Pidilite Industries. CMP: INR164 TP: INR186 Buy

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1 BSE SENSEX S&P CNX 16,640 5,043 Bloomberg PIDI IN Equity Shares (m) Week Range (INR) 188/134 1,6,12 Rel. Perf. (%) 1/20/5 M.Cap. (INR b) 83.0 M.Cap. (USD b) July QFY13 Results Update Sector: Consumer Pidilite Industries CMP: INR164 TP: INR186 Buy Pidilite Industries (PIDI) posted better than expected results for 1QFY13. Adjusted PAT grew 23% to INR1.3b (our estimate: INR1.2b) on sales of INR9.1b (our estimate: INR9b). Though the tax rate increased 270bp, doubling of other income boosted PAT. Consumer & Bazaar sales were up 21.6%, led by strong momentum in volume growth and pricing. EBIT margin in this segment was up 125bp. Industrial Chemicals sales grew 11.5%, while margin declined 270bp. Continued robust growth in the Consumer & Bazaar segment, despite price hike in Fevicol indicates strong demand. Post a weak 3QFY12, the Industrial business has shown revival, indicating an improving exports scenario. Despite flat gross margin, EBITDA margin expanded 110bp. We believe that PIDI will gain from declining VAM (vinyl acetate monomer) prices, which have softened to USD980/ton. We remain positive on the volume growth scenario in Consumer & Bazaar products despite the management s cautious outlook. We maintain our revenue and earnings estimates. We expect 22% CAGR in earnings over FY12-14E. The stock trades at 19.9x FY13E and 16.2x FY14E EPS. Buy. Sreekanth P.V.S. (Sreekanth.P@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Key takeaways from conference call Overall performance Revenue growth was driven by higher volumes and 8-9% price hikes in the Consumer & Bazaar (C&B) segment. Though the company also took 4-5% price hikes in the Industrial segment, volumes were flat. After de-growth of 2.1% in 3QFY12 and growth of just 5% in 4QFY12, Industrial segment revenue grew 11.5% in 1QFY13. New products, better mix and new markets drove growth in the C&B business. Higher repairs and maintenance activity during the quarter drove demand for Adhesives and Construction Chemicals. VAM prices softened from USD1,050/ton to USD980/ton during the quarter. Ad spend was lower than in 1QFY12, aiding margin expansion. Other income was higher on account of higher treasury income. Finance cost was higher due to restatement of interest liability on FCCBs. The fifth unit in Himachal will no longer enjoy tax benefits; expect tax rate to be at 1QFY13 level for the full year. Overseas operations Revenue from overseas operations grew 11.7%; adjusted for the translation effect, overseas revenue would have been flat. Growth was led by the Auto segment. Revenue from North America grew 27%. Brazil sales declined 14%; margin pressure continues; losses jumped from INR5m in 1QFY12 to INR44m in 1QFY13. Signs of improvement in Dubai, Egypt, Thailand and Bangladesh. New line of adhesives launched in Bangladesh in 1QFY13. JV with Hybrid Coatings Has entered into an agreement with Hybrid Coatings for the manufacture of construction chemicals and to establish a joint-venture company in India for this purpose. The JV company will mainly cater to waterproofing solutions and other construction applications. Hybrid Coatings is a partnership firm. Outlook Interest cost to decline sequentially in 2Q, if the INR stabilizes at the current level. Growth outlook - things are not as bad as in FY09, but also not as good as in 1HFY12. Standalone sales up 18.8%; margins expand 110bp on account of lower staff cost and other expenses PIDI's 1QFY13 results were marginally above estimates with Adj PAT up 23% to INR1.3 (est 1.2b). Net Sales was up 19% to INR9.1b (est INR9b), led by ~13% volume growth in Consumer & Bazaar segment. Gross margins remained flat YoY (down 170bp QoQ); VAM prices have steadily declined, but the benefit was offset by INR depreciation. 30bp decline in employee costs and a 80bp decline in other expenditure led EBITDA margin expansion by 110bp at 20.9%. Other income increased by 132% and the tax rate was higher by 270bp YoY and 700bp QoQ. 27 July

3 Gross margins and EBITDA margins show revival QoQ tax rate higher 700bp QoQ Source: Company/MOSL Consumer & Bazaar sales up 21.6%; Industrial sales report healthy double digit growth of 11.5% Consumer & Bazaar sales were up 21.6% led by strong momentum in volume growth of ~13%. EBIT was up 32%. Industrial Products sales were up 11.5% while EBIT growth was muted at 2%. Margins contracted 270bp YoY and 490bp QoQ. Industrial Products growth indicates improving exports scenario unlike 3QFY12. Segmental: Industrial segment drags down overall performance Segmental 2QFY11 3QFY11 4QFY11 FY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 Consumer and Bazaar Sales (INRm) 4,558 4,499 4,098 18,134 6,127 5,604 5,521 5,009 7,457 Sales Growth (%) EBIT (INRm) 1,186 1, ,626 1,586 1,281 1, ,023 % Contribution EBIT Growth % EBIT margin % Industrial Products Sales (INRm) 1,400 1,425 1,575 5,809 1,662 1,646 1,400 1,655 1,844 Sales Growth (%) EBIT (INRm) , % Contribution EBIT Growth % EBIT margin % Source: Company/MOSL Valuation and View: Consumer & Bazaar remains healthy; double digit industrial sales growth and margin expansion positive; Buy Sustained performance in the Consumer & Bazaar segment indicates strong demand; double-digit growth in industrial products segments indicates improvement on the exports front. Margins expansion though on account of lower staff cost and other expenditure is a positive. We maintain our revenue and earnings estimates. We expect 22% CAGR in earnings over FY12-14E. The stock trades at 19.9x FY13E and 16.2x FY14E EPS. Maintain Buy. 27 July

4 Pidilite Industries: an investment profile Company description Pidilite Industries (PIDI) is the largest branded adhesives player in India, with an iconic brand like Fevicol. Besides a strong presence in adhesives, it has expanded its presence in emerging segments like mechanized joinery, modular furniture, flooring, automotive care and waterproofing through brands like Dr Fixit and Roff. Key investment arguments We expect strong consumer-driven demand to continue and drive 15%+ volume growth for the company. Strong brand leadership and pricing power will assist margin expansion in the future. Key investment risks Continued increase in VAM prices which could impact margins in the near term as price increases will be with a lag. Delay in commissioning elastomer project and longer than expected payback period which could strain cash flows. Recent developments Hybrid coatings JV - Mainly to cater to waterproofing solutions and other construction applications. Elastomer project still under hold and board has not given any approval. Valuation and view We maintain our revenue and earnings estimates. We expect 22% CAGR in earnings over FY12-14E. The stock trades at 19.9x FY13E and 16.2x FY14E EPS. Maintain Buy. Sector view We have a cautious view on the sector given the slower income growth in the economy, which might impact volumes as well as profit margins of companies. Companies with low competitive pressures and broad product portfolios will be able to better withstand any slowdown in a particular segment. Longer term prospects appear bright, given rising incomes and low penetration. Comparative valuations Pidilite Inds. Asian Paints P/E (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E EV/Sales (x) FY13E FY14E P/BV (x) FY13E FY14E EPS: MOST forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Stock performance (1 year) Shareholding pattern (%) Jun-12 Mar-12 Jun-11 Promoter Domestic Inst Foreign Others July

5 Financials and Valuation 27 July

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