We believe subsequent price hikes would help in easing margin pressure, going forward, while EBITDA margin will improve 50 bps in FY14-17E • Pidilite has acquired the adhesive business of Blue Coat Pvt Ltd on a slump sale basis for a cash consideration of | 263.6 crore. Acquisition of Blue Coat would help the company to provide synergies in the industrial product business Market leader in adhesive segment Pidilite Industries (Pidilite) is a dominant play in India’s growing adhesive and industrial chemical market with a market share of ~70% in its leading brand categories in the organised segment. The company’s two major segments, consumer & bazaar (C&B) and speciality industrial chemical have grown at a CAGR of ~20% and ~15% (standalone), respectively, in FY10-14.
The consumer & bazaar segment contributes ~79% of Pidilite’s standalone revenue. This segment has grown mainly driven by the adhesive and sealants segments, which contributes ~50% to the company’s consumer & bazaar segment revenue (FY14). We believe since the segment growth is largely driven by construction, repair and maintenance, sales growth in the consumer and bazaar will be at 18.5% CAGR in FY14-17E on the back of an increase in penetration in smaller towns (population below 50,000). Revival in industrial activities to drive industrial chemical demand The specialty industrial segment contributes ~21% of Pidilite’s standalone revenue. This segment has grown at 20% CAGR during FY10- 14 mainly driven by growth in demand from packaging, cigarettes, stickers, labelling, footwear, etc.
The specialty industrial segment has three major sub-segments: industrial adhesive, industrial resins and organic pigments & preparations. We have modelled industrial segment revenues will grow at a CAGR of ~19% for FY14-17E led by strong growth in industrial adhesives & resins. Strong brand: More of consumer pull model Pidilite Industries is one of the well known adhesive companies in India for the quality and reach to end users. Fevicol, the legacy brand of the company, is a generic name in the adhesive category in India. In spite of the strong brand, the company has kept its marketing and selling expenses at ~4% of sales to gain market share.
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We roll over our valuation on FY17E considering the revival in the Indian economy on cards and Pidilite being a strong brand in the adhesive segment is well positioned to capitalise the growth momentum. We believe efficient deployment of cash for inorganic growth would be an added advantage. We estimate revenues, earnings CAGR of ~19%, 20%, respectively, in FY14-17E on the back of demand from tier II, –tier III cities. We believe a recovery in margin coupled with strong return ratios would justify the company’s re-rating possibilities. We upgrade our rating to BUY with a revised target price to | 462/share valuing at 30x FY17E.
Pidilite Industries (Pidilite) is a dominant play in India’s growing adhesive and industrial chemical market with a market share of ~70% in its leading brand categories in the organised segment. The company’s two major segments, consumer & bazaar (C&B) and speciality industrial chemical have grown at a CAGR of ~18% and ~15% (standalone), respectively, in FY09-14. The consumer & bazaar segment contributes ~79% of Pidilite’s standalone revenue. This segment has grown mainly driven by adhesive and sealants segments, which contribute ~50% to the company’s consumer & bazaar segment revenue (FY14). Among other sub segments, construction & paint chemicals and art material contributes ~19% and ~12%, respectively, to the topline.
Consumer & bazaar segment sales growth is largely driven by the company’s pricing power in the branded product category (Fevicol, M-Seal, Dr Fixit), which resulted in margin expansion. We believe since the segment growth is largely driven by construction, repair and maintenance works (Fevicol, M-seal, Dr Fixit are promoted in such a way), sales growth in the consumer and bazaar will take place at ~19% CAGR in FY14-17E on the back of an increase in penetration in smaller towns (population below 50,000). The specialty industrial segment contributes ~21% of Pidilite’s standalone revenue. This segment has grown at ~20% CAGR during FY10-14 mainly driven by growth in demand from packaging, cigarettes, stickers, labelling, footwear, etc.
The specialty industrial segment has major three sub-segments: industrial adhesive, industrial resins and organic pigments & preparations. The company’s specialty industrial chemical export revenue (contributes ~8% to topline) recorded ~21% CAGR over the last five years. This segment caters to various industries (for example, textiles, leather, footwear, ink, packaging, etc). We have modelled industrial segment revenues will grow at a CAGR of ~19% for FY14-17E led by strong growth in industrial adhesives & resins. The specialty industrial segment contributes ~21% of Pidilite’s standalone revenue. This segment has grown at ~20% CAGR during FY10-14 mainly driven by growth in demand from packaging, cigarettes, stickers, labelling, footwear, etc.
Pidilite Industries is one of the well known adhesive companies in India for the quality and reach to end users. Fevicol, the legacy brand of the company, is a generic name in the adhesive category in India. Currently, the flagship brands of the company like Fevicol and M-Seal have market share of ~70% each in the domestic market. Pidilite’s relentless focus on building a strong consumer brand through various ad campaigns differentiates it from its peers. This has helped the company to extend its presence into more consumer centric segments such as automotive and art materials to build a strong relationship with the end user. The company has introduced a direct marketing strategy to reach and educate carpenters about the use of a quality product in their work. Alongside, Pidilite’s simple and creative TV ad campaigns (like “Fevicol ka mazboot jod hai tutega nahi”) attracted many viewers and, thus, reached the masses. In spite of the strong brand, the company has kept its marketing and selling expenses at ~5% of sales to gain market share.
On a consolidated basis, we have modelled revenue and earnings CAGR of ~19% and ~20%, respectively. We expect the domestic business to continue to witness strong volumes growth supported by sustained demand from tier II & tier III cities and its foreign subsidiaries to breakeven by FY16E. Standalone revenue and earnings are expected to grow at a CAGR of 18.8% and 16.8%, respectively. This can be largely attributed to the C&B and industrial division, which is expected to grow at a CAGR of ~19% each in FY14-17E.
During FY14, the EBITDA margin dipped ~50 bps YoY largely on account of ~40% increase in VAM prices in H2F14. Simultaneously, the lag impact of rupee depreciation was also an overhang. We believe VAM prices would continue to remain at elevated levels in H1FY15 due to the shutdown of plants in Europe and the US. However, the company has guided at taking a price hike at regular intervals to mitigate the cost pressure. We have modelled a consolidated EBITDA margin to improve from 15.8% in FY14 to 16.3% in FY17E.
With the improvement in EBITDA margin and low interest outgo (due to redemption of outstanding FCCB of US$20.5 million) of the standalone business, we believe the consolidated net profit will grow at a CAGR of ~20% in FY14-17E.
We believe the company has witnessed sustainable revenue and earnings growth at a CAGR of 16.5% and 32.1%, respectively, in FY09-14 on the back of product demand from the field of art and craft along with interior decoration trends in domestic households. We believe the margin will improve, going forward, supported by benign raw material prices with a favourable currency movement. The company’s ability to pass on the rise in input cost would help margins to remain intact for FY14-16E. Further, Pidilite’s recent redemption of outstanding FCCB (US$20.5 million) would translate into interest cost saving, which will help to drive its bottomline. We expect revenues and earnings to grow at a CAGR of 19% and 20%, respectively, in FY14-17E. In addition, cash deployment in inorganic growth would further aid in margin growth. We believe the stock is a strong re-rating candidate considering the consistent performance in terms of revenue growth and return ratios. We roll over our earning multiple on FY17E and value the stock at 30x FY17E earnings. We upgrade our rating to BUY with a revised target price of Rs 462/share.
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