Company Name – Pidilite Industries Limited (Pidilite)
Current Share Price – INR 2,238 (March 9, 2022)
Market Cap – INR 113,734 cr
1. What is interesting about the stock?
“Yeh Fevicol ka jodh hai, tootega nahin!”. It’s universally accepted that change is the only constant. I beg to differ. According to me, change and brilliant Fevicol ads are the only constants. In fact, over the years Fevicol ads have been so impactful that for the average Indian, adhesive is synonymous with Fevicol just like Surf and Dalda are synonymous with detergent and ghee respectively.
Fevicol is owned by Pidilite Industries, a company with over 60 years of history. Fevicol, a white synthetic resin adhesive was primarily launched as a replacement to animal fat glue used by carpenters and woodworkers. Other well-known brands owned by the Company include M-Seal, Fevikwik and Dr. Fixit. The Company is the market leader in adhesives and sealants, construction chemicals, hobby colors and polymer emulsions. Fevicol and M-Seal have a market share of ~70% each.
Pidilite operates 23 plants in India along with 25 co-manufacturers, and 8 overseas manufacturing plants in the US, Thailand, Dubai, Singapore, Bangladesh, Sri Lanka, Brazil and Egypt. It has 30 warehouses in India, 2 R&D centres and 8 regional offices. Pidilite sells over 5,000 SKUs of ~500 products through over 5,000 distributors and 3 lakh wholesalers. It sells its products through 13 different channels like kirana stores, grocery shops, paan shops, stationery shops, paint shops, hardware shops, automotive spare part shops and wood marts. Fevikwik is available at 4 million outlets. The company launched ‘Pidilite ki Duniya’ initiative to penetrate rural markets and is planning on opening merchandised outlets in small towns. 6 lakh towns are covered under the initiative.
Company earns about 52.5% of its revenues from adhesives & sealants category, followed by Construction & paint chemicals (19%), art& craft materials (8%), industrial adhesives (6%), pigment & preparation (6.2%) & industrial resins & construction chemicals (6%).
Pidilite’s product portfolio is covered under two key categories: 1) consumer and bazaar (C&B) products which include adhesives and sealants, construction chemicals and art & craft materials and 2) Industrial products which include industrial resins, leather chemicals etc. C&B products constitute over 80% of the company’s revenue. Adhesives and sealants contribute to over half of the revenues. The Company is now laying impetus on the water-proofing segment. Water-proofing currently has less than 15% penetration in construction chemicals’ markets in India but is likely to be a high-growth market as consumers and developers shift from short term fixes to long term reliable solutions. To accelerate growth in this segment, Pidilite has acquired two companies - Percept Waterproofing & Nina Waterproofing.
Key competitive advantages of the Company are:
Very high brand recall resulting in monopoly like status in adhesives and sealants. Products such as Fevicol and Dr. Fixit have 98% ‘top of the mind awareness’ among consumers. The Company's adhesive business in the country of India with a 70% market share
Diverse product portfolio that caters to B2C (Stationery and general-purpose adhesives – Fevicol, Fevikwik, Fevistik etc.) and B2B (Industrial resins, leather chemicals, footwear adhesives etc. – sold directly or through intermediaries).
Extremely strong multi-channel distribution reach across India.
2. Key Historical Financials
Revenues were largely flat in FY20 and FY21 but have witnessed a significant jump in FY22 due to pent up demand.
In TTM, EBITDA margins declined due to input cost pressures. Vinyl Acetate Monomer (VAM), a crude oil derivative constitutes ~40% of the company’s overall raw material cost. VAM prices declined to USD 875/ton in Q3FY20 from USD 1,200/ton in Q2FY19, thereby enhancing EBITDA margins. However, VAM prices had risen to USD 2,400/ton in Q3FY22 resulting in reversal of EBITDA margins to FY19 levels.
3. What is my view on company valuation?
Pidilite is currently trading at EV/EBITDA (TTM) ratio of c. 59x and P/E (TTM) ratio of c. 90x. Over the last 5 years, the company’s share price has witnessed a steady upward climb delivering ~25% CAGR returns. However, despite the monopoly like status in its key segments and entry into new segments such as water-proofing, 90 P/E multiple seems a little rich.
The key concern is the impact of the Russia – Ukraine war on VAM prices. A significant rise is likely to result in further shrinking of margins and a correction in stock price.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Impact of Russia-Ukraine war on VAM prices is still to be determined.
Inability to effectively penetrate the water-proofing segment could result in slow growth is sales.
About the Author
I have over 14 years of experience in investment banking and wealth management. I am an engineer by background and MBA from a premier institute in India.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.