Pidilite Industries Limited (“Pidilite” or the “Company“), together with its subsidiaries, manufactures consumer and craftsmen products, and specialty industry chemicals in India and internationally, (most famously it makes the Fevicol brand). The Company’s product range includes adhesives, construction and paint chemicals, automotive chemicals, art materials, and industrial & textile resins. The Company has 19 manufacturing plants and 16 overseas subsidiaries in USA, Brazil, Singapore, Thailand, China, Egypt, Dubai and Bangladesh.

WHAT’S DRIVING THE STOCK

Strong Financial Position

Pidilite has shown consistent growth over the last five years (i.e. 2010-11 to 2014-15). It’s net revenue from operations over this period grew at an impressive CAGR of 12.63 %. For 9 months period ended FY 2016, income from operations increased by 9 % to Rs. 4,128.60 Cr. from Rs. 3,800.58 Cr. and PAT increased by 41 % to Rs. 604.85 Cr. from Rs. 429.02 Cr. Pidilite has reserves in excess of Rs. 2,219.31 Cr and operates with negligible debt on its books backed by consistent dividend payouts. This strong financial position enables the Company to have bigger marketing and advertising budgets to attract more customers. With rising volumes from added capacities and new geographies, and steady margins, earnings could grow significantly in the coming years.

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Robust Product Portfolio

The Company’s brands include Fevicol, Dr. Fixit, Fevikwik, Motomax, M-Seal, and Fevistik. Pidilite’s business can be divided into two main segments:

Consumer and Bazaar Products — this segment covers a wide range of products for consumer and craftsman applications that contribute nearly 82 % to the total revenue. Within this segment, adhesives and sealants contribute nearly 50 % to revenues. The Company derives around 18 % revenues from construction products like coating and paints, waterproofing, tile fixing, sealants etc., under the ‘Dr. Fixit’ brand.

Specialty Industrial Chemicals — this segment includes products like industrial adhesives, industrial resins, and organic pigments and preparations. Through these products, Pidilite caters to packaging, textiles, paints, printing inks, paper and leather industries.

Dominant Market Position

Pidilite enjoys leadership position in adhesives and industrial chemical market with 70% market share. The Company’s brand name ‘Fevicol’ has become synonymous with adhesives in India. The Company operates around the world in North America, South America, South East Asia, Middle East and Africa.

The high market share is attributable to a wide range of high quality products and a strong dealer network. The Company operates through 15 overseas subsidiaries, 19 manufacturing facilities in India and international manufacturing facilities in Thailand, Singapore, Dubai, Brazil, US, Egypt and Bangladesh.  The Company exports to more than 60 countries.

In addition, Pidilite is constantly adding new products and dealers to maintain its market share. The Company has introduced several new product brands like Woodlok, Roff, and Smartcare catering to construction, healthcare and hospitality segments.

Retail Network & Distribution

Pidilite has a robust distribution network of more than 4,000 distributors servicing more than 400,000 dealers/retailers and 4,000 industrial customers. Pidilite has created strong relations with the intermediaries like contractors, carpenters, plumbers, painters, ensuring customer stickiness. Pidilite enjoys strong pricing power due to its diversified product mix, prominent brands and extensive distribution network. To further enhance its distribution reach, the company is making ad spends and adding to its distribution network, grocery (and kirana) stores in the tier 2/3 cities and rural areas.

Flourishing International Operations

Pidilite has considerable presence in the global markets with 15 overseas subsidiaries including those having manufacturing and selling operations in USA, Brazil, Thailand, Dubai, Egypt and Bangladesh.

Pidilite generates around 10% of revenue from international operations and it has grown at a CAGR of ~15% over FY 2012-FY 2015, driven by South & South East Asia, North America and Middle East & Africa with revenue CAGR of 17%, 29% and 30% respectively.

PEER COMPARISON

WHAT’S DRAGGING THE STOCK

Slowdown in Domestic Industrial Activity

Specialty Industrial Chemicals segment growth is highly correlated with the overall economic activity in the country. The specialty industrial segment contributes ~18% of Pidilite’s revenue and caters to various industries like packaging, textiles, paints, printing inks, paper, leather etc. In FY 2015, the sales from industrial products grew at a much slower rate of 6.6% due to weak domestic environment and slowdown in exports.

Any slowdown in the industrial spending would further lower the contribution of company’s industrial products in the total revenue.

Brazil Operation Remain Under Pressure

Pidilite’s Brazil operations continue to remain under pressure impacted by adverse economic conditions, depreciating currency and demand slowdown in that country. The Company is looking to curtail operational costs in order to minimize losses in the coming years. Going forward, this could have a materially negative impact on the stock price.

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Rajat Sharma

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