pidilite

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Edelweiss Securities Limited

Pidilite (PIDI) is a high quality niche consumption play imbued with strong

brand equity in under penetrated and high growth categories. The

company has sustained its dominant position (Fevicol, M-seal have ~70%

market share) by virtue of direct reach to influencers/end users,

successful brand extensions, innovation spurred by robust R&D, out-of-

the-box and catchy ads, acquisitions (ROFF, Mseal, Sargent Art, Hobby

Ideas), limited competition and widespread distribution. Key

risk/concerns are performance of its international portfolio (especially

Brazil) and the Elastomer project. We expect 17% revenue CAGR with

robust 20% PAT CAGR over FY14-16E. We initiate coverage with BUY.

Consumer business will continue to sizzle

Robust growth across segments spurred PIDIs consumer & bazaar products (CBP) and

industrial chemicals segments to post 19% and 14% CAGR, respectively, over FY08-13.

Though we expect the CBP business to maintain growth momentum, the industrial

chemicals business may grow at a slower pace (11.5% CAGR) over FY14-16E due to the

economic slowdown. Overseas business (has been a drag) margins are likely to improve

riding sales pick up (Bangladesh, Thailand fastest growth engines), effective

management changes, price hikes and mix improvement.

Direct connect, distribution and innovation key strengths

PIDI directly reaches out to influencers/end users (furniture makers, plumbers,

architects) via Dr. Fixit Institute, Fevicol Furniture Book and workshops which also

enables it to introduce new products imbibing their feedback. Successful brand

extensions (Marine Fevicol, Speedex), acquisitions (Suparshva) and low-priced SKUs

amidst limited MNC competition provide it the bandwidth to outpace regional players.

Outlook and valuations: Positive; initiate with BUY

We are positive on PIDI and expect re-rating to sustain. We value PIDI at 25x FY16E EPS

and arrive at TP of INR357. At CMP, the stock is trading at 24.5x FY15E and 20.6x

FY16E. We initiate coverage with BUY/Sector Performer recommendation/ rating.

INITIATING COVERAGE

PIDILITE INDUSTRIES Adhesive growth: Ties that bind

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Performer

Risk Rating Relative to Sector Medium

Sector Relative to Market Overweight

MARKET DATA (R: PIDI.BO, B: PIDI IN)

CMP : INR 294

Target Price : INR 357

52-week range (INR) : 304 / 206

Share in issue (mn) : 509.8

M cap (INR bn/USD mn) : 151 / 2,425

Avg. Daily Vol.BSE/NSE(000) : 280.0

SHARE HOLDING PATTERN (%)

Current Q1FY14 Q4FY13

Promoters *

70.1 70.1 70.1

MF's, FI's & BKs 5.3 5.4 5.6

FII's 13.7 13.9 13.6

Others 10.9 10.6 10.7

* Promoters pledged shares

(% of share in issue)

: Nil

PRICE PERFORMANCE (%)

Sensex Stock

Stock over

Sensex

1 month (1.9) 11.1 13.0

3 months 11.6 32.3 20.7

12 months 7.1 39.2 32.1

Abneesh Roy

+91 22 6620 3141

[email protected]

Click on image to view video

Pooja Lath

+91 22 6620 3075

[email protected]

Tanmay Sharma

+91 22 4040 7586

[email protected]

India Equity Research| Consumer Goods

November 28, 2013

Financials

Year to March FY13 FY14E FY15E FY16E

Revenues (INR mn) 36,781 42,997 50,600 58,960

Rev. growth (%) 17.6 16.9 17.7 16.5

EBITDA (INR mn) 5,990 7,358 8,712 10,145

Net profit (INR mn) 4,240 5,070 6,149 7,326

Shares outstanding (mn) 510 510 510 510

Diluted EPS (INR) 8.2 9.9 12.0 14.3

EPS growth (%) 32.9 20.1 21.3 19.1

Diluted P/E (x) 35.7 29.7 24.5 20.6

EV/EBITDA (x) 24.4 19.6 16.3 13.7

ROAE (%) 28.3 27.8 28.1 27.8

Consumer Goods

2


Investment Rationale

Flagship brands to anchor growth

PIDIs presence in niche, under-penetrated and high growth categories with limited

competition makes it a good play on Indian consumer goods spends. The niche presence

yields high gross margins, high barriers to entry, strong brand equity, mass acceptance and

superior growth opportunities.

Chart 1: Consumer & Bazaar product sales expected to grow at 19% CAGR over 14-16E

Source: Company, Edelweiss research

The adhesive & sealants segment, contributing 51% to total sales, houses strong brands like

Fevicol, M-seal and Fevistik under its umbrella. The company has near monopoly in this

segment with Fevicol and M-seal enjoying ~70% market share each in the adhesive and

sealants product categories, respectively. The category grew 18% YoY in FY13.

The second largest category, construction chemicals (contributing 20% to total sales), also

has strong brands, Dr. Fixit (largely used as waterproofing and repair solution) and Roff

(used as complete range of tile fixing solution) under its umbrella. This category grew 20%

YoY in FY13.

PIDIs third largest category, art materials (contributing 10% to total sales), surged 35% YoY

in FY13. In art materials, the company has a host of brands like Hobby Ideas, Ranipal,

Motomax and Cyclo. Off late, the segment has seen significant growth on account of fresh

look at products, new product introductions, better communication and improved

distribution model.

Industrial products account for 19% of the companys revenue. This segment has lower

margin vis--vis consumer and bazaar segment; it includes three sub-segments: (i) Industrial

adhesives: Being market leader, PIDI provides an extensive range of products catering to

packaging, cigarettes, stock labels, stickers, footwear, etc. (contributes 7% to companys

revenue); (ii) Industrial resins: The company produces polymers and co-polymers for

industries like paints, non-woven and flocked fabrics and leather (contributes 6% to total

revenue); and (iii) Organic pigments and preparation: Pioneer in manufacturing Pigment

8,500

16,500

24,500

32,500

40,500

48,500

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

E

FY

15

E

FY

16

E

(IN

R m

n)

We keep our eyes and ears

open to what customers want,

while our strong R&D gets us

exactly the right products"

- M B Parekh,

Chairman & MD

Pidilite

3


Violet 23 in India. Market leader in pigment dispersions for textile segment; the segment

contributes around 6% to total revenue.

Since the industrial segment caters to various industries (textiles, leather, footwear, ink,

packaging, etc.) its growth pattern largely mirrors IIP growth figures.

In the others category, PIDI manufactures a variety of special acetates. Currently, these

products are under test marketing with special focus on niche segments targeted at import

substitution.

Chart 2: Robust growth across categories


Chart 3: EBIT margins strong in both categories especially in CBP


5.0

10.0

15.0

20.0

25.0

30.0

FY08 FY09 FY10 FY11 FY12 FY13

(% Y

oY

)

Consumer & Bazaar Speciality Industrial Chemical

10.0

14.0

18.0

22.0

26.0

30.0


(%)

Consumer & Bazaar Speciality Industrial Chemical

It is the efforts that we put in to

create demand, which would

drive the sales growth for our

products.

- Sandeep Batra,

Director Finance

Consumer Goods

4


Chart 4: Consumer & bazaar products sales split


Chart 5: Speciality industrial chemical sales split


PIDI commands a premium over competitors riding strong brandour channel checks

indicate that Fevicol commands a premium of 10% over its nearest competitor Jivanjor

(Jubilant Industries)and it has created a huge entry barrier in the adhesive segment.

The companys recent launches in the premium endMarine Fevicol (for furniture in

constant touch with water), Speedex (fast adhesives) and fabric glueare growing faster

than base adhesives.

Huge brand equity is a high entry barrier

PIDI is not present in competitive consumer segments or well-penetrated segments; it

focuses on only niche sub-segments. This has resulted in the company developing market-

leading brands Fevicol, Dr Fixit and M-Seal. As there are no large competing products in

these sub-segments, it has developed products that now enjoy indisputable market

leadership.

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Adhesives & Sealants Construction/Paint Chemical Art materials & others

0.0

20.0

40.0

60.0

80.0

100.0


(%)

Industrial resins Industrial adhesives Organic pigments and preparations

Pidilite

5


Table 1: Low competitive intensity creating a strong entry barrier


The company operates in categories where presence of large multi nationals is limited,

which enables it to outpace small regional players (who lack financial strength, economies of

scale and have poor distribution network and weak brand image) with aggressive ads and

product extensions. Though PIDI leads most categories it is present in, Huntsman's brand

Araldite (epoxy resin segment) is ahead of the formers Fevitite, although Huntsmans white

glue brand, Carpenter, has not met with much success.

The Henkel Group has presence in this industry and poses competition in industrial specialty

segment. The Sika Group, based in Switzerland, with significant presence in construction

chemicals poses competition. Similarly in eastern part of India, Dendrite from the Kolkata-

based Chandra's Chemical Enterprise, also has significant presence but not at a national

level. Pidilite faces competition in art and stationery segment from the likes of Camlin, Faber

Castle.

In the construction chemicals category PIDI is not affected by entry of large paint players

(Asian Paints) as penetration levels are low. Though Asian Paints is posing competition by

providing one-stop solution to retail users Dr.Fixit continues to remain the market leader in

the construction chemical business due to its strong relationship with architects and

builders. In our view, new entrants will have limited presence in this space and will help

expand the nascent category.

Segment Pidilite brands Competition brands Use

Adhesive & Sealant Fevicol, Fevistik, Fevikwik, Mseal,

Steelgrip, Feviquick

Jivanjor, Carpenter,

Araldite, Dendrite

Woodwork, Flooring, Upholstery,

Footwear, Plumbing, electrical and

decorative purposes

Construction chemical ROFF, Dr. Fixit, Fevimate Sika, Fosroc Waterproofing, Admixture, Tile fixing,

Floor hardening, Sealants, Heat reduction

coating

Art material & stationery Fevicryl, Hobby Idea, Fevicraft,

Sargent Art

Camlin, Faber Castle Education, Publication, Painting

Fabric care Ranipal Ujala Cloth brightner, Stain removal

Automotive Cyclo, Motomax Castrol Lubricant, Engine Oil, Maintenance,

Polishing

Decorative paints Wudfin, Piditint Asian Paints, Berger Wood finishing, Interior coating and wall

finishing

Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol,

Pidiprimer, Kondicryl

Henkel, Huntsman,

Sika, 3M, HB fuller

Packaging and converting, cigarette, book

binding, stickers, lamination and

labelling, Footwear

Textile Chemical Texcron, Dopcron, Pidifinish,

Pidicryl

BASF, Jubil iant Pigment dispersion, Pigment printing

Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubil iant Waterbased decorative paint, Industrial

paint, Coatings and Construction

chemical

Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic

Masterbatches, Textile Dispersions,

Rubber, Dry Colours

Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubil iant Fungicide, Bactericide, Degreasing agent,

Binder

Consumer Goods

6


Innovating and reinvigorating offerings to capture consumer pie

Strong brand: Consumer pull model

Since adhesive is a low involvement category, consumer tends to go with a superior brand

of good quality and durability. PIDI aptly exploited creative marketing strategies, including

successful advertising campaigns to make its brand generic name in the adhesive category.

Fevicols simple and creative advertisements, over the years, have always made an impact,

right from Bob Cristo wrestling with a chair, to a politician who is glued to his chair, to the

hen that laid unbreakable eggs, to the overflowing bus, to the joint family that refuses to fall

apart and the latest animated elephants bond Raksha Bandhan. Use of Fevicol brand name

in the item number Fevicol Se featured in Bollywood blockbuster Dabangg-2 is a huge

testimony to the brands media success.

Chart 6: A&P helps build strong brands


Advertisements have created a pull for the white glue among retail consumers. This was the

first product in the category to generate sales not only from hardware stores, but also from

consumers who had a strong brand recall due to the creative and eye-catching television

commercials.

Connecting with end usersCarpenters

Fevicol has held most competitors at bay by establishing a strong connect with the major

driver of sales in furniture making (~85% unorganised market)carpentersby direct

marketing, which helped PIDI establish a strong recall for its brand in the white glue market.

To further strengthen its connect, Fevicol introduced Fevicol Furniture Booklets, which

showcased furniture designs with illustrations and measurements. Also, Fevicol Champions

Club (FCC) was another initiative introduced by the company as a platform for carpenters to

enhance their social contacts and be part of a social network.

2.0

2.6

3.2

3.8

4.4

5.0


(as

% o

f sa

les)

Pidilite

7


Table 2: Promotional activities


M-Seal and Steelgrip are also leading brands in the epoxy sealants and PVC insulation tape

categories, respectively. Roff is the second brand after Dr. Fixit in the construction chemicals

portfolio.

Dr. Fixit Institute of Structural Protection & Rehabilitation (DFI SPR) is an initiative by

PIDI to develop the service life of civil structures in India. It is a non-profit organisation

operating as a knowledge centre to create awareness and skill development among

professionals about waterproofing, repair and rehabilitation via training programmes,

workshops and seminars.

PIDI in its endeavour to reach out to users launched Fevicol Furniture Book showcasing

samples of furniture designs, suitable for Indian homes, commercial spaces, offices,

showrooms, restaurants, farm houses, bungalows etc. The company has launched 31

successful volumes of this book riding high on numerous design variants, user-friendly

approach, easy to follow furniture diagrams and affordable price.

The company, under the aegis of its Arts, Stationery and Fabrics division, does the Fevicol

Science Project Challenge. It is an annual nationwide competition that identifies talent from

across schools. This contest encourages students to think about topics that are related to

their everyday life, futuristic concepts and make 3-D models of their interpretations of the

subject/topic. The 3-D modeling is to promote the Learning by doing attitude so that

young minds understand the theory as well as the actual working of concepts.

Leveraging brand Fevicol to promote other products, SKUs

PIDI has been successful in keeping alive the freshness quotient of its brands by consistently

innovating and introducing variants catering to customer needs. As part of its strategy, the

company has successfully leveraged its Fevicol brand to fill gaps by targeting specific

consumer needs with Fevikwik, Fevistik, Fevitite, etc, in new sub categories. To reach out to

retail markets, Fevicol was launched in collapsible tubes at an attractive price of INR5 to

capture the mass market; other smaller packs also helped encourage use by school

students, professional and educational institutions. The new packaging formats transformed

the brand from an industrial product to all-purpose glue.

Activities Purpose

Fevicol Furniture Book Publishing magazines for 300,000 carpenters every quarter showcasing furniture designs

with i l lustrations, measurements, etc aimed to enlighten carpenters on the recent trends

and styles

Fevicol Champion's Club ~45000 member club that provides a platform for carpenters to increase their social

contacts and to make them a part of the social network

Different courses Courses aimed for housewives for the effective use of art material

Dr Fixit Institute Knowledge centre aimed to help Indian construction experts interact with the

international experts in the field of waterproofing and building repairs

Fevicol science project challenge Initiated an inter school contest in 2011 tp promote its hobby ideas products reaching

over 330 schools across India and over 55,000 students

Consumer Goods

8


In FY08, the company introduced Fevicol craft adhesive at INR2 and Fevigum at INR1 which

made high quality adhesives available to consumers at very affordable prices. The company

has continued to attract consumers with its strategically priced LUPs to drive volumes.

PIDI also introduced Fevistik Blue and Fevistik Purple in FY10. Unlike white glue, these

coloured sticks when applied appear coloured, but the colour disappears after a few

seconds, enabling young children to see and control the application of glue.

Brand extension: Tried and tested method to boost brand recall

As per Nielsen, in India, extensions of existing brands are five times more successful than a

new brand. Brand extensions can grow incremental sales up to 38% and contribute as much

as 30% to parent brand sales apart from promoting brand equity. Brand extensions leverage

equity of the parent brand, lead to faster adoption and deliver higher marketing efficiency.

On similar lines, PIDI launched Fevicol SPEEDX, a premium white adhesive which is Indias

first fast-setting adhesive. This water-based adhesive is apt when time is of essence. It is

based on Nano Magnet Technology, which brings molecules closer very fast, resulting in an

exceptionally strong bond. It provides handling strength in just two hours against six to eight

hours taken by regular adhesives.

Similarly, in the construction chemicals segment several new products were launched under

Dr. Fixit brandDr. Fixit Low Energy Consumption systems (for high-end waterproofing

coupled with insulation for terraces and walls), Dr. Fixit Extensa (high-end puncture-proof

waterproof coating for roofs & basements) and Dr. Fixit Bathseal Kit (for comprehensive and

long lasting waterproofing for bathrooms).

Premium products in glue doing well

The companys launches in premium adhesives are doing well. Marine Fevicol (for furniture

in constant touch with water), Speedex (fast adhesives) and fabric glue are growing faster

than base adhesives.

Strong brand equity enables price hikes to offset raw material inflation

VAM and packaging materials (HDPE, LLP) are the key raw materials for PIDI, constituting

30-35% of raw material costs. VAM, a petrochemical produced from ethylene is a crude oil

derivative, which the company imports from Singapore (as imports are cheaper than captive

production). Hence, INR depreciation has a bearing on costs. The company tries to contain

COGS inflation by taking price hikes, which we believe, is not difficult due to its strong brand

equity and high market share.

Pidilite

9


Chart 7: Stable gross margin despite RM volatility due to high pricing power


Chart 8: EBITDA margin stable despite rising crude prices


Rich product portfolio backed by strong R&D

PIDI has successfully identified and met potential consumer demands (water proofing, damp

proofing) backed by its strong in house R&D capabilities and an innovation centre in

Singapore (two third sales come from products pioneered in India).

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(%)

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14

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14

(%)

(IN

R/b

arr

el)

Consumer Goods

10


Chart 9: R&D spends - Key to maintaining leadership


The construction chemical category will be one of the faster growth drivers (Dr. Fixit and

ROFF) as it is a play on retail consumers discretionary income and in construction activity.

Its recent innovations like Fevicol Glue Drop, Dr Fixit Waterbar and smaller sized SKUs of

Fevikwik at INR 5 have done well. It has an extensive product portfolio across segments like

adhesives, sealants, fabric care, decorative paints, arts & stationery material and organic

pigments.

The company has a major research and development facility at Kondivita, Mumbai. Further,

the Pidilite Innovation Centre (companys step-down subsidiary) was incorporated in

Singapore in December 2006 with the objective of undertaking R&D activities. The groups

R&D team works closely with marketing and technical service teams to upgrade existing

products and develop new products to meet the continuously changing requirements. The

group has developed most of its products through strong in-house research and

development teams. The company aims to continuously develop new and innovative

products for consumers, craftsmen and industries.

Acquisitions: Key to augmenting product capability and new markets

PIDI intends to pursue acquisition opportunities in a disciplined and planned manner. The

company uses this strategy to add to its existing portfolio of products, complement

manufacturing and research and development facilities and gain access to new markets as

well as increase market penetration in existing markets. The company, in the past, acquired

companies like ROFF, Mseal, Sargent Art, Hobby Ideas to consolidate its position in

respective segments. In Q1FY14, it acquired the adhesive business of Suparshva Adhesives

(sales less than 1% of PIDIs sales). The slump sale agreement includes brands, know-how

and other assets pertaining to the adhesive business which is into various adhesives and

sells the same under the Falcofix brand. Suparshva Adhesives had a strong presence in

Maharashtra with its products are priced at a discount to Fevicol; it has good brand equity at

the lower end of the market with wood working intermediaries. PIDI plans to retain the

brand and leverage it in some of the other markets as well. The acquisition will help the

company reduce competition in Maharashtra.

0.40

0.42

0.44

0.46

0.48

0.50

FY10 FY11 FY12 FY13

(as

% o

f sa

les)

Pidilite

11


Table 3: Major acquisition- Successful record of acquiring and integrating businesses and brands


Management has no plans to enter any new line of business as of now, but is looking to

expand and strengthen its current portfolio.

Expansion in distribution reach

PIDI has an extensive distribution and marketing network, especially in the adhesive and

sealant industry. The company has a field force of over 1,000 representatives and each of

these representatives have 50 retailers/dealers under them. Distribution is a key

differentiator for the consumer and bazaar category and like Asian Paints, PIDIs widespread

distribution is its key strength against competition.

Rural markets continue to drive growth

The company does not intend to vacate the LUP space (INR5 pack) as it is highly popular in

rural areas (growing faster than urban). In this price segment volume leverage offsets input

cost inflation.

Year Major Acquisition

2000 M-Seal, a brand of epoxy compounds was acquired.

2002 Steelgrip, a brand of PVC insulation tape was acquired.

2004 Roff, a brand of construction chemicals was acquired.

2005 Incorporated subsidiaries in Singapore, Brazil and Dubai to undertake its international operations.

Through its subsidiaries acquired Chemson, a Singapore based company manufacturing waterproof coating and

emulsion paints and Jupiter Chemicals LLC, a Dubai based company manufacturing construction chemicals

2006 Tristar Colman and Fine Art, brands, business and certain assets of canvas and student art colours and brushes

of drawing and painting, respectively, were acquired.

Bamco Limited, Thailand, a construction chemical company was acquired.

Pidil ite USA Inc, Delaware, a subsidiary of the Company, acquired the business and assets of Sargent Art Inc. (the

makers of art material range of products) and Cyclo Industries LLC (the sellers of automotive maintenance

Established a research and development centre in Singapore.

2007 Pidil ite Do Brazil Desenvolvimento De Negocios Ltda, a wholly-owned subsidiary of the Company, acquired Pulvitec

(adhesives, sealants and construction chemicals).

Acquired plant and machinery, patents, trademark and technology of Synthetic Elastomer (Polycholoroprene

Rubber) plant in June 2007.

2008 Acquired assets and business of branded sealants and adhesives from Hardcastle & Waud Manufacturing Co. Ltd

and associates (brands l ike Holdtite, Rustolene and Leakgaurd).

2010 Acquired the retail wood working brand of Henkel, i .e. Woodlok

2013 Acquired the adhesive business of Suparshva Adhesives; strong presence in Maharashtra with its products priced

at a discount to Fevicol; it has good brand equity at the lower end of the market with wood working intermediaries.

The slump sale agreement includes brands, know-how and other assets pertaining to the adhesive business (under

the Falcofix brand).

In terms of looking at the split of

the demand I think it is the

smaller towns, the smaller

population agglomerations,

which are seeing stronger growth

than the larger Tier-1 cities.

- Sandeep Batra,

Director Finance

Consumer Goods

12


Sensitivity analysis: Impact of INR depreciation

As PIDI imports 30-35% of its raw material including VAM (constituting ~10.5% of total

COGS) fluctuation in INR impacts the companys margin.

As per our calculations, for a 10% INR depreciation (considering 35% of RM to be imported)

the EBITDA will decrease by 11.7% and the PAT will decrease by 16.7% keeping all other

variables constant. In order to mitigate this impact of INR depreciation (to maintain EBITDA

margin at 16.3% as in FY13) PIDI will have to take a price hike of 2%.

However, taking into account exports (constitute ~9% of total sales) the impact is lesser.

Taking into account export earnings, 10% INR depreciation leads to 6.2% decrease in EBITDA

and 8.9% fall in PAT.

Table 4: Sensitivity analysis of INR depreciation on EBITDA and PAT

Source: Edelweiss research

FY13A 10% depreciation % change 10% depreciation % change

Sales (inc 9% exports) 36,781 36,781 37,112

Imported RM (35% COGS) 7,028 7,731 7,731

Other 13,053 13,053 13,053

Total COGS 20,081 20,784 20,784

Other costs 10,710 10,710 10,710

EBITDA 5,990 5,287 (11.7) 5,618 (6.2)

Depreciation 686 686 686

Other income 705 705 705

EBIT 6,009 5,306 5,637

Interest costs 214 214 214

PBT 5,795 5,092 5,423

Taxes 1,595 1,595 1,595

Core profit 4,200 3,497 (16.7) 3,828 (8.9)

(INR mn)

Without considering export benefit With export benefit

Pidilite

13


Table 5: Peer comparison table


Over the past two years the entire Consumer pack has seen re-rating due to sustained

robust performance (on a relative basis) despite macro-economic slowdown which has

affected most other sectors. PIDI has also been a party to this re-rating phenomenon.

Company Market Mcap Div yield(%)

CAGR

(%)

Price (INR) (INR bn) FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY15E FY14E FY13-15E

Pidil ite 294 151 9.9 12.0 29.7 24.5 19.6 16.3 27.8 28.1 1.0 21.0

ITC 314 2,451 11.3 13.2 27.8 23.7 18.2 15.4 36.4 38.2 2.5 17.3

Hindustan Unilever 590 1,275 16.6 18.6 35.6 31.7 26.4 23.0 104.5 87.6 1.9 9.2

Nestle* 5,224 504 121.1 146.8 43.1 35.6 23.9 20.4 56.2 52.6 1.3 15.1

Asian Paints 505 484 14.3 18.2 35.4 27.8 22.2 18.2 36.5 38.1 1.4 25.1

United Spirits 2,628 331 41.0 58.3 64.2 45.1 28.6 24.3 9.5 10.5 0.3 NM

Dabur 163 284 5.3 6.5 30.8 25.0 23.1 18.4 38.7 37.7 1.4 21.9

Godrej Consumer 904 307 23.6 28.9 38.3 31.3 26.8 21.7 22.5 23.7 1.0 21.4

GSK Consumer 4,340 182 160.6 150.2 27.0 28.9 18.3 19.5 43.8 33.4 1.4 20.3

Colgate 1,238 168 38.9 45.2 31.8 27.4 23.0 19.5 100.3 101.9 2.7 11.3

Marico 212 130 7.8 9.2 27.1 23.0 18.1 14.9 22.9 22.1 0.4 27.7

Emami 489 74 17.3 20.8 28.2 23.6 24.1 20.0 46.4 46.8 1.5 21.2

Bajaj Corp 233 34 12.8 14.5 18.2 16.0 15.1 13.0 37.1 38.0 2.8 13.6

FMCG - Mean 37.0 41.7 33.6 28.0 22.1 18.8 44.8 43.0 1.5 18.8

* CY numbers

EPS P/E( x) EV/EBITDA(x) ROAE (%)

Consumer Goods

14


Valuation

PIDIs broad product portfolio provides a good play in the consumer and specialty chemicals

space by virtue of its strong presence in under-penetrated and high-growth categories. We

are enthused by the companys strong earnings growth, increasing market share, robust

volume growth and pricing power. Its strong brand equity with undisputed leadership and

sustained high volume growth reinforces our belief in the companys high growth potential.

However, we will closely monitor the performance of its international operations, raw

material inflation (mainly due to INR depreciation) and development in the Elastomer

project.

We assign a target multiple of 25x to FY16E EPS arriving at a target price of INR357, based

on our strong conviction of sustained dominant position in various categories it operates by

virtue of direct reach to influencers/end users, successful brand extensions, innovation

spurred by robust R&D, out-of-the-box ads, acquisitions (ROFF, Mseal, Sargent Art, Hobby

Ideas), limited competition and widespread distribution. We have valued the stock at a

discount to Asian Paints (owing to PIDIs smaller size) and other single product MNC

companies like Colgate and GSK Consumer who are also clear leaders in the categories they

operate in.

PIDIs earnings are expected to grow at 20% CAGR over FY1416E. Strong cash generation

and better visibility of its earnings over the next two years are an added attraction. We

expect current multiples to sustain due to strong earnings growth.

Hence, we initiate coverage on the stock with a BUY recommendation. On relative return

basis, the stock is rated Sector Performer.

Chart 10: 1 year forward PE band; re-rating to sustain


0

70

140

210

280

350

No

v-0

8

Ma

y-0

9

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9

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y-1

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v-1

3

(IN

R)

10x

15x

20x

25x

30x

Pidilite

15


Key Risks

Competition getting stiffer in some segments

The rapidly expanding sector is luring new players. Also, competitors are aggressively

innovating and enhancing efforts to increase contribution from this segment. PIDI will,

therefore, need to drive its resources towards augmenting A&P to back up sales and

maintain brand loyalty. Also, failure to develop new products or to successfully implement

productivity and cost-reduction initiatives may harm the companys competitive position.

Rupee depreciation has a bearing on margins

A rise in crude oil price and INR depreciation could hurt PIDIs margin as VAM and packaging

costs form 30-35% of total raw material costs. EBIT margins may come under pressure

unless product mix improves or commensurate price hikes are taken (price hikes seem to be

a challenging task amidst current macro economic slowdown).

Synthetic Elastomer project a drag

Construction work on the synthetic Elastomer project remains suspended as PIDI is

evaluating various alternatives regarding the projects future. The company is looking for

strategic investors for this project. It has spent INR3.6bn on the project and any negative

development (write-off of entire capex) on this project may have a bearing on PIDI.

International operations remain subdued

Losses in international business continue. Brazilian operations remain the key issue.

Economic slowdown

With urban areas contributing significantly to sales, a slowdown in economic growth may

negatively affect the companys business. Slowdown is sharper in discretionary segment

against directly consumer related segments.

Consumer Goods

16


Porters 5 Forces Analysis

Threat of new competition: Low

PIDI has established strong market leadership in categories it operates in owing to strong

brand equity, focus on R&D, robust distribution network and differentiated and well-

targeted advertising.

Threat of substitutes: Low

It faces low competition from substitutes.

Bargaining power of customers: Low

Being market leader, PIDI commands strong pricing power with competitors following suit.

Bargaining power of suppliers: Medium

30-35% of its raw material is imported and thus has a bearing of INR depreciation. PIDI

needs to take commensurate price hikes to counter raw material inflation.

Competitive rivalry: Low

The company operates in niche categories where there is limited competition from large

multinationals and it can easily exploit small regional players with its existing brand equity

and creative marketing.

Fig. 1: SWOT analysis


Strength

Differentiated products

Strong brand equity

Smart advertising and

educating decision makers

Relevant acquisitions

Opportunities

Premiumization focus

Ability to spot

opportunities in

commodity play

(terminator, etc.)

Weakness

Uncertainty on

Elastomer project

Weak international

business performance

Threats

Entry of paint players

in the water-proofing space

Weakness in Indian rupee

Global geopolitical

uncertainties

Pidilite

17


Company Description

PIDI is the pioneer in consumer and specialties chemicals in India, with diverse product

range that includes adhesives and sealants, construction and paint chemicals, automotive

chemicals, art materials, industrial adhesives, industrial and textile resins and organic

pigments and preparations. Most of its products have been developed through strong in-

house R&D. The company is the market leader in adhesives and sealants, construction

chemicals, hobby colours and polymer emulsions in India. Brand Fevicol has become

synonymous with adhesives to Indian consumers and is ranked amongst the most trusted

brands in the country. Pidilite is also growing its international presence through acquisitions

and setting up manufacturing facilities and sales offices in important regions around the

world.

Pidilite faces limited competition as in most of its segments there are only a few large

companies with national presence. A large number of small size companies are active

regionally.

Business mix

Fig. 2: Consumer Bazaar dominates the business mix


Consumer & bazaar products

Consumer & bazaar products account for 81% of the companys revenue. It includes various

segments like adhesives and sealants, construction chemicals, art materials and stationery

and others like fabric care, automotive and decorative segments. These products are widely

used by carpenters, painters, plumbers, mechanics, households, students, offices, etc.

Pidilite

Consumer and Bazaar

products (81%)

Industrial speciality

products (19%)

Adhesives and

sealants (51%)

Industrial

adhesives (7%)

Construction

chemicals (20%)Industrial resins (6%)

Art Material and

stationery (10%)

Organic pigments and

preparation (6%)

Consumer Goods

18


Table 6: Consumer and Bazaar product segmentation


Adhesive and sealants: The organised adhesive market in India is estimated at ~INR 10 bn

with Pidilite being a major player, garnering 70% market share. Pidilite has established

leadership position in adhesives and sealants segment with it contributing 51% to

companys revenue. The company offers extensive range of products under this segment

used in woodworking, upholstery & flooring, footwear, automotive aftermarket, plumbing

and electrical and for decorative purposes. Brand Fevicol has become synonymous with

adhesives to millions in India and a huge entry barrier for other competing products. The

closest competitor is Jubilant Organosys with its Jivanjor brand. Huntsman's brand Araldite

is the leader in the epoxy resin segment, piping Pidilite's Fevitite into second place, although

its white glue brand, Carpenter, has not been successful. The company faces competition

from various local brands. This industry is expected to post 10-12% in the long term. Fevicol

is marketed in 54 countries worldwide. In India alone it is available at over 50,000 stores

across the country.

Construction chemicals: These are materials that are added to a building structure to

increase its life and provide stability and used during pre-construction and post-construction

stages. These include extensive range of products like waterproofing material, admixtures,

tile fixing solution, floor hardener, sealants, grouts, heat reduction coatings. Current market

size of this segment is estimated to be INR ~18 bn. It contributes ~20% to total revenue. This

segment has delivered 30-35% CAGR over the past five years and is expected to be the

companys growth driver and post CAGR of more than 25%. Pidilite owns two well known

brands under this category viz., Dr. FIXIT and ROFF used for varied application in

waterproofing, sealing, flooring, concrete treatment & plastering. The Sika Group, based in

Switzerland, with significant presence in construction chemicals poses stiff competition.

Art Material and stationery: Pidilite has an extensive range of art material catering to

education, hobby and fine art segments. Products under this segment are complemented

with books, videos and training material to make them popular among the targeted end

user segment. The companys position in this segment was strengthened with the

acquisition of Traistar Colman brand in India and The Sargent Art brand by its subsidiary in

the US. Various products manufactured under this product portfolio are tempera colours,

crayons, chalks, markers, poster paints, water colours, clay, fabric colours, glass colours,

Segment Pidilite brands Competition brands Use

Adhesive & Sealant Fevicol, Fevistik, Fevikwik, Mseal,

Steelgrip, Feviquick

Jivanjor, Carpenter,

Araldite, Dendrite

Woodwork, Flooring, Upholstery,

Footwear, Plumbing, electrical and

decorative purposes

Construction chemical ROFF, Dr. Fixit, Fevimate Sika, Fosroc Waterproofing, Admixture, Tile fixing,

Floor hardening, Sealants, Heat reduction

coating

Art material & stationery Fevicryl, Hobby Idea, Fevicraft,

Sargent Art

Camlin, Faber Castle Education, Publication, Painting

Fabric care Ranipal Ujala Cloth brightner, Stain removal

Automotive Cyclo, Motomax Castrol Lubricant, Engine Oil, Maintenance,

Polishing

Decorative paints Wudfin, Piditint Asian Paints, Berger Wood finishing, Interior coating and wall

finishing

Consumer & Bazaar

Pidilite

19


ceramic colours, moulding putty, brushes, hobby kits, hobby books, etc. This segment

contributes around 10% to the companys total revenue. This segment is expected to grow

at 10-12% in long term. This product range is dominated by competitiors Camlin and Faber

Castle.

Others: This includes a wide range of products like fabric care, car care and decorative

paints. Pidilite acquired Cyclo brand in June 2006; its product range includes maintenance,

performance and appearance products for DIY (Do-it-Yourself) and professional car care

segment. Cyclo products are sold in US and over 50 other countries. Ranipal has a good

market presence in the fabric care segment. Main competitor in fabric care segment is

Jyothy Labs Ujala.

Industrial specialty products

Industrial specialty accounts for 19% of the companys revenue. This segment has lower

margins vis--vis consumer and bazaar segment. The Henkel Group has presence in this

industry and poses severe competition.

Table 7: Industrial products segmentation


Industrial adhesives: Being market leader, Pidilite provides extensive range of products

catering to packaging, cigarettes, stock labels, stickers, footwear, etc. This segment

contributes 7% to companys revenue.

Industrial resins: It contributes 6% to total revenue. The company produces polymers and

co-polymers for industries like paints, non-woven and flocked fabrics and leather.

Organic pigments and preparation: Pioneer in manufacturing Pigment Violet 23 in India.

Market leader in pigment dispersions for textile segment, segment contributes to around

6% to total revenue.

International business

Pidilite exports to more than 80 countries and has 14 overseas subsidiaries (four direct and

10 step-down subsidiaries) operating across various geographies in the world. The

companys overseas subsidiaries, including US, Brazil, Thailand, Singapore, Dubai, Egypt and

Bangladesh, contribute ~11% to consolidated sales. However, most subsidiaries are loss

Industrial products

Industrial Adhesive Fevicol, Pidivyl, Tracol, Trisol,

Pidiprimer, Kondicryl

Henkel, Huntsman,

Sika, 3M, HB fuller

Packaging and converting, cigarette, book

binding, stickers, lamination and

labell ing, Footwear

Textile Chemical Texcron, Dopcron, Pidifinish,

Pidicryl

BASF, Jubiliant Pigment dispersion, Pigment printing

Industrial Resin Pidivyl, Pidicryl, Pidinon BASF, Jubiliant Waterbased decorative paint, Industrial

paint, Coatings and Construction

chemical

Organic Pigments Azo, Quinacridone, Methyl Violet Clariant, Sudarshan Printing Ink, Paints, Plastic

Masterbatches, Textile Dispersions,

Rubber, Dry Colours

Leather Chemicals Pidisper, Pidicryl, Acrytan, Pilcide BASF, Jubiliant Fungicide, Bactericide, Degreasing agent,

Binder

Consumer Goods

20


making mainly due to small scale of operation, geopolitical issues, cost pressure and strong

competition. The company has taken major initiative to curtail overseas losses by shutting

down unviable subsidiaries and changing the management in the nonperforming

geographies. The benefits from appointment of new CEO in December 2012 to flow in

coming years which is expected to help sustain a better international business performance.

Table 8: Snapshot of international subsidiaries performance


Manufacturing facilities: Pidilite has seventeen manufacturing facilities and Research &

Development facility at Kondivita, Mumbai for which it has obtained EMS (Environment

Management System)/OHSAS (Occupational Health & Safety Assessment System)

Certification. In FY13 the Company commissioned a manufacturing unit at Mahad for

producing PVC film. Apart from company owned plants, it contracts third party

manufacturers for a few of its products. Pidilite is the only manufacturer of VAM in India

with an installed capacity of 30,000 MT per annum. Due to the global demand-supply

situation it was unviable to manufacture in house and hence the plant remained shut during

FY13. The company has started manufacturing few speciality acetates at the plant which

have received positive feedback from the markets.

Awards:

Fevicol was ranked as Indias 45th Most Trusted Brand in 2012 in Brand Equitys Most

Trusted brands survey

Fevicol was also ranked 3rd Most Trusted Brand in the Household Care Category

Fevicol was ranked amongst the Most Trusted Brands list for 5 consecutive years

Fevicol was a recipient of the Zee Business Brand Excellence Award

A 40 feet raincoat was installed on a building by Dr. Fixit Raincoat. This won a Gold

award for Madison Media in the Exchange4media Outdoor Awards

(INR mn)

International subsidiaries Country FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13

Pidi lite Speciality Chemicals Bangladesh Pvt Ltd Bangladesh NA 40 119 146 231 NA 0 5 6 13

Pulvitec do Brasil Brazi l 802 1,141 1,316 1,282 1,263 (200) (8) (88) (217) (416)

Pidi lite Industries Trading Co. Ltd China NA NA 3 15 20 NA NA (1) 1 1

Pidi lite Industries Egypt SAE Africa NA 16 60 124 146 (2) (27) (20) (23) (15)

PIL Trading LLC Africa NA 28 69 48 50 NA (2) (21) (15) (2)

PT Pidi lite Indonesia Indonesia 16 30 4 3 8 (12) 3 (1) (2) (2)

Pidi lite Middle East Ltd Middle East 3 NA NA NA NA 3 (0) (242) (30) (1)

Jupiter Chemicals LLC Middle East 194 188 106 154 98 (54) (63) (87) (44) (34)

Pidi lite International Pte Ltd Singapore 6 8 12 15 19 (2) (66) (3) (23) 9

Pidi lite Innovation Centre Pte Ltd Singapore 25 25 54 79 80 (1) (5) (9) (5) 6

Pidi lite Bamco Ltd Thailand 154 170 185 226 316 (27) (4) (6) (1) 9

Bamco Supply and Services Ltd Thailand 5 15 23 42 47 1 1 1 6 5

Pidi lite USA USA 1,250 1,114 1,220 1,364 1,604 (90) (47) 14 25 (13)

Pidi lite South East Asia Thailand 1.4 0 - 0 - (1) - -

Revenues Profit/(Loss)

Pidilite

21


Key Management Personnel

Mr. Sushilkumar K. Parekh: Mr. S.K. Parekh is the current Vice Chairman of the company

and is the promoter director. He has served as the non executive Vice Chairman since 1969

with a vast experience of more than 57 years in the industry. He is also a director of Parekh

Marketing, Pidichem, Fevicol, Kalva Marketing and Services, Ruchiket and Pargro

Investments.

Mr. Madhukar B. Parekh: After Mr. Balvant K. Parekh passed away Mr. M.B. Parekh was

made the Chairman of the company w.e.f. May 28, 2013. He is also Managing Director of

the company and has served as the Director of the company since 1972. He also serves as

the Managing Director of Vinyl Chemicals India and has been an Independent Non Executive

Director of Excel Industries since March 25, 2005. Mr. Parekh holds a Bachelor's Degree in

Chemical Engineering from UDCT and an M.S in Chemical Engineering from University of

Wisconsin, US. He has more than 38 years of experience in the industry.

Mr. Narendrakumar K. Parekh: Mr. N.K. Parekh is the Joint Managing Director and

Executive Director of the company. He is also a Director of Vinyl Chemicals (India), Fevicol

Company, Parkem Dyes and Chemicals and holds senior position in other companies as well.

He is a qualified Technologist for Dyes and Intermediates and a qualified Chemical Engineer

[B.Sc., B.Sc. (Tech), M.S.Chem Engg (U.S.A)] and has experience in the industry for over 44

years.

Mr. Apurva N. Parekh: Mr. A.N. Parekh is the Whole Time Director of the company since

July 2005. He is a promoter director of the company and has been working with PIDI since

1996. Mr. Parekh is a Chemical Engineer with qualification of B.S. Chem. Engg. (U.S.A.) and

has total business experience of 17 years.

Mr. Ajay B. Parekh: Mr. A. B. Parekh is the Whole Time Director of the company since 1985.

He is B.Chem (Engg.), Masters of Business Administration (U.S.A.). He is also the director of

Vacuum Forming, Ishijas Chemicals, Vapkon Finance & Investment and has experience of

over 25 years.

Mr. Sandeep Batra: Mr. Sandeep Batra, Director Finance of the Company, was appointed

as a Wholetime Director with effect from 1 April 2007. Mr. Batra joined the ICI Group in

1988. He is a Chartered Accountant and has held a variety of finance, commercial and

business roles.

Consumer Goods

22


Financial Outlook

Revenue expected to post 17% CAGR over FY14-16E

With increased consumption and discretionary spending, recovery in real estate and

construction sector picking up, PIDI is set to achieve a top line CAGR of ~17% over FY14-16E.

Chart 11: Revenues to continue strong growth trend


EBITDA margin likely to be stable over FY14-16

With expected A&P spends to return to earlier level of ~3.5% of sales cushioning EBITDA

margin. The company has effected price hikes in the past to offset input cost inflation and

being the market leader in the category it is present in, we expect margin to be sustainable

over the long term.

Chart 12: EBITDA margin stable


0.0

5.0

10.0

15.0

20.0

25.0

10,000

20,000

30,000

40,000

50,000

60,000

FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(%)

(IN

R m

n)

Total revenues % growth YoY

0.0

4.0

8.0

12.0

16.0

20.0

0

2,400

4,800

7,200

9,600

12,000

FY

08

FY

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FY

10

FY

11

FY

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FY

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FY

14

E

FY

15

E

FY

16

E

(%)

(IN

R m

n)

EBITDA EBITDA Margin

Pidilite

23


PAT likely to post 20% CAGR over FY14-16E

EBITDA margin expansion to aid PAT growth of 20% CAGR over FY14-16E. With new product

launches and sustained brand equity, long-term PAT growth prospect remains intact.

Chart 13: Strong PAT growth


Strong balance sheet fuel for further acquisitions, expansions

With negligible debt on its books (debt is for working capital needs; on an overall basis it is

expected to end at a net cash level of ~INR5.4bn in FY14E), PIDI is in a comfortable position

with room for further acquisitions and expansions.

Robust return ratios

Return ratios will emulate PAT margin and growth trend. However, further delay and

additional capital infusion for the Elastomer project may have an adverse impact on return

ratios.

0.0

2.8

5.6

8.4

11.2

14.0

0

1,600

3,200

4,800

6,400

8,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(%)

(IN

R m

n)

PAT PAT margins

24


Consumer Goods

Financial Statements

Assumptions

FY13 FY14E FY15E FY16E

GDP(Y-o-Y %) 5.0 4.8 6.0 6.5

Inflation (Avg) 7.4 6.0 6.0 6.0

Repo rate (exit rate) 7.5 8.3 7.3 6.0

USD/INR (Avg) 54.5 62.0 60.0 60.0

Company Assumptions

Sales growth assumptions

Consumer & Bazaar 20.7 19.0 19.7 18.2

Adhesive & Sealant 17.0 19.0 21.0 19.0

Construction and Chemicals 20.7 20.5 20.0 18.5

Art Materials and Others 44.8 16.0 12.0 13.0

Speciality Industrial Chemical 8.5 10.7 12.1 10.9

Industrial Adhesive 0.4 11.0 13.0 10.0

Industrial Resin (0.8) 8.5 12.0 11.0

Organic pigments &

preparation

34.5 12.5 11.0 12.0

Cost assumptions

COGS as % of sales 54.6 54.8 55.0 55.2

Staff costs as % of sales 10.2 10.2 10.1 10.1

A&P as % of sales 4.0 3.8 3.5 3.4

Financial assumptions

Tax rate 27.5 28.0 28.0 28.0

Debtor days 40 40 40 40

Inventory days 89 89 89 89

Payable days 41 42 42 42

Cash conversion cycle (days) 88 87 87 87

Depreciation as % of gross

block

5.6 5.7 5.7 5.7

Capex 1,045 1,120 1,300 1,100

Dividend as % of net profit 31.4 30.0 30.0 30.0

Yield on cash 16.2 14.5 14.0 14.5

Interest rate on outstanding

debt

9.9 35.0 25.0 25.0

Income statement (INR mn)


Net revenues 36,781 42,997 50,600 58,960

Cost of goods sold 20,081 23,557 27,821 32,571

Gross profit 16,700 19,440 22,779 26,388

Staff costs 3,746 4,386 5,111 5,925

Advertisement & sales costs 1,473 1,634 1,771 2,005

Other expenses 5,492 6,063 7,185 8,313

EBITDA 5,990 7,358 8,712 10,145

Depreciation & Amortization 686 766 831 894

EBIT 5,304 6,592 7,881 9,251

Other Income 705 580 700 982

EBIT including other income 6,009 7,172 8,581 10,233

Net finance expense 214 166 84 109

PBT before exceptionals 5,795 7,005 8,497 10,124

Provision for taxes 1,595 1,962 2,379 2,835

Core profit 4,200 5,044 6,118 7,289

Extraordinary items 18 - - -

Minority Interest (2) (3) (4) (4)

Share in profit of associates 24 29 35 41

Profit after minority interest 4,240 5,070 6,149 7,326

Equity shares outstanding (mn) 510 510 510 510

EPS (INR) basic 8.2 9.9 12.0 14.3

Diluted shares (mn) 510 510 510 510

Diluted EPS (INR) 8.2 9.9 12.0 14.3

CEPS (INR) 6.5 7.5 9.0 10.5

DPS 2.6 3.0 3.6 4.3

Dividend payout ratio (%) 31.4 30.0 30.0 30.0

Tax rate 27.5 28.0 28.0 28.0

Common size metrics (%)


Cost of materials 54.6 54.8 55.0 55.2

Employee costs 10.2 10.2 10.1 10.1

Advertising & sales costs 4.0 3.8 3.5 3.4

Other general expenditure 14.9 14.1 14.2 14.1

EBITDA margin 16.3 17.1 17.2 17.2

EBIT margin 14.4 15.3 15.6 15.7

Net profit margin 11.4 11.7 12.1 12.4

Growth metrics (%)


Revenues 17.6 16.9 17.7 16.5

EBITDA 23.8 22.8 18.4 16.4

PBT 33.9 20.9 21.3 19.1

Net profit 30.2 20.1 21.3 19.1

EPS 32.9 20.1 21.3 19.1

25


Pidilite

Balance sheet (INR mn)

As on 31st March FY13 FY14E FY15E FY16E

Share capital 513 513 513 513

Reserves 16,003 19,293 23,284 28,038

Shareholders' funds 16,515 19,806 23,796 28,551

Minority 10 12 16 20

Long term borrowings 0 92 127 162

Short term borrowings 510 52 72 92

Current maturities of long term debt602 118 163 208

Borrowings 1,112 262 362 462

Deferred tax liability 499 499 499 499

Sources of funds 18,136 20,579 24,673 29,532

Tangible assets 5,656 6,090 6,358 6,564

Intangible assets 812 812 812 812

Capital work in progress 4,280 4,200 4,400 4,400

Total net fixed assets 10,747 11,101 11,570 11,776

Non current investments 85 85 85 85

Current investments 2,846 2,846 2,846 2,846

Cash and cash equivalents 1,506 2,800 5,055 8,183

Inventories 5,236 5,728 6,757 7,902

Sundry debtors 4,305 4,787 5,622 6,552

Loans and advances 914 914 914 914

Other assets 113 113 113 113

Total current assets (ex cash) 10,568 11,543 13,406 15,482

Trade payable 2,501 2,680 3,173 3,724

Other current liab. & provisions 5,115 5,115 5,115 5,115

Total current liab. & provisions 7,616 7,796 8,288 8,839

Net current assets (ex cash) 2,951 3,747 5,118 6,642

Uses of funds 18,136 20,579 24,673 29,532

BV (INR) 32.4 38.9 46.7 56.0

Free cash flow (INR mn)


Net profit 4,240 5,070 6,149 7,326

Add: Non cash charge 860 906 885 966

Depreciation 686 766 831 894

Others 174 140 53 72

Gross cash flow 5,099 5,976 7,033 8,293

Less:Changes in WC (604) (796) (1,371) (1,525)

Cash from operations 4,495 5,180 5,663 6,768

Less: Capex 1,045 1,120 1,300 1,100

Free cash flow 3,451 4,061 4,363 5,668

Cash flow metric


Operating cash flow 5,175 5,180 5,663 6,768

Financing cash flow (3,395) (2,767) (2,108) (2,539)

Investing cash flow (1,890) (1,120) (1,300) (1,100)

Change in cash (109) 1,294 2,255 3,128

Capex (1,045) (1,120) (1,300) (1,100)

Dividends paid (1,559) (1,779) (2,158) (2,572)

Ratios


ROAE (%) 28.3 27.8 28.1 27.8

ROACE (%) 34.1 40.1 40.0 38.3

Debtor days 40 40 40 40

Inventory days 89 89 89 89

Payable days 41 42 42 42

Cash conversion cycle (days) 88 87 87 87

Current ratio 2.0 2.2 2.6 3.0

Debt/EBITDA 0.2 0.0 0.0 0.0

Debt/Equity 0.1 0.0 0.0 0.0

Adjusted debt/equity 0.1 0.0 0.0 0.0

Interest coverage (x) 24.8 39.7 93.4 84.6

Operating ratios


Total asset turnover 2.1 2.2 2.2 2.2

Fixed asset turnover 5.8 6.4 7.2 8.1

Equity turnover 2.5 2.4 2.3 2.3

Valuation parameters


Diluted EPS (INR) 8.2 9.9 12.0 14.3

Y-o-Y growth (%) 32.9 20.1 21.3 19.1

CEPS (INR) 6.5 7.5 9.0 10.5

Diluted P/E (x) 35.7 29.7 24.5 20.6

Price/BV (x) 9.1 7.6 6.3 5.3

EV/Sales (x) 4.0 3.4 2.8 2.4

EV/EBITDA (x) 24.4 19.6 16.3 13.7

Dividend yield (%) 0.9 1.0 1.2 1.5

26


Consumer Goods

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SBI Funds Management 0.21 Axis Asset Management Co Ltd 0.18

Blackrock Group Limited 0.17 UTI Asset Management Co Ltd 0.17

*as per last available data

Insider Trades

Reporting Data Acquired / Seller B/S Qty Traded

No data available

*in last one year

Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available

*in last one year

Additional Data

Directors Data Shri S K Parekh Promoter/ Vice Chairman/ Non-Executive Director Shri Bansi S Mehta Non Executive Director/ Independent Director

Shri M B Parekh Promoter/ Managing Director/ Executive Director Shri Ranjan Kapur Non Executive Director/ Independent Director

Shri N K Parekh Promoter/ Joint Managing Director/ Executive Director Shri Yash Mahajan Non Executive Director/ Independent Director

Shri A B Parekh Promoter/ Whole Time Director/ Executive Director Shri Bharat Puri Non Executive Director/ Independent Director

Shri A N Parekh Promoter/ Whole Time Director/ Executive Director Shri D Bhattacharya Non Executive Director/ Independent Director

Shri R M Gandhi Non Executive Director/ Independent Director Shri Sanjeev Aga Non Executive Director/ Independent Director

Auditors - M/s Deloitte Haskins & Sells - Chartered Accountants

*as per last annual report

27


Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Asian Paints BUY SP M Bajaj Corp BUY SP M

Colgate HOLD SU M Dabur BUY SO M

Emami BUY SP H GlaxoSmithKline Consumer

Healthcare

HOLD SP M

Godrej Consumer BUY SO H Hindustan Unilever HOLD SU L

ITC BUY SO L Marico BUY SP M

Nestle Ltd HOLD SP L United Spirits BUY SO H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return

28


Consumer Goods

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Consumer Goods

Asian Paints, Bajaj Corp, Colgate, Dabur, Godrej Consumer , Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare,

United Spirits

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 127 44 8 180

* 1 stocks under review

Market Cap (INR) 112 54 14

Date Company Title Price (INR) Recos

Recent Research

26-Nov-13 United

Spirits

High on W&M potential stake

Sale; Edelflash

2,622 Buy

22-Nov-13 Consumer

Goods

Margins Healthy, Volumes

divergent;

Result Review

18-Nov-13 ITC Forays into nicotine gums;

EdelFlash

314 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

29


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30


Consumer Goods

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Investment RationaleSensitivity analysis: Impact of INR depreciationValuationKey RisksPorters 5 Forces AnalysisCompany DescriptionKey Management PersonnelFinancial OutlookFinancial StatementsAssumptionsIncome statementCommon size metrics (%)Growth metrics (%)Balance sheetFree cash flowCash flow metricatiosOperating ratiosValuation parameters

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