sealants market. FY00 also marked the company’s maiden entry in the Rs 2 bn branded fabric whitener market, with the acquisition of ‘Ranipal’ from Indian Dyestuff Industries.
Apart from this, Pidilite has concentrated on expansion of its distribution network, revamping of sales and marketing structure and improvements in brand management and sales systems. In fact, its brand ‘Fevikwik’s’ commercial won the ‘Best TV commercial of the century’ award at the ABBY awards 2000.
As a result of all these efforts, the contribution of branded products to the company’s total turnover has been steadily on the rise. Branded sales accounted for 52% in FY94. In FY00, branded sales contributed a hefty 65% to Pidilite’s turnover.
However, the company like all FMCG companies has been adversely affected by a slow down in consumer spending. As a result, Pidilite’s turnover growth for FY01 is likely to be slightly in the negative. As per our estimation, its turnover for FY01 will be around Rs 4,400 m. This is 5% lower than turnover reported in FY00. The company is likely to report a marginal growth in its bottomline during FY01E (Rs 486 m).
Till now Pidilite has had it easy in the branded sealants and adhesives market. But, seeing the opportunity, lot of new players like ‘Parcol’ have entered the fray. Some of them have already turned on the heat by price-cutting. Also, the entry into fabric whiteners is a diversification from its core business, which could later hamper the company’s profitability growth.
The company’s stock trades at Rs 239, at a P/e multiple of 12.4 times its FY01 estimated earnings. Pidilite looks inclined to get out of its chemicals division, and concentrate more on brands. This is a positive strategy and despite the concerns reflected above, these are reasonable valuations for this branded adhesive major.