Pidilite Industries: Seal the deal

The stock of Pidilite Industries, a leading manufacturer of adhesives and sealants, has been on an upswing in the last one year. Despite macro-economic headwinds such as a weakening rupee and an increase in raw material costs, the company has delivered double-digit volume growth in the last six quarters. This is thanks to the company’s ability to pass on the cost increases to customers, as it holds a dominant position in the adhesives and sealants market.

Pidilite operates in two major segments: consumer and bazaar (C&B) and industrial products. The company is the market leader in both the segments. It holds a dominant market share in various segments, with brands such as Fevicol, Fevi kwik and M-seal.

Pidilite has a significant presence in both domestic and international markets. Efforts to increase market penetration and the Centre’s initiatives towards infrastructure development bode well for the company’s growth. Strong brand recognition and a debt-free balance sheet are other positives for the company. Investors with a long-term investment horizon can buy this stock. At ₹1,166, the stock trades at 51 times its likely per share earnings for FY20. The stock’s valuation is not inexpensive. But in light of the company’s business prospects, it appears attractive for the long haul. The company also has strong return on equity (between 25-28 per cent).

Growing revenue

Pidilite’s revenue has grown at a compounded annual growth rate of 13 per cent over the last 10 years. The C&B segment contributes nearly 84 per cent of the company’s revenue, which comprises adhesives and sealants, construction and paint chemicals, and art and craft materials. Growth in this segment is driven largely by adhesives and sealants such as Fevicol and Fevikwik, which contribute nearly 55 per cent of revenues.

Rest of the revenue — about 15 per cent — comes from the industrial products segment that includes hot melt adhesives, specialty polymers and co-polymers and pigments. Such products find use in making paper, textiles, leather and packaging materials.

The company is increasing its foot print, particularly in tier II/III cities and foraying into newer international territories.

The company’s flagship product, Fevicol, now holds about 70 per cent of the market share in the adhesive market.

An extensive distribution network (over 1.5 lakh dealers) has helped Pidilite hold on its own against competition. Also, the diversification into non-adhesive business segments has helped. The acquisition of CIPY Polyurethane last year is a good addition to the company’s product portfolio. CIPY mainly supplies floor coatings, which are used in manufacturing plants and healthcare facilities.

The company’s revenue from newer categories such as water proofing and floor coatings is likely to be healthy, given its ability to offer customised products and its pan-India reach.Additionally, overseas markets such as Kenya and Bangladesh will aid the growth in revenue. The company continues to improve operational efficiency in the overseas market (such as Brazil, Sri Lanka and West Asia.

Competitive pricing

Pidilite has faced operating margin pressures over the last few quarters on account of rising cost of raw materials. The cost of vinyl acetate monomer (VAM), a key raw material, increased steadily due to supply constrains from overseas markets such as the US. A weak rupee also added to margin woes. The operating margins in the nine months ending December 2018 declined to 20 per cent from 23 per cent in the same period last fiscal.

To compensate for the raw material price inflation, the company took price hikes of 3-5 per cent in the last three quarters. These hikes, along with moderation in input costs and crude prices (some of the raw materials are derivatives of crude), should aid margins in the coming quarters.

Expansion into newer niche segments such as water proofing, premium wood finishes, title adhesives and joineries may lead growth, as the penetration of these products is only marginal in the country, with only handful of players operating in these areas.

Stable financial position

Pidilite registered a revenue growth of 20 per cent Y-o-Y to ₹5,404 crore in the nine months ended December 2018, aided by robust volumes, but net profits fell 4 per cent Y-o-Y to ₹692 crore.

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