Initial Coverage: PIDILITE

Pidilite is a leading manufacturer of adhesives and sealants, construction chemicals, crafts products, DIY products, and polymer emulsions in India. Pidilite has divided its business into two segments – C&B product segment (C&B; includes adhesives, sealants, art and craft material and others, construction, and paint chemicals) and the industrial product segment (IP; which includes industrial adhesives, synthetic resins, organic pigments, pigment preparations, and surfactants). C&B accounts for ~80% of Pidilite’s standalone revenue, while the balance is contributed by the IP segment. The company’s brand name, Fevicol, has become synonymous with adhesives to millions in India and is ranked among the most trusted brands in the country. Some of the other major brands are M-Seal, Fevikwik, Fevistik, Roff, Dr. Fixit Fevicryl, Motomax, Hobby Ideas, and Araldite.

CONSTRUCTION CHEMICAL MARKET:

• Although the market for building chemicals in India has seen tremendous growth, it is still in the early stages of development; as a result, slower economic growth in India and stress in industries like construction might have an influence on the company's profitability. Admixtures, flooring chemicals, waterproofing compounds, adhesives & sealants, and repair, rehabilitation, and other products are included in this sector's product section.
• The growth in R&D spending, the entrance of new competitors, the adoption of sustainable goods, and technical developments are some key trends in the Indian construction chemicals market. The performance of protective coatings, the development of hybrid and multifunctional coatings, and innovative eco-friendly products like nanocoatings and green coatings are all receiving a lot of attention. The building chemicals industry is projected to see new opportunities as a result of this transformation.
• The general demand for construction chemicals is anticipated to increase in the future due to factors such as the growing population base, rising per capita income, urbanization, and industrialization, as well as Government of India (GOI) initiatives like "Housing for All," "Smart Cities Mission," and a strong emphasis on infrastructural development. The shortage of qualified labor, the erratic pricing of raw materials, and infrastructure developers' disinterest in implementing quality standards are some of the market's problems.

ABOUT

Pidilite is a leading manufacturer of adhesives and sealants, construction chemicals, crafts products, DIY products, and polymer emulsions in India. Pidilite has divided its business into two segments – C&B product segment (C&B; includes adhesives, sealants, art and craft material and others, construction, and paint chemicals) and the industrial product segment (IP; which includes industrial adhesives, synthetic resins, organic pigments, pigment preparations, and surfactants). C&B accounts for ~80% of Pidilite’s standalone revenue, while the balance is contributed by the IP segment. The company’s brand name, Fevicol, has become synonymous with adhesives to millions in India and is ranked among the most trusted brands in the country. Some of the other major brands are M-Seal, Fevikwik, Fevistik, Roff, Dr. Fixit Fevicryl, Motomax, Hobby Ideas, and Araldite.

BUSINESS MODEL:

Portfolio for Creating Value

Investing for Growth:

• Premiumization, innovation, and reinforcing brand leadership in the Core (e.g., Fevicol)
• Scaling-up Growth categories through penetration, brand, and portfolio (e.g., Roff, Dr. Fixit)
• Scaling-up Growth channels/ geographies (e.g., E-commerce, Africa, Emerging India)
• Establishing new/ Pioneer businesses (e.g., Sealants, PidilitePuma, Tenax)
• Inorganic investments (Araldite) 

Enabling Growth & Becoming Future Ready

• Investing in a future-ready supply chain (augmented capex, 24 capacity building projects, digitization & automation)
• Continued investment in R&D
• Accelerating digital & analytics interventions
• Maintaining people a competitive edge ('Great place to work, continued hiring)
• Investing in emerging areas/ business models (digital platforms, Pidilite Ventures)
• Significant thrust on sustainability

Driving Productivity/ Efficiency

• Managing unprecedented input cost inflation effectively through pricing interventions
• Optimal working capital management
• Supply network optimization
• Executing a large pipeline of productivity initiatives 

BUSINESS PERFORMANCE:

•  Q4 FY22 witnessed price-led growth with volumes remaining subdued. The margins were impacted due to inflation in key raw materials. This was partially mitigated by calibrated pricing actions.
• The price of its key raw material, vinyl acetate monomer (VAM) continued to increase during the quarter. The current procurement rate is ~$2,500 per metric tonne.
• In Q4 FY22, the consumption cost of VAM was ~$2,420 per metric tonne compared to $1,180 per metric tonne in Q4 FY21.
• FY22 registered robust sales growth aided by strong volume growth across categories and geographies. The growth was broad-based across C&B and B2B segments. This was supported by the focus on digital initiatives, innovation, and building a resilient and agile supply chain.
• Domestic subsidiaries in the C&B segment reported good sales growth. The performance of domestic subsidiaries in the B2B segment showed a revival on account of recovery in real estate and construction-related activities.
• Overseas subsidiaries in Asia continued the growth momentum. Americas declined on a higher previous year base. During the previous year, the sales were higher on account of pent-up demand as well as benefits passed by the Governments to consumers during Covid. The margins continued to remain under pressure due to higher input costs. 

ABOUT MANAGEMENT:

The management is committed to the strategic agenda of delivering consistent and profitable volume-led growth. As normalcy returns slowly across various markets, the company plans to remain cautious and is focused on restoring volumes enabled by investments in brand-building growth categories, capabilities, sales, and distribution. The management is trying to expand its reach from the consumer & bazaar segment which is the major share of the business to the industrial segment with acquisitions. The management has done a series of acquisitions in the past which has always benefitted the investors. It always looks out for organic and inorganic growth to remain the leader in its segment. 

SHAREHOLDING PATTERN:

The promoter group currently holds a 69.94% stake in the company. FII shareholding in March 2023, decreased to 10.61% (v/s 11.08% in December 2022). DII shareholding increased in March 2023, to 8.46% (v/s 8.12% in December 2022).

RISK

• Profitability vulnerable to volatility in raw material prices

Raw materials constituted 62% of the cost of sales in FY22. An increase in raw material costs like VAM, resins, etc which are derivative products of crude have impacted the operating margins of the Company in fiscal 2022 and the first quarter of 2023. Further, given some of the key raw materials like VAM being imported, profitability is also linked to foreign exchange fluctuations. Though the raw material prices have started softening from Q2 onwards, the impact of the same on margins is expected to be visible in the second half of fiscal 2023.

• Moderate profitability and volatility in the business-to-business segment

The industrial specialty chemicals segment, which is a bulk commodity business, includes industrial adhesives, synthetic resins, organic pigments, and surfactants, and accounted for 20% of total revenue for fiscal 2022. Competition from international and domestic players limits the scope for passage of any hike in cost to customers, thereby limiting the overall profitability of the segment.

• Weak, though improving, the performance of overseas subsidiaries

Performance of overseas subsidiaries, which account for 7% of overall revenue on a constant currency basis, has reported sales growth of 16.4% in fiscal 2022. However, earnings before interest, depreciation, tax, and amortization (EBIDTA) declined by 28.2% in fiscal 2022 mainly due to an increase in input costs. These subsidiaries, specifically in Brazil and the Middle East, operate on a smaller scale and remain vulnerable to high input costs, facing competition along with economic challenges. The performance of international subsidiaries may be dampened by geopolitical tensions.

FINANCIALS

• In FY23, the sales grew by 19% YoY to ₹11,799 cr. The increase was on account of volume growth, improved product mix, and price rise. During the year, the company had taken a price hike of ~8-10% in the Consumer and bazaar business (C&B). Segment-wise, the C&B segment sales increased by 21% YoY and B2B segment sales increased by 13% YoY. The growth was supported by distribution expansion, innovation, and digital initiatives. In FY22, the net sales grew by 36% YoY to ₹9,921 cr. The growth was aided by over 20% volume growth in Consumer and Bazaar (C&B) and Business to Business (B2B) segment each. Segment-wise, the C&B segment increased by 34% led by growth across all categories such as adhesive, construction chemicals, and the Do-It-Yourself (DIY) portfolio. The B2B segment increased by 45% owing to a resurgence in industrial activity. 
• In FY23, the EBITDA grew by 7% YoY to ₹1,984 cr. During the period, the total expenses grew because of an increase in gross expenses and other expenses. The price of its key raw material, vinyl acetate monomer (VAM) witnessed a moderation from Q3 FY23 onwards. In Q4 FY23, the company witnessed a sharp reduction in raw material costs on a QoQ basis. During the quarter, the average consumption cost of VAM was ~$1,300 per tonne as compared to ~$2,420 per tonne in Q4 FY22 and ~₹2,000 per tonne in Q3 FY23. The current procurement cost of VAM is
  ~$1,100 per tonne. Around 60% of the company's raw material costs come from VAM, a key raw material that is a derivative of crude oil, and Pidilite meets its VAM requirement largely via imports. In FY22, the EBITDA grew by 10% YoY to ₹1,847 cr. The EBITDA growth was impacted due to a high increase in raw material cost from Q1 FY22. 
• In FY23, the PAT grew by 7% YoY to ₹1,282 cr. The company remains confident of the medium to long-term potential of the Indian home improvement sector and drives consistently profitable volume growth. In FY22, the PAT grew by 6% YoY to ₹1,195 cr.
• In FY23, the cash from operations increased to ₹1,558 cr due to working capital adjustment on account of lower trade receivables & inventories and an increase in other current financial liabilities. Payment for the purchase of property, plant, and equipment of ₹505 cr and higher investments led to cash outflow from investing activities of ₹899 cr. A higher dividend paid of ₹508 cr led to cash outflow from financing activities of ₹656 cr.
  In FY22, the cash from operations (CFO) declined to ₹955 cr due to working capital adjustment on account of an increase in inventories. Payment for the purchase of property, plant, and equipment of ₹374.7 cr and payments for business acquisitions of ₹262 cr led to cash outflow from investing activities of ₹558 cr.
  A higher dividend paid of ₹432 cr led to cash outflow from financing activities of ₹468 cr. 

CONFERENCE HIGHLIGHT:

• Improving domestic demand; international demand will take time to recover: Management indicated that rural and semi-urban demand grew ahead of urban demand in Q4FY2023. Going ahead, domestic B2B demand is expected to be strong, while international B2B demand is likely to be impacted due to the decline in US & Europe.
• VAM prices corrected to $1,100 - $1,200 per tonne: The company’s procurement price of VAM in Q4FY2023 was at $1,300 per tonne, which is significantly lower than $2,420 per tonne in Q4FY2022 and $2,000 per tonne in Q3FY2023. Management indicated that VAM prices are currently at $1,100 per tonne and are expected to remain in the same range in the near term.
• Capex spends to be at 3-5% of sales: Management guided that the company commissioned 12 plants in FY2023 and will be commissioning 5 plants before June 2023 (i.e. in Q1FY2024). Capex for FY2024 would be 3-5% of sales.
• Widening the product basket through paints: As per the management, the company already had 2/3rd of the paints and launched more products to complete the entire product basket.
• Change in Araldite’s route-to-market impacted sales in Q4: According to the management, the company undertook a change in route-to-market strategy for Araldite in Q4FY2023 which impacted sales to the extent of 200-300 bps in Q4FY2023 on the domestic C&B business. Distribution of Araldite had an extra layer of distribution chain which the company has now reduced. As a result, primary sales of Araldite were impacted in Q4, however, the secondary sales remained intact. Management has guided that ~95% of the impact has been absorbed in Q4 and the company does not see any further impact of the same in Q1FY2024.

VALUATION:

• The company has a high market share and a strong position in most of its products. Mergers and acquisitions (M&A) along with efficient brand management, strong sales and distribution network, innovation and Research and development (R&D) are expected to translate into better revenue visibility. On the distribution front, the company continued its strong investment, especially in smaller towns and rural India. Pidilite Industries on 3rd Nov, 2020, acquired a 100% stake in Pidilite Adhesives Pvt. Ltd (PAPL) [Formerly known as Huntsman Advanced Materials Solutions Pvt. Ltd (HAMSPL)] for a cash consideration of ₹2,100 cr. As per the management, the Araldite brand has a huge potential for growth both from an innovation perspective as well as a sales and distribution reach perspective. The company is selling Araldite in rural areas using the benefit of Pidilite’s distribution network. Araldite is part of its consumer and bazaar business segment. ICA Pidilite Private Limited (ICA), a subsidiary of the company operates in the premium end of the wood finishes market. The management expects strong growth prospects going ahead.
• In the international market, the company’s focus areas would be world emerging markets like Africa, Kenya, and Bangladesh. 
• Category-wise, currently core category and growth & pioneer category are 75:25. In the next three years, the company expects to make it 50:50. Recently, the company entered the decorative paint segment with a soft launch of HAISHA paints in three states, i.e., Andhra Pradesh, Odisha, and Telangana. The company remains confident of the medium to long-term prospects of the home improvement sector. Over the last two years, the company had put in 10 new facilities. Currently, the company has 12 new facilities under construction which are expected to be completed in the next 12 months.
• The management anticipates the EBITDA margin to be in the range of 20%-24% on a standalone basis on account of some softening in input costs. The company’s capex would continue to remain at the same level of 3%-5% of its revenue, going forward. The management anticipates some softening in input costs in H2 FY23. It expects EBITDA margin to be in the range of 20%-24% on a standalone basis. Pidilite Industries is currently trading at a TTM PE multiple of 103.22x. The market leadership position and stable Profitability are likely to continue supporting the premium valuations. The board of directors has recommended a dividend of ₹10 per equity share of ₹1/- each for the financial year ended 31st March 2022.
  This implies a dividend payout of 42% (v/s 38% in FY21). The dividend payout ratio has remained more than  30% in the last five years. 

SOURCE:

• STOCX
• SCREENER
• COMPANY WEBSITE

Articles

Comments