Consumption story, product range to ensure Pidilite sticks to growth path

Pidilite Industries, a leading player in adhesives and sealants, is well set to deliver steady growth driven by higher consumption growth in the domestic market and its focus on expanding its product range.

Business  
Pidilite Industries Limited manufactures and sells consumer and specialty chemicals in India and abroad. The company, headquartered at Mumbai, has 19 manufacturing plants along with more than 25 job working units in India and abroad. The company has 14 overseas subsidiaries in countries like USA, Brazil, Singapore, Thailand, China, Egypt, Dubai and Bangladesh.

The company’s business can be divided into two main segments:
i. Consumer and bazaar products — This segment covers a wide range of products for consumer and craftsman applications that contribute nearly 77% to the total sales. Within this segment, adhesives and sealants contribute nearly 48% to consolidated revenues as it has dominant market share across the products it offers. Its biggest brand ‘Fevicol’ is the largest selling adhesives’ brand in Asia.

The company derives around 18% revenues from construction products like coating and paints, waterproofing, tile fixing, sealants etc., under the ‘Dr. Fixit’ brand. The company also manufactures and markets automotive chemicals, art materials, stationery, fabric care and wood finishes that together contribute around 10% to overall topline numbers.    

ii. Specialty industrial chemicals — This segment includes products like industrial adhesives, industrial and textile resins, and organic pigments and preparations that contribute 7%, 8% and 6% respectively to annual revenues. Through these products, the company caters to packaging, textiles, paints, printing inks, paper and leather industries.

Further, the company also has a manufacturing plant for vinyl acetate monomers (VAM) but since the imports are cheaper, it is not operating the plant and instead, buying and selling.

Investment rationale
Pidilite has been a pioneer in developing innovative products that have become household names. It has strong portfolio of brands like Fevicol, M-Seal, Fevi Kwik, Dr. Fixit, Roff, Fevicryl Hobby Ideas, Ranipal, Motomax etc., which command top of the mind recall among consumers and business class categories alike.

The company has introduced several new product brands like Woodlok, Roff, and Smartcare catering to construction, healthcare and hospitality segments in the recent past and continues to focus on introducing variants of its existing brands.

The demand for fast moving consumer goods is growing rapidly in rural and smaller cities on the back of rising income levels. This would benefit the company as it has a large distribution reach across the country.

Pidilite faces very little competition as there are very few large national players and most of the smaller players are active regionally. As a result, it enjoys high pricing power, thereby reducing the impact of rising input prices.

The company has wide geographical presence with India contributing 90% while export markets like North America, South America and rest of the world contributing 4%, 4% and 2% respectively. Though the company’s overseas business operations currently contribute very little to net profits, it is focusing on cost control initiatives and strengthening of management structure to further grow these businesses. Improvement in economic conditions globally would also support the sales growth of the company.

In order to cater to exports, the company is also setting up a new Elastomer plant with annual capacity of 20,000 tonnes which is expected to be ready by end of fiscal 2012. This would result in additional sales in the long term.

The company has a strong balance sheet with strong cash flows and low debt to equity ratio. The company’s high return ratios (return on capital employed) along with decent dividend payout history also provides assurance to investors.  

Concerns
Higher commodity prices are likely to have an impact on the company’s operating margins but the company has been able to pass on the price hikes, thereby reducing the impact. Delay in commissioning of its new plant may lead to increase in costs involved in construction. Increase in interest rates and inflation may impact the growth in the industrial sector, thereby impacting the demand for Pidilite’s industrial products.

Valuations
Driven by consistent volume growth on back of increasing domestic consumption, the revenues are expected to grow at a CAGR of 18% over FY10-12E while net profits are expected to rise at a CAGR of 17% during the same period. At current market price of Rs138.05, the stock of Pidilite trades at 21.83 times its expected FY11E earnings and 18.47 times its expected FY12 earnings per share. Investors can consider the stock on declines to get decent returns from medium to long-term perspective.

Disclaimer: The writer does not hold any shares in the company.