Materials-Chemicals-Specialty Chemicals Bloomberg Code: PIDI IN India Research - Stock Broking Backed by Brands Like Fevicol, Scaling Up Leadership Position in Adhesives and Sealants Products on Economic Recovery We expect revenue to grow at a CAGR of 14.8%, while EBITDA and net profit are likely to grow by 19%-2% and 12%-13% respectively, during FY16-FY18E on the back of revival in the overall economy. Company likely to continue with robust performance on the back of economic recovery: Pidilite has recorded growth in consolidated operating revenue growth at a CAGR of 15.1% during FY11-16. Improved EBITDA margin by 64 bps resulting into 22.% rise in EBITDA to Rs. 11787 mn during FY15-16 on the back of benign raw material prices during the same year. The momentum so set is likely to continue on the back of strong brand, premiumisation and innovation. Besides rising personal income, pick-up in construction activities and seasonal demand for waterproofing products will further help to improve top line and bottom line. Expansion in business to boost top line: In its bid to enhance market share, the company is on expansion mode, especially in Asian, Middle East and North African (MENA) markets where demand situation is same like Indian market where it has been expanding its business into related areas. Continuation of acquisitions in its core business will spread the inorganic growth and entering into new product line i.e., wood business which can give new opportunity to increase topline of the business. Healthy Balance sheet and operating cash flow: Cash on book and lower debt levels to support organic and inorganic growth of the company. Further, the company has recorded strong operating cash flow which helps to grow its operations. We expect cash rich position helps the company to execute growth plans without affecting the financial performance of the company. Valuation and Outlook Pidilite, having the credentials of being the largest player in Adhesives with healthy financials, is trading at 42.1x of FY18E EPS. We initiate the coverage of the company with BUY recommendation on the stock with the target price of Rs. 84, representing an upside potential of 15%, for a time frame of 9-12 months. Key Risks 1) Volatility in raw material prices. 2) Competition from other players. Exhibit 1: Valuation Summary YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Net Sales 42832 48441 53695 6185 783 EBITDA 6715 778 11787 12443 13861 EBITDA Margin (%) 15.7 15.9 22. 2.1 19.6 Adj. Net Profit 4498 5126 764 7994 8887 EPS (Rs.) 8.8 1. 14.8 15.6 17.3 RoE (%) 25. 24.3 3.1 26.2 24.9 PE (x) 34.8 6.1 39.9 46.8 42.1 ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Jul 11, 216 BUY CMP (as on Jul 8, 216) 73 Target Price 84 Upside (%) 15 Stock Information Mkt Cap (Rs.mn/US$ mn) 37422 / 5552 52-wk High/Low (Rs.) 739 / 57 3M Avg. daily volume (mn).5 Beta (x).8 Sensex/Nifty 27127 / 8323 O/S Shares(mn) 512.7 Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 69.6 FIIs 13.3 DIIs 6.3 Others 1.8 Stock Performance (%) 1M 3M 6M 12M Absolute 4 22 31 34 Relative to Sensex 2 13 2 36 Source: Bloomberg Relative Performance* 12 11 1 9 8 Apr-15 May-15 Jun-15 Jul-15 Source: Bloomberg; *Index 1 Analyst Contact Kishor Kumar Aug-15 4-3321 6277 Sep-15 Oct-15 Nov-15 Dec-15 kishor.kumar@karvy.com Jan-16 Feb-16 Mar-16 Apr-16 May-16 Sensex Jun-16 Jul-16 1
Company Financial Snapshot (Y/E Mar) Profit & Loss (Rs. Mn) Balance sheet (Rs. Mn) Exhibit 2: Shareholding Pattern (%) FY16 FY17E FY18E Total Assets 3982 4685 52814 Net Fixed assets 1575 16363 17714 Current assets 21482 26895 32844 Other assets 566 667 764 Total Liabilities 3982 4685 52814 Networth 27829 33126 3828 Debt 843 843 843 Current Liabilities 9614 1123 12729 Other Liabilities 4632 5462 6259 Balance Sheet Ratios RoE (%) 3.1 26.2 24.9 RoCE (%) 29.3 25.6 24.4 Net Debt/Equity (.) (.1) (.1) Equity/Total Assets 71.2 71.9 72.3 P/BV (x) 1.9 11.3 9.8 FY16 FY17E FY18E Net sales 53695 6185 783 Optg. Exp (Adj for OI) 4197 49362 56969 EBITDA 11787 12443 13861 Depreciation 1331 131 1451 Interest 133 17 17 Other Income 51 516 523 PBT 1833 1148 12762 Tax 3221 3476 3864 Adj. PAT 764 7994 8887 Profit & Loss Ratios EBITDA margin (%) 22. 2.1 19.6 Net margin (%) 14.2 12.9 12.5 P/E (x) 39.9 46.8 42.1 EV/EBITDA (x) 25.7 29.9 26.7 Dividend yield (%).7.6.7 DIIs 6.3% Others 1.8% Company Background Pidilite Industries (PIDI) started in 1959 (based in Mumbai), manufacturing only white glue Fevicol, and has now grown to cater to various other categories including construction and paint chemicals, automotive chemicals, art materials and stationery, industrial adhesives, industrial and textile resins, furniture and organic pigments preparations. The well known brands are Fevicol, Fevikwik, M-seal, Dr. Fixit, Roff, Moto Max, Sargent Art color pencil, etc. At present, PIDI has 8 regional offices with 2 plants and 28 co-makers in India. And, the company is well equipped with Research & Development facilities which comprise of 3 R&D centres in India and 1 in Singapore which work aggressively for product development. Further, there are 16 overseas subsidiaries including 5 Direct, 11 Step down and 1 Joint Venture (i.e., Industria Chimica Adriatica Spa (ICA), in which the company has 5% of shareholding) and with operations in more than 6 countries, majorly Middle East, Africa, USA & Europe. Cash Flow (Rs. Mn) Exhibit 3: Revenue Segmentation (%) FY16 FY17E FY18E PBT 1833 1148 12762 Depreciation 1331 131 1451 Tax (3221) (3476) (3864) Changes in WC (1777) (142) (1292) Others (456) (464) (472) CF from Operations 6842 76 8755 Capex (2218) (2598) (282) Others (245) (647) (594) CF from Investing (4623) (3245) (3396) Change in Debt 259 Interest Paid (133) (17) (17) Dividends & Others* (1789) (2562) (288) CF from Financing (154) (271) (2957) Change in Cash 679 1644 241, *Includes dividend distribution tax Industrial Product 16.% FIIs 13.3% Promoters 69.6% Consumer and Bazaar Product 84.% Source: BSE, Karvy Research 2
Up-tick in Consumer and bazaar segment could increase revenues by CAGR of 14.7% during FY16-18E: Consumer and Bazaar (C&B) product accounted for 84.% in overall sales and grew by ~2 bps on the back of aggressive sales growth in adhesive and sealant product, contributed by 3bps from sub-segment C&B business in FY16. Due to high demand of its product mix in the market, the company is mainly focusing in urban areas. And, we believe that this segment will grow by ~1 bps in next couple of years. With less pressure of competition in its broad product portfolio, oligopoly in product mix and added pricing power give enormous opportunity to the company which would be able to offer healthy accelerated growth margin in this segment. Exhibit 4: Consumer and Bazaar Segment 5 4 3 2 1 79.% 81.% 247 29793 81.% 34694 82.% 39722 84.% 4513 FY12 FY13 FY14 FY15 FY16 Consumer and Bazaar Product (Rs. Mn) % of revenue (C&B) 86% 84% 82% 8% 78% 76% Exhibit 5: Product Range Organic Pigments & Preparations 6.% Industrial Adhesives 5.% Industrial Resins 5.% Art Materials & Others 12.% Construction / Paint Chemicals 19.% Adhesives & Sealants 53.% Waterproofing products likely to be next growth driver: Exhibit 6: Construction / Paint Chemicals (Rs. Mn) 14 11 8 5 2-1 536 657 CAGR of 17.9% 7796 8616 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Construction / Paint Chemicals (Rs. Mn) 1266 122 1252 13871 In FY16, Construction chemical segment grew 1.5% (YoY) and accounted for 19.% in total sales. The high demand of construction chemical product in market and belief of positive monsoon this year, could push demand of waterproofing products which could be next big growth driver after adhesive and sealant products in the coming years. Therefore, PIDI is pushing its volume in domestic market through innovative integrated marketing campaigns consistently, keeping in mind of public demand and needs. Pick-up in construction activities and normal monsoon hold good for volume growth: According to India Brand Equity Foundation (IBEF) report, the Indian real estate sector has grown by 25%-3% annually and has witnessed high growth in recent times with the rise in demand for office as well as residential spaces which can accelerate the optimistic up-tick in organic growth of volume of adhesive, water proofing, paint and furniture products. Moreover, as per India Meteorological Department (IMD), country is set to receive above normal monsoon rain this year, which could play important role to increase the demand for waterproofing products like Dr. Fixit, which will help to increase overall organic volume growth of the company. Stellar performance in overseas subsidiaries likely to continue: Exhibit 7: Geographical Break-up of Revenue Domestic 88.2% Overseas 11.8% Overseas sales grew by 21.4% YoY to Rs. 5819 Mn in FY16 on constant currency terms and recorded EBITDA margin upside of 584 bps in the same year. North America subsidiary counts for highest share in international business segment and contributed ~42% in total international subsidiaries sale and other subsidiaries contributed ~58% in total overseas sales of business. Large amount of this growth has been led by North America, South Asian Association for Regional Cooperation (SAARC) and MENA regions except Brazil which fell by 7% due to slowdown in economy. 3
Exhibit 8: Overseas performance in revenue terms 25 2 15 1 5 2442 12.7% North America -6.8% 978 South America 84.5% 821 SAARC 7.% 549 South East Asia 65.7% 129 Middle East and Africa Revenue (Rs. Mn) YoY growth (%) 9% 6% 3% % -3% Exhibit 9: Overseas performance in EBITDA terms 235 16 85 1-65 -14 222 113.5% -15 98.8% 161 19 23.9% 168.% -134 172% 88% 4% -72.7% -8% North South SAARC South Middle America America East Asia East and Africa EBITDA (Rs. Mn) YoY growth (%) ynorth America: Sales grew by 12.7% accounted to Rs.2442 mn in FY16 due to higher sales volume growth of art and stationary business on the back of Adult Craft Trend campaign in United States. ysouth America: Business in Brazil was impacted by economic slowdown in drop of sales by 6.8% than previous year but EBITDA loss declined by 72.7% due to improvement in gross margin and reduction in fixed overhead cost. ysaarc: Improved YoY Sales and EBITDA by 84.5% and 98.8% respectively due to: Expansion of geographic distribution, marketing effort in Bangladesh; and, Acquisition of business, expansion of distribution and local toll blending operation in Sri Lanka. ysouth East Asia: Sales grew by 7.% and EBITDA grew by 23.9% due to reduced commodity price, better product mix and lower expenditure in Selling, General and Administrative. ymiddle East and Africa: Sales grew by 65.7% largely due to higher sales from the distribution of Pidilite Industries products in the region. Aggressive Business Strategy: Exhibit 1: Sales Promotional Trend 25 2 15 1 5 3.7% 974 3.4% 174 4.% 1477 4.3% 1861 4.% 4.% 2.% FY11 FY12 FY13 FY14 FY15 FY16 Advertisement Expense (Rs. Mn) % of sales 1915 2148 4.5% 4.% 3.5% 3.% 2.5% PIDI s strength lies in strong brand recall, innovation and increased distribution channels in domestic and international markets. Recently, PIDI has hired its strategic consultant, Bain & Company to plot its global growth strategy, especially in Asian & MENA markets where demand situation is same like Indian market. Continuation of acquisitions in its core business will spread the inorganic growth and entering into new product line i.e., wood business is expected to give new dimension of business. Quality is primary parameter for success of the business. So, management has more focus on quality products to continue consumer trust and that s why it is continuously keeping its strength by doing product development & innovation in its in-house R&D labs. And, they are launching their new products in regular intervals, as it is a key mantra for success of business. For example, Dr. Fixit Rain Coool- terrace waterproofing product, useful for preventing heat and keep house cool. PIDI is also known for his iconic and innovative marketing strategy to promote their products which lead to volume growth of the business. That s why, PIDI spent ~3.5-4% of sales towards advertisement and other promotional activities which resulted into increased sales volume growth during FY16. PIDI has strong presence in India and presently, there are 55 plus Stock Keeping Units (SKUs) for its 5 products along with 7 distributors covering 3mn outlets across the country. Management concentrates on iconic products like Fevicol and Fevikwik, M-seal, etc and making efforts to make product, easily available to consumers. 4
Exhibit 11: Business Assumptions Y/E Mar (Rs. Mn) FY15 FY16 FY17E FY18E Comments Revenue 48441 53695 6185 783 We expect the revenue growth at 14.8% CAGR during the FY16-18E on the back of strong demand backed by distribution network and brand strength. Revenue Growth (%) 13.1 1.8 15.1 14.6 EBITDA 778 11787 12443 13861 EBITDA Margins (%) 15.9 22. 2.1 19.6 PAT (normalized) 5126 764 7994 8887 We expect that EBITDA margin would vary in the range of ~19%-2% during the period of FY17-18E due to moderate pick-up expected in crude oil prices in next two years. PAT is likely to experience moderate growth amid exemption of tax benefits that the company is availing till FY15. Fully Diluted EPS (Rs.) 1. 14.8 15.6 17.3 Fully Diluted EPS Growth (%) 14. 48.3 5.1 11.2 Capex (ex. Acquisition) - cash capex (491) (2218) (2598) (282) Net CFO 552 6842 76 8755 Net Debt (276) (477) (2121) (4522) With strong balance sheet, it is not overleveraged being cash rich company. Free Cash Flow 1429 4624 52 5953 Lower capex level led to rich free cash flow. Exhibit 12: Karvy vs Consensus Revenues (Rs. Mn) Karvy Consensus Divergence (%) Comments FY17E 6185 61438.6 We have moderate outlook on volume and realizations growth. Revenue is expected FY18E 783 71282 (.6) to grow at CAGR of 14% to 15% during FY17E-18E. PAT (Rs. Mn) FY17E 7994 8616 (7.2) FY18E 8887 9892 (1.2) EPS (Rs.) FY17E 15.6 16.8 (7.3) We have assumed that crude price is likely to show moderate growth and tax benefit outgo from three manufacturing units of Himachal Pradesh. FY18E 17.3 19.3 (1.2) Source: Bloomberg, Karvy Research 5
Revenues to grow at ~15% CAGR during FY17E-18E Exhibit 13: 72 54 36 18 17.6% 16.5% 36781 FY13 42832 FY14 14.6% 15.1% 13.1% 1.8% 48441 FY15 53695 FY16 6185 FY17E 783 FY18E 2% 15% 1% 5% % Revenue (Rs. Mn) Revenue Growth (%) PIDI has gained by 15.1% CAGR growth in revenue during FY11-16 on the back of Consumer and Bazaar product, sub-categorized by Adhesive & Sealants, Construction & Paint Chemicals and Art Material products growth at CAGR of 15.1% during the same period. We believe that the company is likely to maintain its CAGR growth rate ~15% during FY17E-18E. EBITDA and EBITDA margins Exhibit 14: 14 22.% 2.1% 19.6% 25% 15 7 35 16.3% 15.7% 15.9% 2% 15% 599 6715 778 11787 12443 13861 FY13 FY14 FY15 FY16 FY17E FY18E 1% 5% EBITDA (Rs. Mn) EBITDA Margins (%) The company has recorded EBITDA YoY growth of 22.% in FY16 due to declining crude prices and reflect the same in the operating margin from falling raw material prices. We believe that EBITDA margin would be in the range of 19.6%-2.1% during the period of FY17E-18E due to moderate growth in crude oil prices during next two years. RoE and RoCE (%) Exhibit 15: 31% 28.5% 3.1% 28% 25% 22% 29.3% 26.2% 25.% 24.9% 27.3% 24.3% 25.6% 24.7% 23.9% 24.4% FY13 FY14 FY15 FY16 FY17E FY18E RoE (%) RoCE (%) PIDI s RoE and RoCE are likely to be around 24.9%-26.2% and 24.4%-25.6% respectively during next couple of years. In previous year, the ratios rose due to softening of crude oil prices. PAT and PAT Margin Exhibit 16: 9 14.2% 12.9% 12.5% 15% 6 3 11.5% 1.5% 1.6% 424 4498 5126 FY13 FY14 FY15 764 FY16 7994 FY17E 8887 FY18E 12% 9% 6% PAT grew at CAGR of 19.6% during FY11-16. Bottom line is boosted by strong margin expansion. And, we expect that PAT will grow at steady rate in view of tax exemption which the company has been availing which is getting over from FY16 onwards, along with improved operating margin. PAT (Rs. Mn) PAT Margins (%) 6
Exhibit 17: Dividend 26 21 16 11 6 1 1.%.9%.7%.6%.7%.5% 1333 1384 1487 2128 2333 2564 FY13 FY14 FY15 FY16 FY17E FY18E 1.2%.8%.4%.% Dividend (Rs. Mn) Dividend Yield (%) Over the years, PIDI has consistently distributed stable dividends with healthy payout ratios. We believe that the company is likely to continue its high dividend payout policy. Exhibit 18: Current ratios 2.5 2.2 2.4 1.9 2. 1.7 1.7 1.5 1.7 1.6 1. 1.1 1.2 1.1.5 FY14 FY15 FY16 FY17E FY18E Current ratio Quick ratio PIDI has recorded current ratio and quick ratio of 1.7x and 1.1x during FY16, respectively. And we expect that Current ratio and quick ratio would reach 2.4x and 1.7x in next couple of financial years which show an overall good working capital management for the company. Healthy Operating and Free cash flow Exhibit 19: Operating Cash Flow & Free Cash Flow (Rs. Mn) 9 6 3 3938 245 552 1429 6842 4624 76 52 8755 5953 We believe that the company is likely to maintain its sales growth, expansion in margins and expecting to generate strong cash flows in next two years. Cash flows are improving on the back of operational efficiencies and better management of distribution network. -3-1894 -491-2218 -2598-282 FY14 FY15 FY16 FY17E FY18E Operating Cash Flow Capex Free Cash Flow Exhibit 2: Company Snapshot (Ratings) Low High 1 2 3 4 5 Quality of Earnings 33 Domestic Sales 33 Exports 33 Net Debt/Equity 33 Working Capital Requirement 33 Quality of Management 33 Depth of Management 33 Promoter 33 Corporate Governance 33 7
Valuation & Outlook Pidilite, having the credentials of being the largest player in Adhesives with healthy financials, is trading at 42.1x of FY18E EPS. We initiate the coverage of the company with BUY recommendation on the stock with the target price of Rs. 84, representing an upside potential of 15%, for a time frame of 9-12 months. Exhibit 21: PE Band 7 6 5 4 3 2 Apr-14 Apr-14 May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14 Sep-14 Oct-14 Oct-14 Nov-14 Dec-14 Dec-14 Jan-15 Feb-15 Mar-15 Mar-15 Apr-15 May-15 May-15 Jun-15 Jul-15 Jul-15 Aug-15 Sep-15 Sep-15 Oct-15 Nov-15 Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 Apr-16 Apr-16 May-16 Jun-16 Jun-16 P/E Avg P/E 1SD 2SD -1SD -2SD Source: BSE, Karvy Research Key Risks yvolatility in raw material prices. ycompetition from other players. 8
Financials Exhibit 22: Income Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Revenues 42832 48441 53695 6185 783 Growth (%) 16.5 13.1 1.8 15.1 14.6 Operating Expenses 36117 4734 4197 49362 56969 EBITDA 6715 778 11787 12443 13861 Growth (%) 15.7 15.9 22. 2.1 19.6 Depreciation & Amortization 812 1178 1331 131 1451 Other Income 449 455 51 516 523 EBIT 6352 6985 1966 1165 12933 Interest Expenses 163 156 133 17 17 PBT 6123 6779 1833 1148 12762 Tax 1653 1694 3221 3476 3864 Adjusted PAT 4498 5126 764 7994 8887 Growth (%) 6.1 14. 48.3 5.1 11.2 Exhibit 23: Balance Sheet YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E Cash & Cash Equivalents 1772 86 1319 2964 5365 Trade Receivables 5244 5861 7294 861 9857 Inventories 5997 641 629 7572 8731 Loans, Advances & Others 226 224 2614 334 3437 Investments 263 3599 649 7653 877 Net Block 11642 14188 1575 16363 17714 Total Assets 29284 33158 3982 4685 52814 Current Liabilities & Provisions 84 91 8865 1454 1198 Debt 459 584 843 843 843 Other Liabilities 537 577 825 847 868 Total Liabilities 9716 141 1826 12489 1487 Shareholders Equity 513 513 513 513 513 Reserves & Surplus 1914 22193 27316 32613 37695 Total Networth 19526 2276 27829 33126 3828 Total Networth & Liabilities 29284 33158 3982 4685 52814 9
Exhibit 24: Cash Flow Statement YE Mar (Rs. Mn) FY14 FY15 FY16 FY17E FY18E PBT 6123 6779 1833 1148 12762 Depreciation 812 1178 1331 131 1451 Finance Costs 163 156 133 17 17 Tax Paid (1669) (1749) (3221) (3476) (3864) Inc/dec in Net WC (1514) (593) (1777) (142) (1292) Other Income (114) (113) (51) (516) (523) Other non cash items 262 (1) 53 52 5 Cash flow from operating activities 3938 552 6842 76 8755 Inc/dec in capital expenditure (1894) (491) (2218) (2598) (282) Inc/dec in investments 488 (87) (2891) (1164) (1117) Others 419 539 486 516 523 Cash flow from investing activities (987) (4359) (4623) (3245) (3396) Changes in Debt (653) 125 259 Dividend paid* (1559) (1619) (1789) (2562) (288) Interest paid (23) (157) (133) (17) (17) Cash flow from financing activities (2415) (1651) (154) (271) (2957) Net change in cash 537 (49) 679 1644 241, *Includes dividend distribution tax Exhibit 25: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) 15.7 15.9 22. 2.1 19.6 EBIT Margin (%) 14.8 14.4 2.4 18.8 18.3 Net Profit Margin (%) 1.5 1.6 14.2 12.9 12.5 Dividend Payout Ratio (%) 3.8 29. 28. 28. 28. Net Debt/Equity (x) (.1) (.) (.) (.1) (.1) RoE (%) 25. 24.3 3.1 26.2 24.9 RoCE (%) 24.7 23.9 29.3 25.6 24.4 Exhibit 26: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.) 8.8 1. 14.8 15.6 17.3 DPS (Rs.) 2.7 2.9 4.2 4.6 5. BV (Rs.) 38.1 44.3 54.3 64.6 74.5 PE (x) 34.8 6.1 39.9 46.8 42.1 P/BV (x) 8. 13.6 1.9 11.3 9.8 EV/EBITDA (x) 23.1 39.9 25.7 29.9 26.7 EV/Sales (x) 3.6 6.4 5.6 6. 5.2 ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price 1
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