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Research meeting excerpts: Pidilite - Views on News from Equitymaster
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Research meeting excerpts: Pidilite
Dec 10, 2004

We met adhesives and sealants major, Pidilite, recently to get their view on the company’s prospects in the competitive scenario. The objective was to also find out whether they are geared to sustain the double-digit revenue growth rate that they have seen in the past.

Company background
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).

The company has reported nearly 17% topline and over 12% bottomline growth in the first half of FY05. The key contributor to revenues (72%), consumer and bazaar segment (Fevicol, art materials, construction/paint chemicals etc.) clocked nearly 16% topline growth during this period. Its industrial products business (28% of revenues), grew by nearly 17% in 1HFY05. 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 was among the few companies that have continued to grow in buoyant double digits.

The management view:
Strengths: Good product range, strong brands, good management and people, strong desire to grow.

Opportunities: Growth in Indian economy and potential of product range to grow in international markets.

Threats/Weaknesses: Slowdown in the economy, competition.

On the key business segments:
Consumer and bazaar segment: The company continues to focus on organic and inorganic growth in this segment. Adhesives and sealants (56% of FY04 revenues) continue to be driven by ‘Fevicol’ and its extensions. The ‘Fevicol’ white glue alone accounts for over 20% of revenues. The company has managed to retain its stranglehold on this business despite intense competition, by supporting it through aggressive marketing and advertising push. Product innovation has also been one of the company’s key strengths.

Construction and paint chemicals business that forms about 13% of FY04 revenues has grown from strength to strength. Infact, over the last 6 years, this business has clocked a 20% CAGR. The company continues to grow this business through product differentiation and through acquisitions. Pidilite recently acquired ‘Roff’ chemicals (Rs 130 m – Rs 140 m brand).

Though art material business (Fevicryl, Acron, Rangeela) is currently only 5% of revenues, it continues to grow at a fast pace. In the last 6 years, this business has shown a 26% CAGR.

Speciality industrial chemicals: About 4 years ago, Pidilite was looking to either exit this business or sign up with a joint venture partner. The deal did not materialise. The reason for exit seemed to be the business’ low margin profile (8.4% PBIT margin in FY04, as compared to 21.1% for consumer and bazaar segment). Our interaction with the management suggested that they would continue to focus on this business. But if some good deal comes up, they are open to evaluating it. The business has grown at a healthy rate so far in FY05, owing to the buoyancy in the Indian economy.

The expense side:
The company continues to strongly support its products through the advertising and promotions push, but has indicated that the absolute advertising expenses are unlikely to go up in FY05. On the taxation side, the company (like many others in the FMCG sector) is setting up a plant in Himachal Pradesh, which offers it 5-year income tax and excise holiday. This is likely to bring down its effective tax rate from the FY04 levels of 33%. But the results of this will be visible after a couple of years. The company continues to focus on working capital efficiencies and has indicated that the raw material prices are likely to remain firm this year.

Conclusion
On being asked why does the revenue growth buoyancy not reflect on the bottomline, the management attributed this to increased investment in the international markets and higher manpower costs. Increase in advertising to revenue ratio has also contributed to this. The feeling that we got from this is that going forward, the focus on international markets is likely to continue. But after a couple of years, owing to stabilising of this business and tax benefits percolating, bottomline growth is likely to start picking up pace.

At the current price of Rs 345, the stock trades at a price to earnings multiple of 10 times FY05 earnings. We had recommended the stock in July 2004 with a price target of Rs 425 over the medium term. We retain the view.

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