Pidilite Industries Limited. Rating: BUY FMCG. Pidilite Industries Ltd. STOCK IDEA

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1 Pidilite Industries Limited FMCG STOCK IDEA Rating: BUY Date July 3, 215 CMP (Rs.) 558 Target (Rs.) 662 Potential Upside 18% BSE Sensex 2755 NSE Nifty 838 Scrip Code Bloomberg PIDI IN Reuters PIDI.BO BSE Group A BSE Code 5331 NSE Symbol PIDILITIND Market Data Market Cap.(Rs. Cr) Equity Sh. Cap. (Rs Cr) Wk High/Low 637.6/352 Avg. Quarterly Volume 356 Face Value (Rs.) 1 Shareholding Pattern (As on 3 th Jun 215) FII 5.8 DII 14. Promoters 69.7 Public & Others 1.5 Total 1. Comparative Price Chart Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Pidilite Atul Karwa Research Analyst atulkarwa@systematixshares.com Sensex Arun Gopalan VP Research & Investments arungopalan@systematixshares.com Pidilite Indisutries Limited (PIL) is India s dominant player in the adhesives & sealants segment, with its flagship product Fevicol and other legacy products (M-Seal, Dr. Fixit, etc) that command ~7% of domestic market share and contributes around 5% to its topline. The Company operates through two major segments Consumer and Bazaar Products and Industrial Products contributing on an average of ~8% and ~2% respectively. We expect PIL to benefit over the near future on the back of (i) the strong Indian consumption story, (ii) rising demand from semi-urban and rural India, (iii) large investment in infrastructure and Housing for All by 22 and (iv) a foreseeable surge in industrial activity. We expect topline to grow at a CAGR of 17% and bottomline at 18% over FY15-17 and expect the stock to remain an outperformer. Q1FY16 margins boosted by falling raw material costs: Total income of the company increased by 9.4% yoy to Rs 1469 cr. However EBITDA increased by 43% yoy to Rs 344 cr and margin expanded by 55 bps to 23.4% on back of lower raw material prices. Higher depreciation charges resulted in PAT increasing by 33.8% to Rs 225 cr and PAT margin expanding by 281 bps to 15.3%. Segmentwise Consumer & Bazaar products grew by 9.4% to Rs 1256 cr while revenues from Industrial Products remained flat at ~Rs 75 cr. The two segments witnessed an EBITDA expansion of 54 bps and 79 bps respectively to 27% and 15.3%. Strong Brand with Pricing Power: PIL is dominant player in adhesives & sealants segment with its legacy products Fevicol, M-Seal, Dr. Fixit, etc. that commands ~7% of the domestic market share. This segment has grown primarily driven by the adhesive and sealants segments, which contributes ~5% to the company s revenue at a CAGR of 15.4% over FY9-14. Other subsegments include (i) construction and paint chemicals contributing 2% of total revenue, growing at CAGR of 18% over FY9-14 and (ii) art material products contributing 12% to topline and growing at a whopping CAGR of 32.6% over FY9-14. With Indian consumption story intact and demand likely to improve from semi-urban and rural India we expect Consumer & Bazaar Products to grow at a CAGR of 16% over FY15-17E. Margin recovery with fall in Raw Material Prices: One of its key raw material, Vinyl Acetate Monomer (VAM) prices had shot up during the 9MFY15 and made a high of US$15 in May 214 and was in that range upto December 214. The prices are now cooling off from its high and currently in the range of US$1-US$11. During FY15 the company had to undergo price hike twice by 2-3% in May 214 and 3-5% in August 214. Thus we expect that margins likely to improve with cooling of VAM prices and the earlier price hike to fully reflect in the coming year. Also fall in crude oil price will further add on to the margins on the back of lower distribution cost and other fall in other raw material prices that are crude derivatives. Revival in Industrial Activity: Industrial products grew at a CAGR of 14.3% over FY9-14 contributing ~18% of total revenue. This segment caters to various industries (for example, textiles, leather, footwear, ink, packaging, etc). The growth in the segment in FY15 was subdued growing at 7% due to lower industrial activity. We expect the growth in industrial activity to pick-up going forward and the segment to grow at a CAGR of 14% over FY15-17E. Overseas subsidiary, gradual improvement continues: Sales in constant currency grew by 15% yoy in FY15 adjusting for the translation effect to Rs 489 cr. The US business showed good growth in Art Materials leading to an increase of 11% in revenues in FY15, offsetting the impact of adverse weather earlier in the year. Egypt grew by 19% and South and South East Asia market grew by 9%. Overall EBITDA for overseas subsidiaries improved from Rs 4.4 cr in FY14 to Rs 12.8 cr in FY15. Valuation & Outlook: We expect EBITDAM% and PATM% to expand by 3bps and 2bps respectively over the next two years. With practically no debt in it s books and clocking a sustainable ROCE of 29%, the stock currently trades at PE of 39.6x of our FY17E earnings. We recommend a BUY with a target of Rs 662 implying an upside of 19%. Particulars Sales EBITDA EBITDAM PAT FY FY15P FY16E FY17E PATM EPS (`) BVPS (`) P/E (x) P/BV (x) RoNW

2 Sales & Growth Sales breakup (FY14) % 17.6% 16.5% 13.1% 18.1% 16.4% Organic Pigments, 6% Adhesives & Sealants, 5% Net Sales (Rs Cr) Growth Industrial Adhesives, 6% Industrial Resins, 7% Art Material & Others, 12% Construction/ Paint Chemicals, 19% EBITDA & Margin Segmental Sales % 16.2% 16.2% 15.9% 15.7% 15.5% EBITDA (Rs Cr) EBITDA Margin Consumer & Bazaar Products Industrial Products PAT & Margin RoNW & RoCE % % 1.5% 1.6% 1.6% 1.8% PAT (Rs Cr) PAT Margin RoCE RoNW Source: Company, Systematix Research

3 COMPANY BACKGROUND Pidilite Industries Ltd. (PIL) is one of India s leading players in the consumer and specialties chemicals space, with a 7% share in the Indian market. Its 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. PIL s Fevicol has become synonymous with adhesives in India and has been ranked as the largest selling adhesive brand in Asia. Pidilite faces limited competition, as in most of its segments there are only a few large companies with a national presence. The company caters to two segments: 1) consumer and bazaar products, which contributes to 8% of revenues and 2) industrial products. Pidilite has also expanded into international markets through acquisitions and by setting up of manufacturing facilities and sales offices in important regions, including the US, the UK, Singapore, Brazil, the UAE, Egypt and South Africa. It has state of-the-art manufacturing plants in 18 locations across the globe. Consumer & Bazaar Products (~8% of revenues) Product Line % of rev Characteristic Key Brands 51% - Dominant market share across most products / categories Fevicol, M-seal, Fevi Adhesive & Sealants - Wide distribution network & strong connect with dealers Kwik, Fevi Stik 2% - Used for water-proofing & tile fixing solutions Dr. Fixit, Roff - High potential in new construction and repair & renovation segments; less Construction impacted by slowdown Chemicals - First mover advantage; but competition inching up - Wide product range Art Materials & Stationary 1% - Extensive range of art materials for Education, hobby and fine arts segments - Relatively small size business, but huge growth potential - New products, distribution and promotions driving growth Key Management Personnel : Rangeela, Hobby ideas, Fevigum Industrial Products (~2% of revenues) Product Line % of rev Characteristic Industrial Adhesive 7% - Leadership position & Extensive range of products catering to packaging, cigarettes, stickers, labelings, footwear etc Industrial Resins 6% - Specialty chemicals for industries like paints, fabrics and leather - Caters to domestic & export market Organic pigments and preparations 6% - Market leader in pigment dispersions for Textile segment - Pioneer in manufacturing Pigment Violet 23 Name & Designation Mr Bharat Puri Managing Director Mr Madhukar Parekh Executive Chairman Mr Sandeep Batra Director-Finance Brief profile Mr Puri is an MBA from IIM, Ahmedabad. Earlier he served as Head of Global Chocolate Category for Cadbury Limited since Oct-8 and was the architect of the successful A Cadbury in every pocket strategy. He has been an Independent & n Executive Director of Pidilite Industries Ltd. since May-8. Mr Parekh holds a Bachelor's Degree in Chemical Engineering from UDCT and an MS in Chemical Engineering from University of Wisconsin, USA. He has been Executive Chairman of Pidilite Industries since May-13. He served as the Managing Director of Pidilite from May-13 to Apr-15. He serves as the Managing Director of Vinyl Chemicals Mr Batra is a qualified CA and CS. He has an experience of more than 2 years. He served as the CFO of Akzo bel from 1988 to 29. He also served as the Group Compliance Officer and Company Secretary of ICICI Bank Ltd. from v- 7 to Jan-14. He serves as CFO of ICICI Prudential Life Insurance

4 FINANCIAL PERFORMANCE PROFIT & LOSS (Rs Cr) CASH FLOW (Rs Cr) Particulars FY13 FY14 FY15E FY16E FY17E Particulars FY13 FY14 FY15E FY16E FY17E Operating Income Profit Before Tax Materials consumed Depreciation Employee cost Others (23.4) 18.7 (23.1) Other operating expenses Change in working capital.. (33.1) (4.5) (114.5) EBITDA Tax expenses (141.4) (166.9) (169.4) (224.7) (267.2) Depreciation Cash flow from Ops EBIT Net Capex (18.1) (189.5) (37.9) (18.) (15.) Interest Other investing activities (46.2) 9.7 (99.6) (5.) (5.) Other Income Cash flow from Invest (144.5) (98.7) (47.5) (23.) (2.) Profit Before Tax Proceeds from Eq Cap..... Tax Borrowings / (Repayment) (159.6) (65.3) PAT Dividends paid (112.) (155.9) (174.) (213.3) (253.6) PAT after Min Int Interest paid (67.8) (2.3) (15.6) (14.6) (12.9) Cash flow from finance (339.5) (241.5) (177.1) (227.9) (266.4) Net Cash Flow (12.2) 53.7 (77.5) BALANCE SHEET (Rs Cr) RATIO ANALYSIS Particulars FY13 FY14 FY15E FY16E FY17E Particulars FY13 FY14 FY15E FY16E FY17E Share Capital EPS Reserves & Surplus BVPS Total Shareholder funds P/E Minority Interest P/BV n Current Liabilities RoNW 25.7% 23.% 22.6% 22.8% 23.1% Total borrowings RoCE 3.8% 29.5% 28.% 29.% 29.3% Deferred tax liabilities EV/EBITDA Other long term liabilities..... Growth Net Sales 17.6% 16.5% 13.1% 18.1% 16.4% SOURCES OF FUNDS EBITDA 22.6% 13.2% 14.8% 19.9% 16.9% Fixed Assets PAT 3.7% 6.1% 13.9% 18.5% 18.9% Investments Profitability Other n-current Assets EBITDA Margin 16.1% 15.7% 15.9% 16.2% 16.2% PBIT Margin 14.3% 13.8% 13.5% 13.8% 14.% Current Assets PAT Margin 11.5% 1.4% 1.5% 1.6% 1.8% Current Liabilities Stability Net Current Assets Debt/Equity..... Current Ratio TOTAL ASSETS Interest Coverage

5 DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION We, Atul Karwa & Arun Gopalan, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report, (2) part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Disclosure of Interest Statement Response Analysts holding in the stock Served as an officer, director or employee II. ISSUER SPECIFIC REGULATORY DISCLOSURES, UNLESS SPECIFICALLY MENTIONED IN POINT NO. 9 BELOW: 1. 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CIN: U65993TN1995PLC31285 : SEBI Regn..: BSE: INB/F Member Code: 182 NSE: INB/F/E Member Code : MCX-SX: INB/F Member Code: 1756 PMS SEBI Reg. : INP2692 Depository Participant: IN-DP-CDSL AMFI: ARN Corporate Office Address: A 63-66, The Capital, BKC, Bandra (E), Mumbai, India - 451