Pidilite Industries India Equity Research Consumers February 3, 2016 Result Update Emkay Your success is our success Bonding strongly; Upgrade to BUY CMP Rs567 Target Price Rs670 ( ) Rating Upside BUY ( ) 18.2 % Strong beat on all counts - Revenues +11% yoy to Rs 13.3bn, EBITDA +53% yoy to Rs 3bn, EBITDA margin strong at 22%, +600bps yoy, APAT at Rs 1.9bn, up 49% yoy Standalone consumer & bazaar grew at 11% led by 11% volume growth with steady performance across segments. Industrial also revived with 3% growth Stellar gross margin at 51.6% +750bps yoy driven by weak VAM prices, with EBITDA margin at 22%, up 600bps. We expect strong margin performance to sustain driven by low inputs, better mix and demand uptick We are enthused by the improvement in consumer & bazaar growth profile; further urban demand uptick and strong innovation pipeline are key revenue drivers, while margin performance is expected to remain stellar. We expect 14% revenue CAGR & 27% PAT CAGR over FY15-18E. Upgrade to BUY with revised price target of Rs 670/share Change in Estimates EPS Chg FY16E/FY17E (%) (0.7)/(2.8) Target Price change (%) 11.7 Previous Reco ACCUMULATE Emkay vs Consensus EPS Estimates FY16E FY17E Emkay 14.1 17.3 Consensus 13.9 15.8 Mean Consensus TP Rs 591 Stellar all-round show Pidilite Industries Q3FY16 result saw healthy all-round performance. Key highlights are: (1) Consolidated revenues at Rs 13.4bn, up 11.4% yoy above our estimate with domestic growth at 9% and International subsidiaries constant currency growth at ~26%. (2) EBITDA grew 52.7% yoy to Rs 2.9bn, Gross margins improved 750bps to 51.6% and EBITDA margins was also strong at 22%, up 600bps yoy, (3) APAT at Rs 1.9bn, up 49.3% yoy. Healthy volume uptick in consumer & bazaar; Industrial also partially recovers Domestic operations grew by 9% yoy to Rs 11.8bn, with volume growth at 10% yoy led by consumer & bazaar segment (11% revenue & volume growth). Growth was driven across business segments, with healthy growth in most key products. After 3 quarters of flat to decline in revenues, industrial segment grew 3.1% yoy. While demand sentiments remain benign, company continues to beat slowdown through strong product innovations and promotions. Gross margin strong; Healthy flow through to EBITDA as well Company reported stellar gross margin (51.6%, +750bps) led by benign inputs and favorable mix, while operating leverage and prudent cost management aided in healthy flow through from gross to EBITDA margin at 22%, +600bps. Company has made some price adjustments and also upped promotions in the quarter. With inputs expected to be benign, mix improvement and demand uptick with further drive margins. We estimate for 21.3%/22.4% EBITDA margins in FY16/17E. Growth profile improves; Upgrade to BUY We are enthused by the improvement in consumer & bazaar growth profile; We expect growth trends to improve further led by urban demand uptick and strong innovation pipeline, while margin performance is expected to remain stellar. We have marginally cut our earnings by 1%/2% in FY16/17E factoring rise in tax rate and we introduce FY18E estimates with EPS of Rs 21/share. We expect 14% revenue CAGR & 27% PAT CAGR over FY15-18E. We upgrade to BUY with revised target price of Rs 670/share (32x FY18E EPS). Financial Snapshot (Consolidated) (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 42,559 48,204 52,727 61,252 71,208 EBITDA 6,723 7,766 11,307 13,815 16,619 EBITDA Margin (%) 15.7 16.0 21.3 22.4 23.2 APAT 4,516 5,175 7,247 8,892 10,744 EPS (Rs) 8.8 10.1 14.1 17.3 21.0 EPS (% chg) 7.0 14.6 40.0 22.7 20.8 ROE (%) 25.1 24.5 28.6 28.8 28.9 P/E (x) 64.4 56.2 40.1 32.7 27.1 EV/EBITDA (x) 43.0 37.4 25.6 20.6 16.8 P/BV (x) 14.9 12.8 10.4 8.6 7.2 Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. Stock Details Bloomberg Code PIDI IN Face Value (Rs) 1 Shares outstanding (mn) 513 52 Week H/L 638 / 507 M Cap (Rs bn/usd bn) 291 / 4.26 Daily Avg Volume (nos.) 5,26,001 Daily Avg Turnover (US$ mn) 4.4 Shareholding Pattern Dec '15 Promoters 69.7% FIIs 13.4% DIIs 6.0% Public and Others 10.9% Price Performance (%) 1M 3M 6M 12M Absolute 2-2 5 Rel. to Nifty 1 9 19 26 Relative price chart 650 Rs % 30 620 22 590 14 560 6 530-2 500-10 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Pidilite Industries (LHS) Rel to Nifty (RHS) Source: Bloomberg Prashant Kutty prashant.kutty@emkayglobal.com +91 22 66121341 Dhaval Mehta dhaval.mehta@emkayglobal.com +91 22 66121284 Emkay Global Financial Services Ltd.
Healthy constant currency growth led by Bangladesh, MENA and USA Subsidiary reported strong constant currency growth of ~26% aided by Bangladesh, MENA and USA. Nina Waterproofing Systems result had been included in subsidiary performance, Nina performance was better than previous quarters. While, margin profile was lower than our estimates, it still improved 90bps yoy to 5.2% aided by strong gross margins. Exhibit 1: North America and Middle East drives international performance; Brazil continues to under pressure Region Revenue (Rs mn) CC Growth yoy (%) EBITDA (Rs mn) North America 623 22.2% 51.9 8.3% South America 229-16.7% -2.5-0.9% Middle East & Africa 261 63.1% -37.1-14.2% South and South East Asia 375 60.3% 66.9 17.9% EBITDA Margin (%) Comments Sales growth healthy led by art material and automotive chemical business. EBITDA for the region improved by 8.3% on account of higher sales and improvement in gross margins. Brazil business impacted due to continued slowdown of the economy. Losses at EBITDA level reduced to Rs 2.5mn led by healthy gross margin expansion and lower SG&A expenses. Commencement of distribution of Pidilite Industries products in the region, which hitherto was being done by a third party distributor. Adjusting for this, sales of product manufactured in MENA grew by 8%. Loss at EBIDTA level increased to Rs 37.1mn due to lower sales and higher SG&A expenses to support future sales growth in this region. Sales growth healthy led by improved market penetration and introduction of new products in Bangladesh. Thailand growth healthy led by project segment, while Sri Lanka geography also started operations through distribution and acquisition of business. Exhibit 2: Revision in Earnings Estimates FY16E FY17E FY18E Y/E, Mar (Rs. mn) Earlier Revised % Chg. Earlier Revised % Chg. Revised Revenues 53,175 53,006-0.3 61,919 61,582-0.5 71,599 EBITDA 11,368 11,312-0.5 14,103 13,821-2.0 16,624 EBITDA Margin (%) 21.4 21.3 0 bps 22.8 22.4-30 bps 23.2 APAT 7300 7247-0.7 9122 8892-2.5 10744 EPS 14.2 14.1-0.7 17.8 17.3-2.5 21.0 Emkay Research February 3, 2016 2
Exhibit 3: Quarterly Summary - Consolidated Y/E, Mar (Rs. m) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 YoY (%) QoQ (%) 9MFY16 9MFY15 Gr (%) Revenue 12,022 10,435 14,695 13,201 13,391 11.4 1.4 41,286 38,006 8.6 Expenditure 10,088 9,097 11,258 10,187 10,438 3.5 2.5 31,883 31,606 0.9 Consumption of RM 6,708 5,556 7,486 6,355 6,475-3.5 1.9 20,315 21,259-4.4 as % of sales 55.8 53.2 50.9 48.1 48.4 49.2 55.9 Employee Cost 1,276 1,137 1,423 1,393 1,442 13.0 3.5 4,258 3,835 11.0 as % of sales 10.6 10.9 9.7 10.6 10.8 10.3 10.1 Other expenditure 2,104 2,404 2,348 2,439 2,522 19.9 3.4 7,309 6,512 12.2 as % of sales 17.5 23.0 16.0 18.5 18.8 17.7 17.1 EBITDA 1,934 1,339 3,437 3,014 2,953 52.7-2.0 9,403 6,400 46.9 Depreciation 307 306 321 329 330 7.5 0.4 980 872 12.4 EBIT 1,627 1,033 3,116 2,685 2,623 61.2-2.3 8,423 5,528 52.4 Other Income 47 43 110 110 90 90.7-18.3 324 392-17.4 Interest 56 46 39 31 31 27 2.0 101 110-8.2 PBT 1,618 1,029 3,187 2,765 2,681 65.7-3.0 8,646 5,810 48.8 Total Tax 377 234 926 836 822 118.1-1.6 2,584 1,460 77.0 Adjusted PAT 1,241 795 2,261 1,929 1,859 49.8-3.6 6,062 4,351 39.3 (Profit)/loss from JV's/Ass/MI -2-11 5 12 2-186.4-83.9 19-28 -168.8 APAT after MI 1,244 806 2,255 1,917 1,857 49.3-3.1 6,043 4,378 38.0 Extra ordinary items 0 0 0 0 0 0 0 0 49-100.0 Reported PAT 1,244 806 2,255 1,917 1,857 49.3-3.1 6,043 4,329 39.6 Adjusted EPS 2.4 1.6 4.4 3.7 3.6 49.3-3.1 11.9 8.6 38.1 Margins (%) (bps) (bps) (bps) EBIDTA 16.1 12.8 23.4 22.8 22.0 600-80 22.8 16.8 590 EBIT 13.5 9.9 21.2 20.3 19.6 600-80 20.4 14.5 590 EBT 13.5 9.9 21.7 20.9 20.0 660-90 20.9 15.3 570 PAT 10.3 7.7 15.3 14.5 13.9 350-70 14.6 11.5 310 Effective Tax rate 23.3 22.8 29.1 30.2 30.7 740 40 29.9 25.2 480 Exhibit 4: Segmental Performance - Consolidated Y/E, Mar (Rs. m) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 YoY (%) QoQ (%) 9MFY16 9MFY15 Gr (%) Segment Revenues Consumer & Bazaar 10,009 8,418 12,559 11,160 11,375 13.6 1.9 35,094 31,813 10.3 Industrial 2,039 2,157 2,185 2,116 2,102 3.1-0.6 6,403 6,535 (2.0) Others 123 98 138 100 90-27.1-10.1 328 353 (7.1) Total 12,171 10,674 14,882 13,376 13,567 11.5 1.4 41,824 38,701 8.1 Segment Results Consumer & Bazaar 1,897 1,269 3,364 2,913 2,865 51.0-1.7 9,142 6,380 43.3 Industrial 251 288 335 370 367 46.5-0.8 1,073 679 58.1 Others -28-35 -14 10-11 -59.2-211.9-15 -72 (79.7) Total 2,120 1,523 3,686 3,293 3,221 51.9-2.2 10,200 6,986 46.0 Add- Unall Income / (Exp) 445 447 461 498 508 14.1 2.0 1,467 1,127 30.2 Less- Interest Exp 56 46 39 31 31-44.1 2.0 101 110 (8.2) PBT 1,618 1,029 3,187 2,765 2,681 65.7-3.0 8,632 5,750 50.1 Segment Capital Employed Consumer & Bazaar 12,801 12,002 12,162 13,182 13,180 3.0 0.0 13,180 12,801 3.0 Industrial 2,540 2,474 2,506 2,507 2,447-3.7-2.4 2,447 2,540 (3.7) Others 378 394 442 366 325-14.0-11.3 325 378 (14.0) Unallocated 8,071 7,837 9,304 10,872 12,901 59.8 18.7 12,901 8,071 59.8 Total 23,790 22,706 24,413 26,927 28,854 21.3 7.2 28,854 23,790 21.3 Segment Margins (%) (bps) (bps) (bps) Consumer & Bazaar 18.9 15.1 26.8 26.1 25.2 620-90 26.1 20.1 600 Industrial 12.3 13.4 15.3 17.5 17.5 520 0 16.8 10.4 640 Others (22.5) (35.5) (9.8) 10.1 (12.6) 990-2270 (4.5) (20.5) 1600 PBIT Margins% 17.4 14.3 24.8 24.6 23.7 630-90 24.4 18.1 630 Emkay Research February 3, 2016 3
Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Sales 42,559 48,204 52,727 61,252 71,208 Expenditure 36,062 40,675 41,699 47,767 54,980 EBITDA 6,723 7,766 11,307 13,815 16,619 Depreciation 812 1,178 1,312 1,558 1,818 EBIT 5,912 6,588 9,995 12,257 14,800 Other Income 393 397 452 530 622 Interest expenses 163 156 136 136 136 PBT 6,142 6,828 10,310 12,650 15,286 Tax 1,653 1,694 3,050 3,743 4,525 Extraordinary Items (65) (49) 0 0 0 Minority Int./Income from Assoc. 30 50 35 39 43 Reported Net Income 4,451 5,126 7,247 8,892 10,744 Adjusted PAT 4,516 5,175 7,247 8,892 10,744 Balance Sheet Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E Equity share capital 513 513 513 513 513 Reserves & surplus 19,014 22,193 27,385 33,363 40,027 Net worth 19,526 22,706 27,898 33,876 40,540 Minority Interest 42 51 42 42 42 Loan Funds 459 584 440 440 440 Net deferred tax liability 537 566 566 566 566 Total Liabilities 20,564 23,907 28,946 34,924 41,588 Net block 7,291 9,785 9,944 10,086 9,967 Investment 2,662 3,667 6,973 6,973 6,973 Current Assets 14,750 15,077 16,364 23,543 31,923 Cash & bank balance 1,772 860 1,389 6,162 11,733 Other Current Assets 125 61 102 119 138 Current liabilities & Provision 8,719 9,240 9,207 10,550 12,148 Net current assets 6,030 5,837 7,156 12,993 19,775 Misc. exp 0 0 0 0 0 Total Assets 20,564 23,907 28,946 34,924 41,588 Cash Flow Y/E Mar (Rs mn) FY14 FY15 FY16E FY17E FY18E PBT (Ex-Other income) (NI+Dep) 5,748 6,432 9,858 12,121 14,664 Other Non-Cash items 23 (251) (14) (15) (17) Chg in working cap (1,271) (689) (791) (1,063) (1,212) Operating Cashflow 3,938 5,520 7,905 9,523 11,487 Capital expenditure (1,936) (3,709) (1,726) (1,700) (1,700) Free Cash Flow 2,002 1,811 6,179 7,823 9,787 Investments 269 (1,005) (3,305) 0 0 Other Investing Cash Flow 287 (42) (523) (530) (622) Investing Cashflow (987) (4,359) (5,102) (1,700) (1,700) Equity Capital Raised 0 0 0 0 0 Loans Taken / (Repaid) (651) 125 (144) 0 0 Dividend paid (incl tax) (1,559) (1,619) (2,081) (2,914) (4,080) Other Financing Cash Flow (42) (1) 0 0 0 Financing Cashflow (2,415) (1,651) (2,362) (3,050) (4,216) Net chg in cash 537 (490) 441 4,773 5,571 Opening cash position 1,506 1,772 860 1,389 6,162 Closing cash position 2,314 860 1,389 6,162 11,733 Emkay Research February 3, 2016 4
Key Ratios Profitability (%) FY14 FY15 FY16E FY17E FY18E EBITDA Margin 15.7 16.0 21.3 22.4 23.2 EBIT Margin 13.8 13.6 18.9 19.9 20.7 Effective Tax Rate 26.9 24.8 29.6 29.6 29.6 Net Margin 10.5 10.6 13.7 14.5 15.0 ROCE 32.6 31.4 39.5 40.0 40.3 ROE 25.1 24.5 28.6 28.8 28.9 RoIC 56.4 50.1 65.6 75.1 84.8 Per Share Data (Rs) FY14 FY15 FY16E FY17E FY18E EPS 8.8 10.1 14.1 17.3 21.0 CEPS 10.4 12.4 16.7 20.4 24.5 BVPS 38.1 44.3 54.4 66.1 79.1 DPS 2.7 2.9 4.1 5.7 8.0 Valuations (x) FY14 FY15 FY16E FY17E FY18E PER 64.4 56.2 40.1 32.7 27.1 P/CEPS 54.5 45.8 34.0 27.8 23.1 P/BV 14.9 12.8 10.4 8.6 7.2 EV / Sales 6.8 6.0 5.5 4.7 3.9 EV / EBITDA 43.0 37.4 25.6 20.6 16.8 Dividend Yield (%) 0.5 0.5 0.7 1.0 1.4 Gearing Ratio (x) FY14 FY15 FY16E FY17E FY18E Net Debt/ Equity (0.1) 0.0 0.0 (0.2) (0.3) Net Debt/EBIDTA (0.2) 0.0 (0.1) (0.4) (0.7) Working Cap Cycle (days) 36.3 37.5 39.7 40.5 41.0 Growth (%) FY14 FY15 FY16E FY17E FY18E Revenue 16.3 13.3 9.4 16.2 16.3 EBITDA 12.0 15.5 45.6 22.2 20.3 EBIT 11.1 11.4 51.7 22.6 20.7 PAT 5.0 15.1 41.4 22.7 20.8 Quarterly (Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Revenue 12,022 10,435 14,695 13,201 13,391 EBITDA 1,934 1,339 3,437 3,014 2,953 EBITDA Margin (%) 16.1 12.8 23.4 22.8 22.0 PAT 1,244 806 2,255 1,917 1,857 EPS (Rs) 2.4 1.6 4.4 3.7 3.6 Shareholding Pattern (%) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Promoters 69.8 69.7 69.7 69.7 69.7 FIIs 15.5 15.4 14.7 14.5 13.4 DIIs 4.1 4.2 5.0 5.1 6.0 Public and Others 10.6 10.6 10.6 10.7 10.9 Emkay Research February 3, 2016 5
Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months. SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months. Emkay Global Financial Services Ltd. CIN - L67120MH1995PLC084899 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. 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