Pidilite Industries: Strong bonds

Pidilite Industries is a leading manufacturer of adhesives and sealants in the country. The company operates in two major segments — consumer and bazaar (C&B), and industries. The C&B segment covers a wide range of products for consumers and craftsmen. The company is the market leader in both categories in the country and caters to both the domestic and international markets.

Pidilite’s strong penetration in multiple sectors, improving presence in the urban and rural areas and the government push to infrastructure bode well for its growth prospects. The ability to pass on cost increases and a strong brand, bolstered by effective marketing campaigns and a robust balance sheet, are other positives. The company’s financials have grown strongly over the past few years aided by sound operating performance. The stock has also run up well. Despite this, it provides a good buying opportunity for investors with long-term perspective.

At ₹790, the stock quotes at about 46 times its trailing 12-month earnings. Over the past three years, it has traded in the range of 39-71 times. The stock’s valuation is not too expensive and the company’s business prospects remain bright.

Market leader Pidilite’s strong brand positioning with well-known products such as Fevicol and M-seal, pan-India distributor network and diversified products catering to the needs of varied clientele (from carpenters, plumbers, painters, students and offices to industries such as textiles, paints, paper and printing inks) have helped the company retain its leadership position in the market. So have the regular additions to the product portfolio.

The company has 23 manufacturing plants in India and exports some of its products to over 80 countries, particularly to West Asia, Africa, the US and Europe. A chunk of the company’s revenue comes from domestic operations, with C&B accounting for 84 per cent and industrial products 16 per cent.

On a good wicket The C&B segment comprises adhesives and sealants, construction and paint chemicals and art and craft materials. Growth in this segment is mainly driven by adhesives and sealants, which contribute over 50 per cent to the overall revenue.

In a market with only a few large players, Pidilite dominates the C&B segment with a share of about 70 per cent. This should continue, thanks to strong brand recognition and business expansion. There is also scope for market expansion, especially in the adhesives segment.

Looking up The industrial segment includes products such as industrial adhesives, synthetic resins, and organic pigments. The company has been able to hold its own against competition in this segment, thanks to its strong market presence and distributor reach. This segment’s growth has been subdued in the recent past as industry is slowly reviving from the impact of high input costs and GST roll-out. But the government’s push to infrastructure projects should translate into strong demand for many of the company’s products such as adhesives, sealants and construction chemicals.

Impact of GST Pidilite Industries has a diversified portfolio with different products subject to various GST rates. Most of the products under the industrial segment are taxed at 18 per cent GST. Products under the C&B segment, such as adhesives, are taxed at 18 per cent while sealants are taxed at 28 per cent; and art & craft material at 28 per cent GST. Some of these rates are higher than what it was earlier, when the company’s products were mostly charged 12.5-14.5 per cent sales tax plus excise duty of 12.5 per cent.

The GST implementation has caused short-term supply-chain disruptions due to de-stocking of inventories; this has impacted the recent June quarter results of the company. Revenue declined 1.3 per cent y-o-y while profit fell 17 per cent. However, in the long run, GST is likely to aid entities in the organised sector. Also, the impact on margins should be mitigated by the input tax credit mechanism. Costs in terms of logistics could come down. The company has started passing on the benefits derived from lower GST to its customers; this should aid volumes.

Pricing power Pidilite’s revenue and profit grew at an annual average of 12 and 22 per cent respectively, between 2011-12 and 2016-17. Revenue and profit in FY2017 stood at ₹6,062 crore and ₹863 crore respectively. The operating margin at about 23 per cent, was a tad higher than the 22 per cent in the previous year, thanks to decline in the cost of raw materials, a lot of which are crude oil derivatives.

While crude oil prices have climbed from the lows of the last quarter of 2015-16, they are expected to remain range-bound ($45 to $60 a barrel) due to global demand-supply dynamics. Even if costs rise, Pidilite, thanks to its market leadership, is well-positioned to pass them on to its customers. The company has hiked prices in May in some select products. The company has a strong balance sheet with negligible borrowings.

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