Investment Presentation

Pidilite Industries

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What is the organisational DNA of this company?
Identifying underserved
categories, introducing
problem solving pioneering
products and aggressively
market and distribute. If
successful, own the category/
product ecosystem completely
– i.e. continued product
innovation, engaging with
users and influencers and
steady category leading brand
building efforts.
Continued focus on the target
customer and market
development and less on
competition. Usually like to
lead category development
and competition typically
attempts a ‘me too’ (invariably
with limited success).
As a philosophy, do not believe
in entering existing large
categories which with strong
incumbents – unless the
company can introduce/ offer
something remarkably
different. For example,
company has repeatedly
stayed away from decorative
paints, tiles. Paint companies
however are trying to enter
adhesives.
Pidilite has amongst the most
varied distribution channels
among all consumer
companies. Pidilite products
are sold through plywood
stores, cement dealers,
hardware stores, paint dealers,
retail (‘kirana’ stores). This is
due to historical reasons given
the varied product portfolio
but is also a competitive
advantage today.
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Broad product portfolio and market positioning Pidilite revenue mix (FY19)

• Two broad segments – consumer & bazaar (85% of sales) and industrial
(15% of sales)
• What comes under consumer & bazaar?
• All branded products sold across all segments. These are marketed
and sold via retailers, dealers to end users (retail, carpenters,
masons, plumbers, electricians)
• 10 year sales CAGR of 15% with avg. ROCE of 100%+

• What comes under industrial products?

• Industrial grade adhesives and bonding materials supplied to
factories in bulk. Typically not branded.
• Surprisingly this segment is also very profitable – due to scale
benefits and some supplier power with customers.
• 10 year sales CAGR of 10% and avg. 50% ROCE.

• Sales mix of the consumer portfolio

• Adhesives and sealants – 55% (Fevicol, Fevikwik and M-Seal)
• Construction chemicals – 20% (largely Dr Fixit – water proofing)
• Art materials – 10% (Colours, Fabric glues, art adhesives)

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Some recent television ads to appreciate product positioning in the market
• Fevicol - https://www.youtube.com/watch?v=9W87c1Jfr7M; https://www.youtube.com/watch?v=IzbSLQ8WQQc
• Fevikwik - https://www.youtube.com/watch?v=CcfZqA_R7Tc
• M-Seal - https://www.youtube.com/watch?v=EYNSaSpVcYA
• Dr Fixit - https://www.youtube.com/watch?v=LCxJ4YRqB1Q
• Roff - https://www.youtube.com/results?search_query=roff+tile+adhesive

Pidilite has been credited with running among the best advertising campaigns ever in India. The ads have mass appeal are
designed in a way that it easily makes the point on product efficacy for the target customer. Worth a look for every
prospective investor.

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Identifying competitive
advantages

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 Strong well entrenched and market leading brands across adhesives, sealants and water
proofing. Several brands are household names and synonymous to those categories

Strong user connect with product users – carpenters, architects, masons, plumbers,
electricians via loyalty programs, networking events and training and user awareness
workshops. This serves as a massive feedback loop for product improvement and
innovation.
Sources of Products have low price elasticity. Typically make up a tiny fraction of customers

competitive budgeted costs but protects against high failure costs. Customer has no incentive to buy
‘cheap’ or experiment with new products

advantages Distribution leadership not only its own core categories but what makes the company
unique is a multi-channel distribution reach and user connect. Only company to have a
strong presence in dealers in multiple categories – plywood, cement, paints, hardware,
electrical goods, FMCG etc.

Cost leadership in mass product range: Pidilite makes decent portfolio level margins by
straddling the price pyramid (see slide 22). However the entry level products make
lower gross margins to keep new entrants in check who do not find it viable to
underprice easily with a smaller scale of operations and limited distribution.

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 • Adhesives – near monopoly with ~70% market share in core ‘wood
working’ adhesives (Fevicol portfolio) for several decades. Several domestic
and MNC players have failed to scale up. Recent example is lack luster
response to Asian Paints adhesives portfolio.
• Fevikwik (instant all purpose adhesive) and M-seal (all purpose sealant)
both market leaders in their categories. Competition has failed to create
large well-known rival brands. Fevikwik distributed in 4mn outlets in India.
Evidence of • Dr Fixit is by far the largest brand in the fast growing and nascent water
proofing segment in India. Dr Fixit revenues have grown 10x in 15 years

competitive from Rs1bn in FY05 to more than Rs10bn in FY19. Market leader in both
preventive and curative water proofing segment of the market – both retail
and institutional.

advantages • Several other market leading brands in smaller categories – example: ‘Steel
Grip’ in insulation tapes, ‘Roff’ in tile adhesives, ‘Fevicryl’ in fabric glues
used in schools and in handicraft industries.
• Robust financial profile: Last 10-year revenue CAGR of ~15% with average
ROCE of ~30%. Gross margins have moved up ~5ppts over the last five
years. Solid FCF conversion (70% of PAT converts to FCF on avg.). Consistent
dividend pay-outs of 35-40%.

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Why has competition failed to make a dent in Pidilite’s adhesives portfolio

In the adhesive segment, Pidilite has managed to maintain dominant market shares (70% plus today) for a long time. While there have been
competing products from some regional and localised small players, larger national players and a few foreign players, none have made a major dent in
Fevicol's strong market position. Several players from multiple industries have tried unsuccessfully to create a franchise in adhesives. These include
plywood manufacturers, chemical companies, hardware companies and more recently paint companies (there too, response has been poor)

Inability to create a brand over the years through advertising: We have not yet seen much advertising effort by any of the Indian or international players. A part of
the reason could be that even in developed markets, an adhesive is not something which is heavily advertised.

No serious efforts at mass engagement with contractors or carpenters: There is no parallel for the Championship Club (200K+ carpenters as members) run by
Pidilite. This means that even if someone has a strong product offering, they may not have the platform to showcase it and spread awareness of its usage. Most
importantly, this feedback loop is the engine that keeps driving the next round of product innovation. (network effects at play?)

Low cost of usage, but high cost of failure does not incentivise experimenting: The cost of usage is thus low but were any of the bonds to break during service, the
cost of failure can be high in terms of warranty costs, reputational damage and lack of repeat business. Most carpenters thus do not bother with switching to another
adhesive even when pressed hard.

Pidilite miles ahead in distribution: Bulk of the Fevicol is sold through plywood stores. Dealers refuse to stock any other adhesive but Fevicol since the latter is fast
moving. This is despite higher margins being offered by new entrants (they can give margins but not inventory turns).

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Competition in the water proofing
segment
On the water-proofing side, Dr Fixit has, over the years, become a household name just like Fevicol has
become one in the adhesive category. Leading paint companies such as Asian Paints and Berger have in recent
years started offering water-proofing products along with paints. A large cement company has also launched
its own range of preventive water proofing products.
India’s water proofing market (sub-segment of construction chemicals) has a very long runway for growth as
India’s water-proofing to paints is substantially lower than developed markets. Overall waterproofing
penetration is less than 10%.
The overall water proofing market can be divided into the three board buckets as below
• Preventive water proofing for houses and buildings: Pidilite (Dr. Fixit) has strong brand equity here
and have been dominant over the years. This segment requires detailed expertise in understanding
the potential leakage problems and in application. Target market is builders, SMEs, tier 2/3
individual house contractors, exterior construction architects. Paint companies have only had some
limited success here thus far. Cement companies can also participate here.
• Mild curative water proofing: These are mild leakages where the source of the problem is easier to
identify, and treatment is easy. While Dr Fixit is the leader in this segment here as well, paint
companies have been scaling up in this segment. Mild water proofing jobs can be performed by
painters/ small contractors as well which is turning out to be the entry door for paint companies in
this segment. No scope for cement companies.
• Severe curative water proofing: These are severe leakages with risks to structural integrity and
high-water seepage. These problems cannot be solved by painters who are not trained in this area.
These can only be understood by masons, contractors trained and experienced in this area – most
of these have strong relationships with and experience in using in Dr Fixit products (due to Pidilite’s
initiatives over the years). Paint companies are having a tough time gaining traction here. Several
experienced painters also recommend Dr Fixit products over paint company products here
(personal experience). Limited scope for cement companies.

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 Dr Fixit brand equity much stronger: The Dr Fixit range of construction chemicals was launched in 2001 and since then, the
brand has come to identify with all water proofing-related problems. Many contractors, masons and even architects have
been trained at and interacted with the Dr Fixit institute and have used its product range in their work.

Addressing severe water-proofing needs is a specialist's job: While basic waterproofing can be addressed with a simple
coating of a water-proofing material before a paint job, severe leaks and high level of wall dampness need more specialised
attention and solutions. A painter may be ill-equipped to identify the problem and recommend a solution, and a specialist
may be needed. Such masons or contractors have mostly worked with Dr Fixit products in the past.

Distribution channel not restricted to only paint dealers: Water-proofing products are distributed not just by paint dealers
More on the but also other hardware stores (selling tiles, bathroom fittings and electrical hardware) and cement stores. Paint companies
as of now have limited reach in the latter two types of stores and gaining a strong foothold will not be as easy as store
‘moat’ in owners only want to stock what sells the most.

water Waterproofing a large opportunity; not a zero-sum game it is made out to be: The water-proofing segment in India is so
underpenetrated that is not a question of increasing competition but of market development. Entry of more players only
proofing helps create and uplift the category. Patanjali, for example, with its herbal range of products has expanded the Ayurveda
FMCG market which is now benefiting other FMCG companies as well as they launch their own herbal range.

Water proofing performance history –segment growth prospects near term are linked to discretionary consumption and new construction

14,000 35%
12,000 30%
10,000 25%
8,000 20%
6,000 15%
4,000 10%
2,000 5%
- 0%

Water proofing revenues (Rs mn) Growth (RHS)

Note: Pidilite reports data for a segment called ‘construction chemicals’ of which water proofing is the largest sub-segment. The 10
above is from standalone statements and excludes the water proofing services companies Nina and Percept.
Scalability

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Adhesives growth runway not over yet and waterproofing a large future opportunity

Adhesives and sealants (core category) – not a mature category as yet

1. Adhesive demand is a function of new house formation and urbanization in India (a very long-term theme) and furniture repair (second derivative of the
first).
2. Pidilite tries hard to keep the category fresh by launching new variants for specific applications. A bit like what HUL does to fabric care – multiple Surf Excel
variants at various price points.
3. Home furniture making remains a large market in India due to low labor costs and the propensity to make good quality long lasting furniture.
4. Pidilite mgmt. reckons this category can easily grow at 1-1.2x times nominal GDP growth.
5. India adhesive consumption is 200 grams per capita versus 9kg for US/ Germany and 1.5kg for China. In value terms, China’s adhesive market is 15x India’s.
6. Machine made modular furniture market is fast growing but very small of the overall market. Moreover, India is amongst the very few countries where
custom made furniture is cheaper than factory made furniture.

Water-proofing (growth category) – Challenge is market development and not the size of the pie
1. This is a very underpenetrated but fast-growing segment in India. India’s water proofing to paints ratio is abysmally small compared to the developed
world. There are those who would say paints has a long runway for growth in India; well then think about water proofing!!
2. Pidilite here competes against ‘non-use’ and thus needs to keep developing a market (Dr Fixit has been at it for over a decade). Traditionally, white
cement, grout and other coarse material were used as temporary water fixes for leakage problems.
3. Pidilite is equally strong and going after two broad segments – a) preventive water proofing – used during the construction phase b) remedial water
proofing which is used to address leakage problems which later crop due to poor construction quality in India.
4. Admittedly, estimating TAM is difficult but my bottom up estimates (see appendix slide 24) suggest this can easily be a Rs100bn plus market only for
remedial water proofing. Including preventive water proofing, potential TAM could be much larger.
5. Pidilite mgmt. reckons this category can easily grow at 1.5-2.0x times nominal GDP growth.
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 New high potential pioneer categories/businesses Pidilite has entered in
recent years
Tile adhesives: Traditionally, tiles in India are struck on surfaces using cement or other grout materials. This leads to low life, wear and tear and tiles coming off and breaking with
limited use. Pidilite is now marketing its ‘tile adhesive’ range of products under the ‘Roff’ brand. This is small market but potentially a large opportunity as construction quality and
standards in India improve (globally using specialised tile adhesives is standard practice). Pidilite markets this product as something which increases tile life and lowers repair costs in
the longer term (http://roff.in/). Current sale of these products would be ~INR1-1.5bn.
Wood finishes: The product portfolio ranges from basic wood polishing needs to advanced wood coating solutions. These are globally used both for decorative purposes and to
enhance product feel and life. At the premium end of the market, Pidilite has entered into a JV called ICA Pidilite with the leading Italian firm ICA. Paint companies have also entered
this market but Pidilite has more control on the entire wooden furniture ecosystem and thus has a higher right to win in this segment. (http://www.pidilite.com/product/wood-
finishes/). In FY19, this JV made sales of INR1.7bn with a 10% EBITDA margin.
Floor coatings: This is another nascent category in India – floor coatings to be used in different applications – manufacturing plants, hospitals, warehouses. The coatings help improve
floor life, minimize maintenance and application is standard practice globally but just starting to gain traction in India. Pidilite bought a 70% stake in FY18 in a company called CIPY
Poly Urethanes (CIPY) is engaged in the business of manufacturing and selling of floor coatings. The JV did sales of INR1.5bn in FY19 with a 13% margin.
Water proofing services (end to end solutioning): Pidilite has in the recent past acquired two water proofing services companies and combined them into one business under the
name ‘Nina Percept’. Essentially, Nina Percept take up end to end water proofing projects for large institutional projects in the country and is the only company in India that gives a
"supply & apply warranty" from the manufacturer's side. Typically, manufacturers of the waterproofing chemicals and the applicators / executing agencies are 2 separate companies
which is a hindrance later during the warranty period or service life of the structure in terms of responsibilities to be taken for the overall executed work. However Nina Percept both
combine both services under one roof. (http://ninapercept.com/about/). Nina Percept did about Rs3bn in sales in FY19 with a 10% EBITDA margin.
Others: There are numerous other nascent but high potential categories which Pidilite keeps trying from time to time. Some recent examples include MotoMax (car polishes),
Steelgrip (India’s no 1 PVC insulation tape), WD-40 license in India (automobile maintenance products).

Some of these pioneer categories may go on to become large brands of tomorrow. What's notable is that these launches follow the organisational template and DNA
stated earlier – identify large underserved product categories, serve it well and the slowly create a brand out there

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International focus now clear
• Pidilite earlier tried to enter multiple international markets but saw limited success.
• The management now has decided to focus on only those markets which are more India like – emerging
market, underserved – Bangladesh, Sri Lanka and select African markets like Egypt.
• In Bangladesh for example, Pidilite entered a few years back and is already the number in adhesives crossing
sales of Rs1bn in FY19.
• Exports to these focus markets can grow at high double digits over the next few years although the share in
overall revenues is small currently.
• International subsidiary sales contribute 7% to overall sales.

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Culture

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An entrepreneurial organization
now professionalizing
• No evidence of any corporate governance red flag
historically. Pidilite is now trying to transition from a
family run company to a professionally run company. Two
family members, Apurva Parekh and Ajay Parekh, are still
actively involved in the operations and focus on further
building and taking forward the franchise. No other major
family run business which is starved for capital.

• Bharat Puri (who has been the board since 2008)

became the first professional CEO for the company in
2015. Under his leadership and experience (formerly
Mondelez), Pidilite is adopting best practices in
marketing, recruiting and technology which is essential as
the company grows larger.

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Price

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 Cross between FMCG, Paints and other consumer discretionary

ROCE profile healthy albeit slightly lower than FMCG and paints due to
higher working capital requirements.
Points to
keep in mind Market positioning very strong across most categories with high
evidence of pricing power. Near monopoly position in core adhesive
category.
while Less staple like and more discretionary like in nature. Furniture

valuing replacement cycle longer than paints so more dependent on new house
construction. Likewise preventive waterproofing linked to construction.

Pidilite COVID impact can be significant on earnings in FY21. However gross

margins likely to expand sharply in FY21 due to lower crude prices.

Over the medium-term construction chemicals (water proofing, tile

adhesives) and pioneer categories will drive higher share of incremental
growth versus core adhesives portfolio.

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 Arriving at Duro Capital TP

FY21E FY22E FY23E

DCF based TP 941 1,043 1,157
Upside/ (downside) -31% -23% -15%

DCF based FV ~ INR 900- DCF assumptions

Sales growth
FY12-19 A
12%
FY19-30 E
11%
FY30-40 E
11%
1,100 per share EBIT growth 17% 13% 11%
Avg ROCE 33% 37% 43%
• Versus Titan, Pidilite scores higher on not having to
depend on any commodity consumption and price Per share value WACC -->
movement for its growth and profitability. It also 941 9.9% 10.4% 11% 11.2% 11.5% 11.8%
operates in multiple potentially large TAMs versus Titan 4.0% 938 853 784 748 717 689
4.5% 988 891 814 774 740 709
where the overall jewellery market is not growing.

growth rate
Terminal
5.5% 1,122 992 890 840 796 758
• Versus Britannia, Pidilite scores higher on ‘culture’ where 6.0% 1,214 1,059 941 883 832 788
the owners are still involved and have built the business 6.5% 1,334 1,144 1,002 934 876 825
grounds up. There are also no corporate governance red
Implied Valuation FY19 FY20E FY21E FY22E FY23E
flags. Additionally, unlike Britannia, Pidilite operates in
P/E 54x 40x 49x 40x 35x
several categories which have low penetration and hence
P/S 6.7x 6.5x 7.4x 6.5x 5.6x
longer runway for growth (construction chemicals).
P/FCF 6.7x 6.5x 7.4x 6.5x 5.6x
Pidilite’s track record of entering successfully into new
EV/Sales 6.4x 6.2x 7.0x 6.2x 5.4x
adjacent categories is far stronger versus Britannia as
EV/EBITDA 33x 29x 33x 27x 24x
well.
EV/EBIT 37x 32x 38x 30x 26x
• This is reflected in our target multiples for the three
businesses. We value Pidilite at 40x FY22 earnings, Titan Basis CMP FY19 FY20E FY21E FY22E FY23E
at 37x and Britannia at 32x. PE 78x 58x 70x 57x 50x
P/FCF 118x 101x 66x 98x 79x
• Our numbers are substantially below consensus (10-20%)
Mcap/Sales 9.7x 9.4x 10.7x 9.4x 8.1x
as the nature of large portion of this business is linked to
EV/EBITDA 49x 43x 48x 40x 35x
new construction and discretionary spends which would EV/EBIT 54x 48x 55x 45x 38x
likely be anemic during and post COVID. That might offer EV/Sales 9.5x 9.2x 10.4x 9.1x 7.9x
a better entry point in the future. Recommend buying
into this business at any level below INR 1000 per share 19
or below 45xFY22 EPS on DC earnings.
Appendix – some interesting
charts and tables

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 60% 140

56%
120
55% 54% 53%
53%
52%
100
Evidence of 50%
50%

pricing power – 47%

80
gross margins 45% 44%
45%
45% 44%

have trended 60
up following 40%
benign crude 40

35% 20
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Gross margin (LHS) Avg crude (US$/bl) (RHS)

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• It is a well-known and widely acknowledged fact that the quality of construction in India is below global standards though it is improving now. India is also a very price
sensitive market which is explained by the fact that the share of admixtures used in India is much higher than that used globally.
• Admixtures are concrete strengthening agents which also reduce the cost of concrete construction and also reduce the amount of water needed in concrete mixing.
Overusing admixtures may bring in some short-term tangible benefits which is why they seem to be having a higher share in the Indian market.
• On the flipside, water-proofing agents and bonding materials and other protective mixtures are used relatively wisely globally than in India. These tend to take up the
overall cost of construction or repair but provide more reliable and longer-term protection.

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30
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60
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
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Jan-16
PE (x)

Apr-16
Jul-16
Oct-16
versus our numbers due to COVID.

Jan-17
Apr-17
5 yr median

Jul-17
Oct-17
Jan-18
Apr-18
Jul-18
Oct-18
Pidilite 1 yr. fwd. PE trends – business has seen a sharp
rerating over the last few years. The chart is basis
consensus estimates which have meaningful downside

Jan-19
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10
20
30
40

(50)
(40)
(30)
(20)
(10)

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traded at a discount but now trades in line.

01-Jan-17
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01-Jul-19
PIDI vs. Asian Paints PE comparison – historically PIDI

01-Jan-20
Thank you

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