Pidilite Industries;(CMP INR 115, Mcap INR 29bn, Not Rated); Visit Note
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Pidilite Industries - (CMP INR 115, MCap INR 29bn, Not Rated) - Visit Note
Key takeaways from our recent meeting with the management:
Business Overview
Pidilite Industries Limited (Pidilite) has been a pioneer and market leader in the field of consumer and speciality chemicals in India, since its inception in 1959. The company has a wide range of products, which find application in construction, plastics, textiles, paper, leather, paints, and engineering industries.
Pidilite segregates its revenue streams into two broad categories, namely Consumer products and Specialty industry chemicals. The two segments are further subdivided as follows:
Branded consumer and bazaar products
Branded consumer and bazaar products contribute ~ 75 % of the total 9mFY07 revenues, with margins of ~20%. As the name suggests this business mainly concentrates on the branded product offerings of the company across three product categories and are largely targeted for the retail consumer. Revenues for this division have grown at ~20% CAGR over the past three years.
Source: Company
Pidilite as a strategy tries to introduce a few products every year, mainly as variants to existing products. However during last year the company has ventured into two new unrelated areas with the launch of the hobby ideas store and Chikkers, a food snack. Hobby Ideas is India's first Craft and Hobby store in In- orbit Mall, Mumbai, that would sell a variety of hobby and craft products outsourced from abroad as well as house Pidilite's relevant products as well. This store has done well and Pidilite is opening another store of ~7000 sq ft on the same lines, at the Cross Roads Mall in Mumbai, which will be operational by April end.
Speciality Industry Chemicals
Speciality Industry Chemicals contributed ~25 % to the total revenues in 9mFY07; however margins in this segment are lower at ~11.2%. Most of the products in this segment are non-branded products and highly price sensitive. This segment is further subdivided into three sub-segments namely
Source: Company
Raw materials
Vinyl Acetate Monomer (VAM) accounted for 20% of Pidilite's raw material costs and ~7.8% of sales in FY06. VAM prices which are dependent on the crude prices are often a reason for concern due to their volatile nature. The industrial chemicals segment is very price sensitive and it is not always possible to pass on the price increase. The branded business on the other hand can easily absorb small price increases because of the loyalty that they enjoy. During the last two years Pidilite has seen a slight fall in its margins from 17.4% to 15.6% in FY06.
Capacity expansions
In FY06 Pidilite has increased its capacities by ~65% by setting up new units in Himachal Pradesh, which have become fully operational in the current financial year. Historically the company has been increasing its capacity by 40 to 50% every three years to supplement the growing demand. It has also been increasingly outsourcing its manufacturing to reduce costs. The company now has 10 manufacturing units of its own and 20 other exclusive contract manufacturing sites.
Acquisitions
Over the past few years Pidilite has been consistently adding various brands and products to its portfolio, where it has been very selective in choosing brands that have leadership potential but no established distribution channels. Its prominent acquisitions over the years have been Ranipal, Fixit and Steelgrip. During the year Pidilite has acquired 75% stake in Chemson's Pte which manufactures waterproofing chemicals and emulsion paints, through its subsidiary Pidilite International Pte, Singapore. Other acquisitions include Bamco, Thailand (Construction Chemicals) and Jupiter Chemicals, UAE also through its subsidiaries in Singapore and the Middle East respectively. Its latest acquisition in the US is that of Sargent Art (Art material) and Cyclo Industries (Auto maintenance products) with combined sales of USD 20mn.
Outlook
Branded adhesives and sealants have only a 25% market penetration in India, which throws open a huge untapped market opportunity for Pidilite. Other large players in the branded adhesive market are Henkel (Quickfix), Huntsman (Araldite) and Jubilant Organosys (Vamicol); however Pidilite continues to be the market leader.
Pidilite has been growing consistently at 17-20% p.a. over the last few years both organically as well as through a host of acquisitions. Its flagship brand Fevicol, which has become synonymous with white adhesive, continues to grow and hold its leadership position backed by quality and novel marketing and advertising strategies. The innovative product variants and acquisitions have helped Pidilite gain entry into niche areas and segments which other players often overlook or find too small to enter into. Going forward the company has shifted its focus on exports and is eyeing markets in Africa, Middle East and South East Asia and has already set up subsidiaries and sales teams in these areas.
The management believes that organically Pidilite would continue to grow at ~20% over the next two to three years. Margins would be maintained at the same levels; however there is scope for expansion in case crude prices should cool off further. At CMP of INR 115, the stock trades at 23x its 9mFY07 annualised EPS, which is almost at par with other FMCG players. Though we are quiet positive on the future growth prospects of the company, at current valuations we believe the stock is fairly valued and provides limited upsides.
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