PIDILITE INDUSTRIES LTD

Transcription

1 S t o c k I d e a PIDILITE INDUSTRIES LTD ACCUMULATE Date: 06-Sep-13 CMP: Rs.226 TARGET: Rs.301 Upside: 35%+ SENSEX 19,270 NIFTY 5,680 Eq. Cap. (Rs. Crs) Face Value (Rs.) 1.0 M. Cap (Rs. Crs) 11,585 BSE Code NSE Code Financial Year PIDILITIND Apr-Mar 52-w H/L 303/189 Avg. Daily Vol TTM EPS (Rs.) 8.89 P/E (x) 25.4x BVPS (Rs.) P/BVPS (x) 7.0x M.Cap/Sales 3.1x Dividend Yield 1.17% Stock vs. Sensex Incorporated in 1959, Pidilite Industries Ltd (Pidilite) is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India. Its brand name Fevicol has become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in India. Consumption story + Product range: The Key drivers Pidilite is well set to deliver steady growth driven by higher consumption growth in the domestic market and its focus on expanding its product range. The company has been a pioneer in developing innovative products that have become household names. Successful in creating products for different segments The company develops products in new (non-existent) sub-segments. It has created brands such as M-Seal to stop leaks in pipes (where earlier, pipes were replaced). Also, it has created sub-segments for tiling, where broken tiles were earlier discarded. Its products to fix crockery and utensils have also created a new sub-segment. Continuously expanding the range of adhesives and sealants Pidilite has been continuously expanding the range of adhesives and sealants used for building construction and interior decoration. From adhesives for furniture, the range includes adhesives for fixing tiles, marble, and granite on various surfaces, adhesives for fixing wallpapers, and adhesive for laying wooden floors. Almost all these new products were developed at the R&D labs of the company. During FY13, the Company introduced a range of adhesives and sealants to cater to the expanding building construction, interior decoration market and waterproofing segment. Several varieties of speciality industrial colorants and industrial adhesives were also launched. Consistent improvement in financial performance Pidilite has been continuously reporting excellent set of numbers backed by strong brands. The EBITDA margin and Net margin reported in the recent quarter (1QFY14) has been the highest in last 8-10 quarters. Smart Television campaign, leveraging existing brands One of the main reasons for Pidilite s (Fevicol) popularity is the successful advertising campaigns. The advertising and marketing of Pidilite has been very strong, especially the Fevicol ads have become a viral hit among the masses. The Advertising expenses as a % of sales has been increasing continuously and currently it stood at 4% vs 2.9% in FY09. 1QFY14: Consumer and bazaar products segment bails out Pidilite s 1QFY14 results show the impact of the wheezing economy, but strong growth in the Consumer and bazaar products segment offset the poor performance of the Industrial segment. Demand for industrial adhesives has taken a hit due to a sharp slowdown in investment activity. Operating profit margin (EBITDA margin) grew 151 bps y-o-y to 20.4% because vinyl acetate monomer (VAM) prices in US$ terms have remained steady. The management has expressed concern that the 1QFY14 margin will be difficult to sustain because prices of imported raw material have gone up due to the weak rupee. Further the company is betting on better product mix and likely to raise product prices if the currency scenario remains at these levels. At the CMP of Rs.226, the stock is trading at 22.4x FY14E and 18.8x FY15E consolidated EPS of Rs and Rs respectively. We recommend ACCUMULATE the stock in the range of Rs with a months Target price of Rs.301, providing an upside of 35%+. Please Refer DISCLAIMER on the Last Page

2 Research Desk Company Profile Fevicol is now the largest selling adhesives brand in Asia Incorporated in 1959, Pidilite Industries Ltd (Pidilite) is the market leader in adhesives and sealants, construction chemicals, hobby colours and polymer emulsions in India. Its brand name Fevicol has become synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in India. Pidilite is also growing its International presence through acquisitions and setting up manufacturing facilities and sales offices in important regions around the world. Fevicol is now the largest selling adhesives brand in Asia. The Company's product range includes Adhesives and Sealants, Construction and Paint Chemicals, Automotive Chemicals, Art Materials, Industrial Adhesives, Industrial and Textile Resins and Organic Pigments and Preparations. Pidilite Industries has ~20 manufacturing facilities at various locations in India, including Mahad (Maharastra), Vapi (Gujarat) Baddi (H.P.) and Kala Amb (Himachal Pradesh). Over two-thirds of Pidilite s products have been developed by its in-house R&D team. The company has 14 overseas subsidiaries in countries like USA, Brazil, Singapore, Thailand, China, Egypt, Dubai and Bangladesh. BUSINESS SEGMENT - divided into two broad segments Consumer & Bazaar Products: Branded Consumer & Bazaar products Segment contribute ~81% of the total sales of the company and have grown at a 5 year CAGR of ~18%. This division includes Adhesives & Selants, Construction Chemical and Art Materials. Speciality Industrial Chemical: Speciality Industrial Chemical Segment contributes ~19% of the total sales of the company. This division includes Industrial Resins, Industrial Adhesives and Organic Pigments. Others: This segment largely consists of the Vinyl Acetate Monomer (VAM) manufacturing unit. The Company continues to import rather than operate the VAM plant, as the import price of VAM continues to be more favourable. Industrial Resins 6% Industrial Adhesives 7% Organic Pigments & Preparations 6% Business Segments FY13 Art Material & Others 10% Adhesives & Sealants 51% Construction/P aint Chemicals 20% Pidilite Industries Ltd Sep-2013

3 INVESTMENT POSITIVES Research Desk Consumption story + Product range: The Key drivers Pidilite is well set to deliver steady growth driven by higher consumption growth in the domestic market and its focus on expanding its product range. The company 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. Pidilite 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. Market leader in niche segments Fevicol and M-Seal enjoy over 75% market share in the organized Adhesive and Sealant markets Pidilite focuses on the niche sub-segments of adhesives and sealants. Fevicol and M-Seal enjoy over 75% market share in the organized Adhesive and Sealant markets, respectively. The brands are very well positioned and do not face any major competition as rest of the market is highly fragmented with many small players. Since there are only few players in such segments, Pidilite can develop strong brands without much competition. The company has historically leveraged the strong brand value and large presence of its products, and has been continuously infusing new brands in the market. Its focus on niche sub-segments allows it to develop marketleading brands such as Fevicol, Dr Fixit and M-Seal. Strong and trusted brand portfolio Pidilite Industries Ltd Sep-2013

4 Successful in creating products for different segments Research Desk The company develops products in new (non-existent) sub-segments. It has created brands such as M-Seal to stop leaks in pipes (where earlier, pipes were replaced). Also, it has created sub-segments for tiling, where broken tiles were earlier discarded. Its products to fix crockery and utensils have also created a new sub-segment. We believe that developing sub-segments and brands in such space has been Pidilite s strength. Developed a strong sub-segmentation strategy The company has developed a strong sub-segmentation strategy to create products for all consumers. In adhesives, it has products for furniture, paper, marine products, crockery etc. Each adhesive has different characteristics and targets various types of consumers. Continuously expanding the range of adhesives and sealants Pidilite has been continuously expanding the range of adhesives and sealants used for building construction and interior decoration. From adhesives for furniture, the range includes adhesives for fixing tiles, marble, and granite on various surfaces, adhesives for fixing wallpapers, and adhesive for laying wooden floors. Almost all these new products were developed at the R&D labs of the company. During FY13, the Company introduced a range of adhesives and sealants to cater to the expanding building construction, interior decoration market and waterproofing segment. Several varieties of speciality industrial colorants and industrial adhesives were also launched. Fevicol Heatx: A heatproof adhesive that provides craftsmen an opportunity to work hassle-free, even on vertical applications. Fevicol PVCFIX is a specialized adhesive for PVC to wood pasting. Pidilite Industries Ltd Sep-2013

5 Rs. Crs % of Sales Research Desk The construction chemicals division introduced several innovative products under the Dr. Fixit brand during FY13. Dr. Fixit Low Energy Consumption (LEC) systems for high end waterproofing coupled with insulation for terraces and walls. Dr. Fixit Extensa: A high end puncture-proof waterproof coating for roofs & basements. Dr. Fixit Bathseal Kit: A solution for comprehensive and long lasting waterproofing for bathrooms. Consistent improvement in financial performance Pidilite has been continuously reporting excellent set of numbers backed by strong brands. 25.0% 20.0% EBITDA Margin Net Margin 15.0% 10.0% 5.0% 0.0% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Advertising and marketing of Pidilite has been very strong, especially the Fevicol ads have become a viral hit among the masses. Smart Television campaign, leveraging existing brands 160 Advertisement Expenses 140 % of Sales % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0 FY09 FY10 FY11 FY12 FY13 0.0% One of the main reasons for Pidilite s (Fevicol) popularity is the successful advertising campaigns. The advertising and marketing of Pidilite has been very strong, especially the Fevicol ads have become a viral hit among the masses. Some of the famous ads of the brand are Dam laga ke haisha advertisement, the hen eating out of a Fevicol can laying unbreakable eggs, a Pidilite Industries Ltd Sep-2013

6 Research Desk man s shadow refusing to follow him as it gets stuck to a Fevicol logo and an overloaded bus in a desert with people not falling off due to the Fevicol signage. This led the brand to enjoy a high level of trust among its target audience. Later Pidilite Industries decided to leverage the Fevicol brand s success and popularity by launching other adhesive brands like Fevistick, Fevikwik and Fevitite. Acquired adhesive business of Suparshva Adhesives Pidilite has announced acquisition of SUPRASHVA Adhesives, a Pune based company which is into various adhesives and sells the same under the Falcofix brand. Though the Sales of Suprabha are less than 1% of Pidilite s sales it will erase some completion as Falcofix competes with Fevicol in some of the markets in Maharashtra and has good brand equity at the lower end of the market. Pidilite has plans to retain the brand and leverage it in some of the other markets as well. 1QFY14: Consumer and bazaar products segment bails out Pidilite s 1QFY14 results show the impact of the wheezing economy, but strong growth in the Consumer and bazaar products segment offset the poor performance of the Industrial segment. Consolidated net sales grew 12.1% y-o-y to Rs Crs in 1QFY14, slower than the 16.6% y-o-y growth in the March quarter (4QFY13) and lower than street estimates. The consumer and bazaar products segment, which contributes ~81% to the total revenue, grew at a slightly slower rate of 14%, but that was much better than the flat growth seen in the industrial segment. Demand for industrial adhesives has taken a hit due to a sharp slowdown in investment activity. Volume growth was slower at 7-8% in 1QFY14, compared with % growth in the 4QFY13 because of lower demand for construction and adhesive chemicals. Operating profit margin (EBITDA margin) grew 151 bps y-o-y to 20.4% because vinyl acetate monomer (VAM) prices in US$ terms have remained steady. Raw material costs as a % of net sales declined 140 bps to 54.2%. The company did not raise prices despite the depreciating rupee. The previous price hike of 5% was announced last year. The management has expressed concern that the 1QFY14 margin (highest in last 8 quarters) will be difficult to sustain because prices of imported raw material have gone up due to the weak rupee. Further the company is betting on better product mix and likely to raise product prices if the currency scenario remains at these levels. Overall net profit growth slowed 25.8% to Rs.161 Crs in the June quarter, with profits for the consumer and bazaar products segment growing at 23%, while profit growth in the industrial products segment dropped 15%. Pidilite Industries Ltd Sep-2013

7 FY1992 FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 Rs. Crs Dividend % Research Desk Healthy Dividend Payout History Dividend (Rs. Crs) Dividend (%) 300% 250% 200% 150% 100% 50% 0% Other Key Positives Net Cash from Operating Activities has been positive since last 5 years. Average Return on Net worth has been at ~28% over last 5 years. Health Cash & Investment stood at Rs. 444 Crs at the end of FY13. Debt on Balance Sheet stood comfortable at Rs.111 Crs; Debt/Equity ratio healthy at CONCERNS International businesses are struggling to contribute to group profitability Spike in raw material prices and Depreciating Rupee VALUATIONS At the CMP of Rs.226, the stock is trading at 22.4x FY14E and 18.8x FY15E consolidated EPS of Rs and Rs respectively. We recommend ACCUMULATE the stock in the range of Rs with a months Target price of Rs.301, providing an upside of 35%+. Pidilite Industries Ltd Sep-2013

8 Research Desk FINANCIAL STATEMENT Source: Company, Capitaline Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) LMSPL Network: Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana, Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh) This document is for information only and is meant for the use of the recipient & not for circulation. The information contained in this document has been taken from publicly available information, trade and statistical services & other sources. While the information contained herein is from sources believed to be reliable, we do not hold ourselves responsible for its completeness and accuracy. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. Investors are expected to use the information contained in this report at their own risk. This report is not and should not be construed as an offer or the solicitation of an offer to buy or sell any securities. M/s Latin Manharlal Securities Pvt. Ltd. and its affiliates may act as market maker or have assumed an underwriting position in the secure-ties of companies discussed herein and may sell them to or buy them from customers on a principal basis. Pidilite Industries Ltd Sep-2013