Viewpoint

Pidilite Industries Limited

Investment ka majboot jod

Pidilite Industries Limited (Pidilite) is India’s market leader in adhesives and

Sector: Consumer Goods sealants, construction chemicals, hobby colours and polymer emulsions
New Idea in India. Its flagship brands - Fevicol and M-Seal have a market share of
~70% each in the domestic market. With a slew of new launches under
Change existing brands and entry into consumer-based categories well supported
by adequate media activities, Pidilite has transitioned its target markets
View: Positive from industrial users to consumers through effective communication, which
has helped the company to register itself in the minds of all its customers.
CMP: Rs. 1,476
Revenues grew at a CAGR of 10% over FY2015-19. Though FY2021 is
Upside potential: 18-20% expected to be lull affected by Covid-19 pandemic, the growth is expected to
come back on track in FY2022 driven by recovery in refurbishment of house/
á Upgrade  No change â Downgrade construction activities. Further, expected increase in demand for adhesive
products in global markets such as South East Asia, Europe, North America
and Latin America post the normalisation of business environment would
Company details add to overall revenues in FY2022 and FY2023. A fall in prices of key inputs
such as Vinyl Acetate Monomer (VAM) by ~30% in last three quarters will
Market cap: Rs. 74,982 cr
be a blessing in disguise amid the pandemic. Gross margins have improved
by 377 bps in 9MFY2020 to 52.8% and if VAM prices continue to correct in
52-week high/low: Rs. 1710/1090
line with fall in crude oil prices, we expect gross margins to remain high in
the near term.
NSE volume: (No of
6.5 lakh
shares) Strong cash flows, consistent dividend payer: With a stable working capital
cycle, Pidilite’s cumulative free cash flows (FCF) stand at close to Rs. 2,000
BSE code: 500331 crore over FY2017-19. This will take care of any major cost element during the
lockdown in FY2021. Thus, we expect the company to remain debt-free with
NSE code: PIDILITIND minimum stress on the balance sheet. The company has been a consistent
dividend payer with an average dividend payout standing at 36.3% during
Sharekhan code: PIDILITIND FY2016-19. Pidilite’s return profile is also strong with a return-on-equity (RoE)
and return on capital employed (RoCE) standing at above 20% each in FY2019.
Free float: (No of
15.3 cr Our Call
shares)
View - Initiate with Positive view assigning an 18-20% upside: With a strong
portfolio of brands, Pidilite has a monopoly in the domestic adhesives market.
Shareholding (%) This along with strong cash flows would enable Pidilite to witness an early
recovery in performance after the pandemic situation eases. The stock is
Promoters* 70.0 currently trading at 49.1x its FY2022E earnings. Its leadership positioning
in adhesives, strong cash flows and decent dividend payout would keep
FII 11.3 valuation at a premium. The opening of global market with some international
clients expected to shift from China to other South East Asian players provides
DII 8.3 a huge growth opportunity in the long run. Thus, current volatility in the stock
market provides good opportunity to accumulate quality stocks with sturdy
Others 10.5 balance sheet and strong growth prospects. We initiate viewpoint on Pidilite
with positive view and assign an upside of 18-20% from current levels.

Price chart Key Risks

1700
If the COVID-19 global pandemic takes time to get under control, the recovery
1600 in the business environment will take more time, which will continue to affect
1500 the financial performance of Pidilite in the near term.
1400
1300
1200 Valuation (Consolidated) Rs cr
1100
Particulars FY19 FY20E FY21E FY22E FY23E
Aug-19
Apr-19

Apr-20
Dec-19

Revenue 7,079 7,296 6,825 8,662 9,547

OPM (%) 19.3 21.8 22.0 23.1 23.3
Adjusted PAT 944 1,212 1,138 1,525 1,721
Price performance
% YoY growth -2.2 28.3 -6.1 34.1 12.8
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 18.6 23.9 22.4 30.0 33.9
P/E (x) 79.4 61.8 65.9 49.1 43.6
Absolute -2.4 3.6 9.3 17.0 P/B (x) 18.1 15.0 13.0 10.8 9.1
EV/EBIDTA (x) 49.4 41.8 42.0 31.7 27.8
Relative to
-8.2 27.4 28.1 35.1 RoNW (%) 24.5 26.5 21.2 24.0 22.6
Sensex
RoCE (%) 22.2 22.0 18.5 20.9 19.7
Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

April 21, 2020 2

 Viewpoint
Investment Argument
Š Strong competitive moat and near-monopoly in adhesives and sealants: Pidilite is the market leader
in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India.
Fevicol, a legacy brand, is a generic name in the adhesive category in India. Currently, the flagship
brands such as like Fevicol and M-Seal have a market share of ~70% each in the domestic market. Pidilite
has transitioned its target markets from industrial users to intermediaries and to consumers through
effective communication, which has helped the company gain a strong imprint in customers’ minds. Not
only did the company create a strong brand equity but also a robust feedback loop from the influencers
to continuously refine its products (in the form of product innovations) and processes in order to deliver
consistently strong results. For widening its presence across geographies, the company has acquired
companies and established manufacturing facilities in international as well as domestic markets.
Š Pre-Covid-19 growth at 10% CAGR; FY2021 will be a one off year; significant recovery expected in
FY2022/23: Pidilite offers products like adhesives, sealants, organic pigments and more whose growth
rate is driven by demand for construction, repair and maintenance activities. Pidilite reported a consistent
revenue growth with revenue CAGR of 10% over FY2015-19 with good growth in all years except FY2018,
which was affected by GST implementation. The COVID-19 outbreak has affected demand in the last
few days on Q4FY2020. No sales are expected in Q1FY2021 as a result of a complete stoppage of
construction activities amid the nation-wide lockdown. Thus, we expect H1FY2021 to remain subdued
while some recovery is anticipated in H2FY2021 once the pandemic normalises. Though revenues are
expected to remain low in FY2021, we expect strong recovery in FY2022/23. Launching of new products
in the core categories, entry into new categories, improving penetration of some of the new product
launches, expanding the distribution reach and growing in the international markets are some of the key
growth drivers in the near to medium term. Further with global customers likely to shift from China to
other South Asian countries (such as Vietnam, Indonesia and India), demand for industrial products might
increase in the near to medium term.
Š Correction in input prices to driver margins in the near term: Vinyl acetate monomer (VAM), a crude
derivative, is one of the key inputs for Pidilite (constituting around 35-40% of Pidilite’s overall raw material
cost along with packaging material). With a fall in the crude oil prices, VAM prices corrected to $875 in
Q3FY2020 from $1200 in Q2FY2019. This led to a significant expansion in the gross margins by 377 bps
y-o-y basis in 9MFY2020. VAM prices currently stands at $835 and with a sharp fall in crude prices we
expect VAM prices to correct further. Thus, we expect gross margin expansion to continue in FY2021.
However with a decline in revenues and lower operating leverage, operating margins remain stable in
FY2021. We should expect margins to get back in shape from FY2022 after revenues recover.

Correction in VAM prices Gross margins expanded significantly in last two quarters

1400 1325 1325 1300 800

655
1200
1200 1200 1100 600
1000 980
950 340
1000 901 875 400 315
875 890 850
GM expansion (BPS)

198
$ per tonne

800
200
600
0
400 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20
-200
200 -179
-400
0 -360
Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 -600
-618
consumption price spot price -800

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

April 21, 2020 3

 Viewpoint
Š Strong manufacturing capacity and robust distribution reach: Pidilite operates 23 plants in India along
with 25 co-manufacturers. 12 more plants are expected to be added by 2022 to create a seamless
manufacturing and supply chain network across the country. The company also has manufacturing plants
in the US, Thailand, Dubai, Singapore, Bangladesh, Sri Lanka, Brazil and Egypt. It has 30 warehouses in
India along with 8 regional offices and 2 Research & Development Centres. It sells more than 5,200
SKUs of over 500 products through over 5,000 distributors. Pidilite has a strong distribution reach across
India. The company sells its products through 13 different channels like mom & pop grocery shops, paan
shops, stationary shops, hardware shops, automotive spare part shops and wood marts. Fevikwik is sold
through 4 million outlets, and the company has presence across 3 lakh wholesalers. It is the second-
most penetrated company in paint shops after Asian Paints and is available at 40,000 dealers out of the
60,000 outlets universe. The ‘Pidilite ki Duniya’ initiative is launched to access deep rural markets and
targets opening merchandised outlets in towns with smaller population. Out of 0.6 million towns covered
under the initiative, Pidilite has a direct reach of 23,000. Moreover, Pidilite is the only company in India
which has a strong influence across users:
o B2C business: Stationery (including hobby ideas and Fevicryl) and general purpose adhesives (Fevicol,
Fevikwik, Fevistik, etc);
o B2I business: Most of its core products – Fevicol, M-seal, Steelgrip, etc. – are dependent on
intermediaries
o B2B business: Industrial and specialty chemicals division is largely a B2B business wherein clients are
real-estate developers or manufacturers of products such as footwear and other industries.
Thus, the strong distribution reach not only helps the company to have inventory days in control, it also
helps its innovative products to reach the market with minimum incremental cost.
Š Pidilite has a strong product portfolio: Pidilite’s product portfolio is categorised into two key categories: 1)
consumer and bazaar (C&B) products which include adhesives and sealants, construction/paint chemicals
and art/craft materials and 2) Industrial products which include industrial resins, industrial adhesives and
pigment and preparation. The Consumer & Bazaar products constitute ~84% of the total revenue with
adhesives and sealants contributing the highest at 56%. Products such as Fevicol and Dr. Fixit have
98% top of the mind awareness among consumers. Consistent innovation of new products or variants
has helped the company to fill in the gaps in its product portfolio and also has further strengthened
its presence in the adhesive industry. The company has launched products such as Steelgrip, a self-
adhesive PVC electrical insulation tape, Fevicol Exee spray for convenience and Fevicreate Kits to help
foster creativity through crafting in FY2019. Pidilite has also launched various innovative and regional
media campaigns/communications for Fevicol and other key products. The company is also exploring the
untapped potential in the tiling and stone solutions market.

Categories under Consumer & Bazaar products Categories under industrial products

8%
5%
Adhesives &
6% Industrial resins
20% Sealants

Construction/Paint
chemicals Industrial adhesives

Art/Craft materials
56% and others Pigment &
4% Preparation

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

April 21, 2020 4

 Viewpoint
Key products by Pidilite

Source: Company

Š Inorganic initiatives and expansion of international business to support growth going ahead: Pidilite
had acquired two companies in the recent past namely Percept Waterproofing Services Limited (Percept)
& Nina Waterproofing Systems Private Limited (Nina), both catering to the waterproofing segment and
now which is merged to form Nina Percept Private Ltd, to expand in the high growth waterproofing market.
The current penetration level of waterproofing products (~15% of overall construction chemical market)
is low as compared to other countries such as China and USA, largely on account of lack of awareness
about the product and its applications. This provides immense opportunity for companies like Pidilite to
scale up the business by improving overall penetration of the category. Further, acquisitions such as CIPY
Polyurethanes (floor painting in India) and ICA Pidilite provide levers in tapping new markets. In terms of
international business, Pidilite is targeting markets with high headroom for growth. The company’s major
international subsidiaries are in the US, Brazil, Thailand, Egypt, Dubai and Bangladesh. Pidilite is currently
the market leader in Bangladesh and the company recently opened its second factory in the country. The
company has also set up a new plant in Sri Lanka. Pidilite’s US subsidiary plans to increase its focus on
retail and e-commerce whereas various initiatives are being taken to improve sales and margins in Brazil.
Š Strong cash flows, consistent dividend payout: With a stable working capital cycle, Pidilite’s cumulative
free cash flows (FCF) stand at close to Rs. 2,000 crore over FY2017-19. This will take care of any major cost
element during the lockdown in FY2021. Thus, we expect the company to remain debt-free with minimum
stress on the balance sheet. The company has been a consistent dividend payer with an average dividend
payout standing at 36.3% during FY2016-19. Pidilite’s return profile is also strong with a return-on-equity
(RoE) and return on capital employed (RoCE) standing at above 20% each in FY2019.

April 21, 2020 5

 Viewpoint
Financials in charts

Revenue & PAT CAGR of 10% & 16% over FY15-19 GPM to expand due to lower input costs

60 54.0 56.0
51.8 51.3
49.1 49.3
8,000 50 44.9
7,079 40
6,000 6,219
6,062
5,361 30 21.9 21.6 21.8 22.0
20.8

(%)
4,844 19.3
Rs. in crore

4,000 15.9
20

2,000 10
744 863 966 944
516
0
0

FY15

FY16

FY17

FY18

FY19

FY20E

FY21E
FY15 FY16 FY17 FY18 FY19
Revenue Adjusted Profit OPM GPM

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Revenue growth of key categories Highest contribution to revenue by C&B products

20 19.0
1%
15.0 15%
15 14.0
Consumer & Bazaar
10 9.0 Products
7.0 7.0 7.0
(%)

Industrial Products
5 3.0 3.0
2.0
Others
0
FY15

FY16

FY17

FY18

FY19

84%
Consumer & Bazaar Products Industrial Products
Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Free cash flows remained strong Dividend payout ratio maintained

800 50
640 656
614 622
600 38.9
40 38.0
34.7 34.4 34.0
Rs. in crore

400
(%)

262
30
200

0 20
FY15 FY16 FY17 FY18 FY19 FY15 FY16 FY17 FY18 FY19
Free Cash Flows Dividend Payout Ratio (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

April 21, 2020 6

 Viewpoint
Outlook
Pandemic to affect Q4FY2020 and FY2021, recovery likely in FY2022: Consolidated revenue grew by ~5%
and PAT grew by 42% (largely driven by improvement in the gross margins due to fall in VAM prices). The
COVID-19 outbreak affected demand in the last few days of Q4FY2020. No sales are expected in Q1FY2021
as a result of complete stoppage of construction activities amid the nation-wide lockdown. Thus, we expect
H1FY2021 to remain subdued while some recovery is anticipated in H2FY2021 after the pandemic situation
normalises. Strong cash flows and a stable balance sheet would help company to see early recovery when
business environment improves. Thus, FY2022 is expected to see strong double-digit revenue growth. Further,
lower input prices would help in posting stable operating margins in the near to medium term.
Valuation
Initiate with Positive view assigning an 18-20% upside: With a strong portfolio of brands, Pidilite has a
monopoly in the domestic adhesives market. This along with strong cash flows would enable Pidilite to
witness an early recovery in performance after the pandemic situation eases. The stock is currently trading
at 49.1x its FY2022E earnings. Its leadership positioning in adhesives, strong cash flows and decent dividend
payout would keep valuation at a premium. The opening of global market with some international clients
expected to shift from China to other South East Asian players provides a huge growth opportunity in the long
run. Thus, current volatility in the stock market provides good opportunity to accumulate quality stocks with
sturdy balance sheet and strong growth prospects. We initiate viewpoint on Pidilite with positive view and
assign an upside of 18-20% from current levels.

One-year forward P/E (x) band

1800.0
1650.0 70x
1500.0 65x
1350.0 60x
1200.0 55x

1050.0 50x

900.0
750.0
600.0
450.0
300.0
150.0
0.0
Jul-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19
Apr-15
Nov-14

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20
Mar-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Source: Sharekhan Research

Peer Comparison
P/E (x) EV/EBIDTA (x) RoCE (%)
Particulars
FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E
Asian Paints 60.5 54.8 45.0 33.5 30.7 25.8 20.0 19.5 20.5
Astral Poly Technik 47.6 39.7 30.5 26.7 23.0 18.4 23.5 23.4 25.2
Pidilite 61.8 65.9 49.1 41.8 42.0 31.7 22.0 18.5 20.9
Source: Company, Sharekhan estimates

April 21, 2020 7

 Viewpoint
About company
Pidilite is a leading manufacturer of adhesives and sealants, construction chemicals, crafts products, DIY
(Do-It-Yourself) products and polymer emulsions in India. Pidilite has divided its business into two segments;
Consumer & Bazaar Product segment (C&B; includes adhesives, sealants, art and craft material and
others, construction and paint chemicals) and Industrial Product segment (IP; includes industrial adhesives,
synthetic resins, organic pigments, pigment preparations and surfactants). C&B accounts for ~84% of Pidilite’s
standalone revenue while balance is contributed by IP segment. The company’s brand name Fevicol has
become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in the
country. Some of the other major brands are M-Seal, Fevikwik, Fevistik, Roff, Dr. Fixit and Fevicryl.

Investment theme
Pidilite has monopoly in the domestic adhesive market on account of its strong product portfolio. Over the
years it has transformed itself from B2B to B2C players by consistently introducing consumer centric product in
the domestic market. Though FY2021 will be affect the by Pandemic situation, its long term growth prospects
are intact as the company is continuously launching new products under core brands, entering into new
categories, expanding into neighbouring countries and enhancing the domestic distribution reach. Strong
cash flows, lean balance sheet and decent payout makes it safest better in the volatile market environment.

Key Risks
Š Sustenance of pandemic situation: If global pandemic situation takes time to get under control,
the recovery in the business environment will take more time, which will continue affect the financial
performance of Pidilite in the near term.
Š Increase in competition: Any increase in competition from established players would act as a key risk to
the earnings estimates in the near to medium.

Additional Data
Key management personnel
Madhukar Parekh Chairman
Debabrata Gupta Whole-time Director
Pradip Menon Chief Financial Officer
Puneet Bansal Company Secretary
Source: Company Website

Top 7 shareholders
Sr. No. Holder Name Holding (%)
1 Genesis Indian Investment Co Ltd 5.0
2 Life Insurance Corporation Of India 3.0
3 Axis Asset management Co Ltd 2.3
4 Vanguard Group 0.9
5 Blackrock Inc 0.8
6 Norges Bank 0.7
7 UTI Asset Management Company 0.4
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

April 21, 2020 8

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