Pidilite Industries Ltd.

NSE: PIDILITIND | BSE: 500331 | ISIN: INE318A01026 |Industry: Specialty Chemicals
|Expensive Performer

Pidilite Industries Ltd.    
18 Feb 2020
Investors stick with Pidilite after a tough quarter

by Suhani Adilabadkar

Fevicol is among India’s most trusted brands, touching over 50 lakh households every year. ‘Zor Laga Ke Haisha’ is an iconic ad,  which showcased the brand and product strength of Fevicol and made it a household name. The manufacturer of Fevicol, Pidilite Industries Ltd is a leading producer of adhesives and sealants, construction chemicals and craftsmen products. Over the years, its product portfolio has extended to waterproofing solutions, arts & crafts, industrial resins, polymers, paint chemicals, automotive chemicals, stationery, fabric care, maintenance chemicals and organic pigments. 

Though Fevicol is synonymous with adhesives, Pidilite Industries has further augmented its leadership in the organized premium adhesive segment by building major brands, M-Seal, Fevistik, Roff, Dr. Fixit, and Fevicryl. The company has more than 5,200 SKUs of 500 products armed with 23 plants and 25 co-makers. Its network extends across the country with 8 regional offices, 2 RDCs, 30 warehouses and more than 5,000 distributors. 

Quick Takes:

  • Fevicol is among India’s most trusted brands touching over 50 lakh households every year.

  • In Q3FY20, revenue grew 4%, operating profit jumped 38% YoY and PAT increased 58% YoY.

  • VAM prices have declined from a high of $1,300 to $875 over the past one year.

  • Pidilite has recently invested in and

Results show resilience in a tough quarter

Pidilite Industries gained 5% after its December quarter numbers came out with revenue growth of 4% YoY amidst challenging market environment. Revenue stood at Rs. 1,927 crore in December quarter FY20 compared to Rs. 1,848 crore in the same period, last year. Operating profit jumped 38% YoY reported at Rs. 463 crore in Q3FY20 against Rs. 337 crore in the corresponding quarter of the previous year, favourably impacted by lower cost of material. Operating margins stood at 24% in December quarter FY20 expanding 580 bps YoY. 

PAT or net profit for the quarter stood at Rs. 344 crore in Q3FY20 compared to Rs. 218 crore corresponding quarter FY19 growing 58% YoY supported by lower corporate tax rate. Mr. Pradip Menon, CFO, Pidilite Industries said, “Amidst a challenging market environment, Pidilite has delivered a resilient performance. While topline growth remains subdued, earnings have improved substantially, primarily as a result of softer input cost. We remain focused on driving volume growth, enabled by investments in brand building, growth categories, capabilities and sales and distribution”. 

The brand, ‘Pidilite’ was established in 1990 and the company went public in 1993. In its current avatar, the company operates through 11 domestic subsidiaries and 2 partnership firms while its overseas business is managed through 19 overseas subsidiaries (6 direct and 13 step-down) and one joint venture which includes manufacturing and selling operations in USA, Brazil, Thailand, Dubai, Egypt, Sri Lanka and Bangladesh. 

There are two main divisions in the revenue segmentation- consumer & bazaar (largely B2C, 84% of total revenues) comprising adhesives & sealants, construction/paint chemicals and art/craft materials making up 56%, 20% and 8% respectively of segment revenues. The remaining revenue chunk belongs to the industrial products division which has industrial adhesives, industrial resins and pigments as its subsegments putting in 4%, 5% and 6% respectively to industrial revenue basket.

Investors are sticking around

Despite Pidilite Industries reporting muted revenue growth, its stock price struck 52-week high over the past week. The street acknowledged Pidilite’s resilience operating in a subdued and slowing macro environment, especially after a dull September quarter FY20 when revenue grew 2.8% YoY, operating profit was flat and 39% YoY growth in PAT was uplifted by corporate rate tax cut. 

Consumer & Bazaar, after double digit growth in every quarter of FY19, has also been subdued in FY20, moving in single digits, reporting 9% jump in June and coming to a flattish halt in September quarter with a mere 1% YoY growth. Relatively, December numbers are stronger, revenue improving 4% YoY with sequential growth of 7%, consumer & bazaar segment reviving at 4% YoY, PAT rising 58% YoY, operating profit expanding 38% YoY, operating margin highest over the past nine quarters and management’s stance of being ‘optimistically cautious’ uplifted market leader, Pidilite’s stock making successive 52 week highs over the past one week.  

Investors are constantly looking for companies with resilient DNA in the present challenging environment and Pidilite Industries fulfills this prerequisite due to its robust product portfolio commanding superior pricing power being a major premium category player in core adhesive market. The street is also happy about robust operating profit performance and margins expanding by 366 bps sequentially and 580 bps YoY in Q3FY20. The reason for this merry making is Pidilite’s key raw material VAM (vinyl acetate ethylene) declining from a high of $1,300 in Q3FY19 to $875 in December quarter FY20. VAM price impacts operating performance of Pidilite as it constitutes 18% of its total raw material cost. 

The overseas subsidiaries constituting roughly 10% of revenues is another positive headway. In Q3FY20, all major subsidiaries of Bangladesh, Srilanka, USA, Brazil, Egypt except Thailand have reported strong double-digit revenue growth rates. In the domestic front, operating amidst a weak macro environment, largest domestic subsidiary, Nina Percept’s (waterproofing solutions) negative growth has been stymied from a high double digit to just 4% in December quarter along with ICA Pidilite reporting positive growth consistently. Nina Percept’s business has been impacted by the heavy and extended monsoon season. The company is making efforts to expand its customer mix and growing new customer segments like industrials, commercial and infra business. On the other hand, with respect to ICA Pidilite, the company has switched to local manufacturing, improving its profitability significantly. 

The slowdown has impacted product offtake, consumption and has also led to channel inventory correction for Pidilite. The company has been witnessing slowing services business, auto and engineering but the largest degrowth contribution has been by decelerating construction and interior decor-related activities. Operating amidst unfavourable market conditions, the company is making its best efforts to kindle growth. To take slowdown head on, Pidilite is widening its core product offerings by strategically investing in (tech-enabled interior décor company) in December last year and in February in the present  year to enhance its customer mix and acquire new technologies and markets. 

Clarifying further for Pidilite’s future course of action, Mr. Parekh, Executive Director, Pidilite Industries said, “We continue to take initiatives so that we revert back to our growth rate of around 15% in value terms”. Along with the promoters, the street is also optimistic.

Number of FIIs/FPIs holding stock rose by 28 to 590 in Dec 2019 qtr.
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