Pidilite Industries

Transcription

Pidilite Industries

Pidilite Industries
BUY
PIDI IN EQUITY
July 21, 2016
Building Materials
Recommendation
unassailable franchise (FY96-16: 17% sales CAGR/25% RoE). Misplaced
investor concern on rising competition does not credit formidable
competitive moats – brand, relationships with influencers, and reach
better than FMCG majors. Induction of senior professionals from iconic
consumer franchises provides bandwidth to grow legacy adhesive
segment/ extensions and incubate new ones like construction chemicals
(an opportunity bigger than Fevicol). Demand recovery and product
launches should keep sales/earnings CAGR at 18%/21% over FY16-20,
similar to last two decades. Rich valuation (40x FY17E EPS) is justified
given earnings/FCF longevity rivaling branded consumer names helped
by under-penetration and innovation-led applications.
Mcap (bn):
6M ADV (mn):
CMP:
TP (12 mths):
Upside (%):
Competitive position: STRONG
Catalysts
in end-user industries in FY17
 Non-linear growth in segments such
as construction chemicals in
FY18/FY19
 Improvement in supply chain driving
working capital efficiencies from FY18
Performance (%)
SENSEX
PIDI
Source: Bloomberg, Ambit Capital Research
40x for 60 years of reputation for excellence
Over the next decade, Pidilite could close the gap with Asian Paints and emulate
3M given (a) presence in multiple low capital intensity segments and geographies
(finally turning around); (b) a strong supply of resources (cash, people, brands)
and (c) culture of innovation. We value the company at 40x FY18 eps (using
fading growth in DCF) well knowing the fact that near-term multiples can be
misleading; Asian Paints and 3M are prime examples.
Key financials
Particulars
Revenues
FY14
FY15
FY16
FY17E
FY18E
Research Analysts
42,832
48,441
53,695
62,845
74,703
Achint Bhagat, CFA
Operating Profits (` mn)
6,715
7,708
11,792
13,385
16,341
Net Profit (Adj)
4,499
5,126
7,615
8,625
10,911
+91 22 3043 3178
[email protected]
Diluted EPS (`)
8.8
10.0
14.9
16.8
21.3
25.1%
24.3%
30.1%
28.0%
29.2%
P/E (x)
82.7
72.6
48.9
43.2
34.1
P/B(x)
18.9
16.4
13.4
11.1
9.1
ROE (%)
Nitin Bhasin
+91 22 3043 3241
[email protected]
Source: Company, Ambit Capital research
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Jul-16
May-16
Apr-16
135
125
115
105
95
85
75
Feb-16
Well-crafted platform for creating more Fevicols
Pidilite’s history, truly sustainable competitive advantages, product portfolio and
present talent pool (at par with Asian Paints) drive its right-to-win as awareness
and acceptance of adhesives/chemicals rise across end-uses, especially
construction/packaging/industrial/personal-care. Pidilite’s focus on new products
(some “Moonshots”) poses upside risks to near-term estimates as these could
become Fevicol-esque (~`16bn brand); Dr Fixit, is the highly probable one.
AMBER
GREEN
GREEN
 Pick-up in revenue growth with revival
Oct-15
Pre-empted and prepared for today’s competition
Until 2007 the franchise was largely family-run and Fevicol (and extensions)
dominant. Entry into construction chemicals and to further scale up consumers/
intermediaries connect, promoters brought Bharat Puri on Board and doubled
employee base by first hiring experienced talent (from Castrol, Asian Paints) and
then young talent from top B-Schools. Simultaneously, Pidilite strengthened
distribution/HR processes, adopted Kaizen, and now supply-chain management.
Accounting:
Predictability:
Earnings Momentum:
Sep-15
Franchise built on bonds with customers and through ambassadors
Pidilite’s leading adhesive brands (Fevicol, Fevikwik, M-Seal and Fevistik) are
built via (a) innovation in branding (witty messaging, double run times and
consumer feedback); (b) innovation in packaging which helped in brand flanking
and expanding end-user base (B2B-B2I-B2C); (c) converting intermediaries into
ambassadors; and (d) chasing shelf space at every shop in India. In three highgrowth, high-potential segments Pidilite brands enjoy near-monopoly recall.
Flags
Jul-15
Changes to this position: POSITIVE
`373/US$5.6
`497.6/US$7.4
`728
`835
15
Jan-16
It’s all sticking together
Six decades of innovation in category/brand
creation
manufacturer?XXXIt’s
not (just)
anwith prudent
capital allocation (FCF in 18 of past 20 years) make Pidilite an
Dec-15
INITIATING COVERAGE
Pidilite Industries
CONTENTS
Snapshot of Company Financials …………………………………………………3
Story in charts ………………………………………………………………………..4
Champion for five decades and counting………………………………………..6
Great process; great outcome……………………………………………………..7
The legend of Pidilite………………………………………………………………..8
Secret sauce: The strength of diversity …..……………………………………..16
Gauging longevity of PIDI’s growth……………………………………………..26
Financial assumptions……………………………………………………………..36
Valuation: Near-term valuations the right parameter ……………………….39
for this franchise?
Appendix ...…………………………………..……………………………………..48
July 21, 2016
Ambit Capital Pvt. Ltd.
Page 2
Pidilite Industries
Snapshot of Company Financials
Profit and Loss
Pidilite’s key milestones
FY16
FY17E
FY18E Year
53,695
62,845
74,703 1959
11%
17%
Total expenses
41,902
52,603
19% 1970 -80s Sets up synthetic resins project in Maharashtra.
Innovation: carpenter journals, collapsible tubes
62,097
EBITDA
11,792
13,385
16,341
53%
14%
22%
1,331
1,493
1,641
10,971
12,742
16,087
Interest and financial charges
133
117
Other income
510
850
10,839
12,625
15,986 2003
Provision for taxation
3,221
4,040
5,116 2004
Adjusted PAT
7,618
8,585
10,871
49%
13%
27%
7,615
8,625
10,911
EPS basic (`)
15
17
21
EPS diluted (`)
15
17
21
4
5
6
FY16
FY17E
FY18E
513
513
513
Reserves and surplus
27,316
33,047
40,349
Total Networth
27,829
33,559
40,862
Loans
843
843
843
Deferred tax liability (net)
670
670
670
Sources of funds
29,769
35,499
42,802
Direct taxes paid
Net block
10,696
11,203
11,812
CFO
Capital work-in-progress
4,618
4,618
4,618
Net capex
Investments
6,490
6,490
6,490
Interest received
Cash and bank balances
1,319
8,123
14,650
CFI
1,319
8,123
14,650
Interest & finance charges paid
17,246
25,857
35,116
Current liabilities and provisions
9,281
12,669
Net current assets
7,965
13,188
29,769
35,499
` mn unless mentioned
Revenue
yoy growth
yoy growth
Depreciation
EBIT
Adj PBT
yoy growth
Reported PAT
DPS (`)
Share capital
Total Current Assets
Application of funds
The brand mapping of Pidilite
Incorporated as Parekh Dychem Industries
1980-00s
2000
101 2002
1,388
Balance Sheet
Event
2005-08
2009-13
2014-15
Tie up with the O&M group - marketing and branding
Won several awards for TV advertisements
Launch of new products such as Fevistik, Fevikwik. Acquired
Ranipal fabric whitener in 1999
Acquired M-Seal and Dr. Fixit from Mahindras
Acquired insulation tape brand Steel Grip for `80m from Bhor
Industries.
Expands presence in Fabric care, car care and stationery segments
Launches new liquid pipe sealant and unveils Fevicol Marine.
Set-up manufacturing units in Himachal Pradesh
Enters into snack market with 'Chikkers'.
Acquires subsidiaries in Thailand, Middle East, Brazil and USA
Decided to set-up elastomer business
Sharp increase in employee base and professionalizing
management; brings Bharat Puri on Board in May-08
Acquired Percept, Nina waterproofing and Blue coat adhesives.
Hired Mr. Bharat Puri - the first professional CEO in Pidi's history
Cash flow
FY16
FY17E
FY18E
10,839
12,625
15,986
Depreciation
1,331
1,493
1,641
Interest paid
133
117
101
CFO before change in WC
11,792
13,385
16,341
Change in working capital
(150)
(417)
(880)
(3,221)
(4,040)
(5,116)
8,421
8,928
10,345
(2,457)
(2,000)
(2,250)
510
850
1,388
(1,947)
(1,150)
(862)
(133)
(117)
(101)
Dividends paid
(2,468)
(858)
(2,855)
15,234
CFF
(2,342)
(974)
(2,956)
19,882
Net increase in cash
4,131
6,803
6,527
42,802
FCF
10,878
10,928
12,595
PBT
History of strong FCF generation and ROEs
8,000
50%
6,000
40%
4,000
30%
2,000
20%
(4,000)
FCF (Rs bn)
RoE (RHS)
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
(2,000)
FY05
-
10%
0%
July 21, 2016
Page 3
Pidilite Industries
Story in charts
Exhibit 1: Strong FCF generation consistently except for
FY08
(` mn)
8,000
100%
6,000
50%
4,000
0%
2,000
-50%
-
2.5
1.0
2.0
0.8
1.5
0.6
1.0
0.4
0.5
0.2
-100%
FCF (LHS)
FCF as a % of CFO
CE Turnover X
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
-200%
FY05
(4,000)
-
-150%
FY04
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
(2,000)
Exhibit 2: CE turnover remained steady and leverage has
reduce over the last five years, sharp spike in FY08-09 was
due to the elastomer project.
D/E (RHS) X
Exhibit 3: Advertisement expenses has remained high as
the company continued spending to build the brand
Exhibit 4: Working capital cycle shrank as the brand
strengthened
50
-
0.0%
90
80
as a % of sales (RHS)
Working capital days
Exhibit 5: Significant investment in employee ecosystem
Exhibit 6: ..as the company increased employee count and
improved employee productivity
Nos
60%
6,000
50%
5,000
40%
4,000
30%
3,000
2,000
20%
2,000
1,000
10%
1,000
July 21, 2016
YoY growth (RHS)
No of Employees
FY14
FY13
FY12
FY11
FY10
-
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
0%
FY06
-
FY09
3,000
FY08
4,000
11
10
9
8
7
6
5
4
3
2
FY06
5,000
(` mn)
FY07
(` mn)
7,000
6,000
Employee cost
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
40
FY15
Adv. expenses
FY16
1.0%
FY15
500
FY14
60
FY13
2.0%
FY12
1,000
FY11
70
FY10
3.0%
FY09
1,500
FY08
4.0%
FY07
2,000
FY06
5.0%
FY05
(` mn)
2,500
Revenue/Employee (RHS)
Page 4
Pidilite Industries
Exhibit 7: Rising competition – we do not see any major risks to Pidilite’s core portfolio
Market
Size
(` bn)
Segment
Pidilite's
Risk of
market
Competitor
competition
share
Pidi's competitive advantage
23
70%
Low
Karpenter – Huntsman
Jivanjor – Jubilant
Cyanoacrylates
(Fevikwik)
5
60%
Low
Polyfix
Vetra – Resinova
Glue stick (Fevistik)
3
70%
Low
Kores
Faber Castell
11
45%
Moderate
7.5
7%
High
3
60%
Low
Polyvinyl acetate
(Fevicol)
Rubber Adhesives
(Fevibond)
Epoxy Adhesives
(Fevitite)
Epoxy Sealant (Mseal)
Bostik
Chandra Chemicals
Araldite- Huntsman
Bondtite – Resinova
Araseal – Huntsman
Bondset – Resinova

















Connect with carpenters
Legendary brand
Low cost in overall construction, high cost of failure
Influence and relationship with the channel
Scale - sourcing advantage, bulk purchase from China
Well-established brand
Unparalleled retail reach
Scale - sourcing advantage bulk purchase from Korea, China
Superior distribution with depots spread across the country
Strong relationships with end-user industries
An industrial product, hence competition could impact Pidilite
No major presence, Huntsman is the leader
Expansions by Astral could impact Pidilite’s market share
Strong connect with plumbers
Low unitary cost and hence little incentive for plumbers to shift
Astral’s aggressive entry could impact market share
Source: Ambit Capital research
Exhibit 8: BAS framework for top building material
franchises in India – Asian Paints and Pidilite – almost
flawless
Innovat
-ion
Brand
Architecture
Rural Urban
Mfg.
reach
Strategic Final
asset
rank
Dtrbn.
reach
Exhibit 9: International
businesses
turning
around
6%
4%
Asian
2%
Pidilite
0%
Havells
-2%
Supreme
-4%
FY11
FY12
FY13
FY14
EBITDA margin
Kajaria
Source: Ambit Capital research;
Note :
- Strong;
- Relatively Strong;
weak.
FY15
FY16
RoCE (RHS)
- Average;
- Relatively
Exhibit 10: FCF generation likely to remain strong
Exhibit 11: PAT growth likely to accelerate in FY18
(` mn)
(` mn)
CFO
FCF
July 21, 2016
6,000
20%
4,000
0%
2,000
-20%
-40%
FCF as a % of CFO (RHS)
PAT
FY18E
FY17E
FY18E
FY17E
FY16
FY15
FY14
FY13
FY12
FY11
-
40%
FY16
2,000
8,000
FY15
4,000
60%
FY14
6,000
80%
10,000
FY13
8,000
12,000
FY12
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
10,000
FY11
12,000
YoY growth (RHS)
Page 5
Pidilite Industries
Champion for six decades and counting…
Pidilite is one of the most popular case studies in Indian business schools as
a commoditized product that turned into an exemplary consumer business.
The company’s evolution from a manufacturer of synthetic adhesive for
wood-work to a consumer brand influencing multiple end-users and
applications (home, office, hardware, repairs, waterproofing, plumbing and
specialty chemicals) has been an outcome of continuous innovation around
products, packaging and, most importantly, branding. The strength of this
champion franchise is clearly visible in its stellar financial performance over
the last two decades – 24% CFO CAGR and 20%+ RoE each year alongside
maintaining a strong balance sheet.
The strength of this champion
franchise is clearly visible in its
stellar financial performance
over the last two decades –
24% CFO CAGR.
Exhibit 12: Strong financials throughout the last two decades
30%
30
25%
20%
25
23% 25%
24%
15%
5%
16%
15%
10%
11%
20%
20
9%
0%
15
FY95-00
FY00-05
Sales CAGR
FY05-10
EBITDA CAGR
FY10-16
RoE (RHS)
Source: Company, Ambit Capital research; RoE is the median RoE for the respective period
Business segments

Consumer and Bazaar (84%/90% of FY16 sales/EBITDA) – segment consists
of adhesives, construction chemicals and art materials. Most products in this
segment are branded products sold at retail shops.

Industrial products (16%/10% of FY16 sales/EBITDA) – largely a B2B
segment, with sales to several industries such as footwear, automotive etc.

International business – Pidilite has subsidiaries in five international locations,
with the USA and Brazil accounting for ~60% of sales; international business
accounts for 10% of consolidated sales.
Exhibit 13: Adhesives and sealants account for >50% of
revenues (FY16)
Exhibit 14: North and South America account for 60% of
Pidilite’s international revenues (FY16)
Pigments,
6%
MEA, 18%
Industrial
adhesives ,
10%
North
America,
42%
SEA, 9%
Craft, 12%
Adhesives ,
53%
SAARC, 14%
Construction
chemicals ,
19%
July 21, 2016
South
America,
17%
Page 6
Pidilite Industries
Great process; great outcome
Pidilite has not only created strong brands but has also created new product
categories in India. We segment the company’s brands into four broad
categories. The Hits – extremely successful brands (such as Fevicol, Fevikwik,
M-seal etc) with majority market share and well-established competitive
advantages; the Misses – not very successful and is a marginal player in the
segment (such as Fevitite, Renaissance etc). The Still to be Proved –
incubating brands, wherein the market is still to evolve (Motomax, Cyclo etc).
The Moonshots – segments like Dr. Fixit which are yet to reach full potential
and, if successful, could create a segment as big as Pidilite’s
adhesives/sealants business.
Exhibit 15: Mapping Pidilite’s brands
Pidilite has not only created
strong brands but has also
created new product categories
in India.
Pidilite transitioned its target markets from industrial users to intermediaries and to
consumers through effective communication to carpenters (end-users) and packaging
innovation. Not only did the company create strong brand equity but also a robust
feedback loop from the influencers to continuously refine its products and processes.
Exhibit 16: A snapshot of Pidilite’s process of building brands and extending end-users
Process




Entry into a seemingly commoditized
business
Establish strong connect with the
influencers
Innovative branding to increase retail
recall
Innovation in packaging to reach mass
users
Source: Ambit Capital research; B2I is Business-to-Intermediaries
July 21, 2016
Page 7
Pidilite Industries
The legend of Pidilite
1950-1980 – Changing the rules of the game
In 1954, Mr. Balvant Parekh, a distributor of chemicals for Hoechst (German
chemical manufacturer), started manufacturing synthetic glue and pigments
for the textile industry. After having built expertise in adhesive
manufacturing and sales, in 1959 he began manufacturing synthetic glue for
the wood-working industry, where natural glue was the preferred adhesive
product. In its early years, Pidilite faced competition from fragmented local
players and a few large manufacturers which used to sell adhesives in
hardware shops. Intermediaries (carpenters in woodworking) were neither
aware of brands and, in those days, were largely indifferent to which brand
of adhesives they were using. Pidilite was the first Indian company to figure
this out and, as a first step towards brand building, started direct marketing
to the intermediaries – a practice it follows across its product range till date.
In its early years, Pidilite faced
competition from fragmented
local players and a few large
manufacturers which used to
sell adhesives in hardware
shops.
The key innovations by Pidilite in this period were:

Educating carpenters about the benefits of better quality and easy to apply
adhesive was the first level of innovation for the company. Earlier, companies
focused only on the channel and no adhesive manufacturer had cared to build a
connect with the intermediaries.

‘Fevicol design ideas’ – a free book with furniture designs helped carpenters in
building designs and also served as a catalogue for the carpenters to add value
to clients. The idea was to add value to carpenters by helping them to become
advisors to clients; this significantly enhanced the company’s relationship with
carpenters. Pidilite understood that adhesive is a minor cost to the overall
furniture construction but a poor quality adhesive could dent the carpenter’s
reputation. Hence, they positioned Fevicol as a high quality product which could
ensure longevity of furniture.

Introduction of 30 gram collapsible tubes of Fevicol was the first instance of
product extension and innovation in packaging. Through this, the company began
channel expansions – selling adhesives is small packages in retail shops as
against bulk packages sold in wood-marts.
Fevicol was the first adhesive
company to start training
carpenters.
Exhibit 17: One of the first print ads of Fevicol
Source: Google images, Ambit Capital research
July 21, 2016
Page 8
Pidilite Industries
1980-2000 – setting up the consumer franchise
Through continuous training and other initiatives with the carpenter, Pidilite
established itself as the leading synthetic adhesive brand for the wood working
industry by the 1980s. Thereon, the company’s focus was to establish a consumer
franchise to sell adhesives in retail outlets in smaller packages. The key initiatives by
the company in this phase were:

Pidilite hired an advertising agency (O&M) to set up its retail brand recall.
Piyush Pandey, an intern with O&M in 1983 and now the executive chairman and
creative director, created the iconic logo and introduced taglines such as (dum
laga ke haisha, Crude english translation – put in all your efforts). Whilst the logo
was earlier designed for Fevitite (epoxy adhesive), Pidilite’s management decided
to use it for their flagship product – Fevicol.
Exhibit 18: Fevicol’s iconic logo in its first television advertisement in 1980s
The company’s focus was to
establish a consumer franchise to
sell adhesives in retail outlets in
smaller packages.
In this phase, Pidilite focused on
branding, expanding product
range and backed it up with
innovative advertisements
Source: Google images, Ambit Capital research

Expanding products and end-users: Over 1980-2000, Pidilite grew the
product portfolio to expand the addressable opportunity and end-users (from
carpenters to home/office applications, plumbers, electricians, etc.). It launched
Fevikwik, which failed to find success initially; but in early 2005 the company
repackaged Fevikwik in `5 shell packages and it is now one of the core brands.

Focus on innovative advertisements: Throughout this period, Pidilite
continued to aggressively invest in advertising; Pidilite and O&M combined to
produce some of the best television advertisements in Indian ad history. Pidilite
won several awards, both domestically and internationally for its advertisements.
In 1998, Pidilite was amongst the top-15 Indian brands.
By end of this phase (2000),
multi-product consumer brand
Pidilite
had
evolved
into
a
Indeed, in its 1997 annual report, the company talks about the business as:
“A child has made a cardboard toy for his younger sibling. Another has stood first in a
painting competition. Someone's sticking a laminate. And, someone is fixing a tile.
Someone is showing off a leather jacket. And, someone's gloating over tennis shoes.
Someone's buying a saree. And, someone is reading a magazine. Someone's driving a
car. Someone's getting his house painted. And, someone is... Phew! The list is endless,.
The number of ways in which PIDILITE touches millions of lives across the world is a
thing that cannot be confined in a limited amount of space 40 established brands. 400
varied products. Fevicol. Fevicryl. Fevikwik. Fevitite. Acron. Pidivyl. And more”
In 1997, the company had sales offices in 8 metropolitan areas, representatives in 33
towns and cities, 30,000 dealers and distributors serving 3,00,000 retail outlets
countrywide and hundreds of personnel directly serving over 2000 industrial users.
July 21, 2016
Page 9
Pidilite Industries
The company discontinued its NBFC business in FY98, given weak performance of the
business to funnel management bandwidth in the core business. We do not find
much details of the start and the functions of this venture.
Financials: Over FY93-00, the company’s sales/EBITDA expanded at a 15%/33%
CAGR. Cumulative/median EBITDA margin was 16.8%/13.9%. Median RoE in this
phase was 23% and not in a single year was RoE lower than 20%.
Exhibit 19: Consistent improvement in RoE
Exhibit 20: Sharp growth in EBITDA and declining leverage
(%)
24
(%)
35
22
30
20
18
25
16
20
14
15
12
10
(` mn)
1,000
1.4
1.2
800
1.0
600
0.8
400
0.6
0.4
200
10
0.2
0
FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00
EBITDA margin
(X)
FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00
RoE (RHS)
EBITDA
Debt/Equity (RHS)
2000-05 – acquiring and incubating brands
After having established Fevicol as the market leader in white glue, Pidilite started
acquiring and building other adhesive and sealant brands to expand its product
offering. The idea behind doing this was not only creating other lines of business but
also extending the company’s channel presence and intermediary influence. In its
2002 annual report, the company highlighted:
The idea behind doing this was not
only creating other lines of
business but also extending the
company’s channel presence and
intermediary influence.
“The Company has strong brands, extensive distribution, strong R&D and an excellent
reputation amongst trade and consumers. This provides the Company with
opportunities to increase the market share, to introduce new products and to acquire
new brands and businesses.”

Acquisitions: The key acquisitions by the company in this phase were M-Seal,
Dr. Fixit, Ranipal, Steelgrip and Roff. The details of these acquisitions are
summarised in the table below:
Exhibit 21: Acquisitions by Pidilite during FY01-05
Acquisition
Ranipal
Year of
acquisition
Acquired from
Value
(` mn)
1999
IDI limited
40
2000
Mahindra Engg
and chemicals
320
Steelgrip
2002
Bhor Industries
100
Roff
2005
Roffe
M-seal
Dr. Fixit
NA
Product description
Channel
Fabric whitener - a small product in Pidilite's
Retail stores
portfolio
Epoxy putty (sealant) for plumbing and leaking
applications. M-seal is the market leader of this Hardware shops
category in India
Cement and
Waterproofing solutions for roofing, bathroom
Hardware
etc. Leader in the category
shops
Wiring and insulation tape.
Electricals shops
Construction chemicals for tiling, flooring and
Hardware shops
grouting
Influencer
Retail
Consumers
Plumber
Mason,
construction
contractors
Electrician
Mason,
construction
contractors

New product launches: Apart from the acquisitions, the company continued to
launch new products in its existing categories to enhance shelf space at the
dealer level. Some of these launches were:
July 21, 2016
Page 10
Pidilite Industries
Exhibit 22: New launches by Pidilite during FY02-05
Products
Adhesive
launched
FY02
FY03
Plumbing
Upholstery adhesive
Laminator glue,
M-seal Plumber,
M-seal Instant
Export market products,
Fevicol variants
FY04
Waterproofing
Stationary
Construction/
Industrial
Paint
Dr. Fixit
Acron and
Fevicryl, Fabric glue,
Fabric whitener
Steelgrip acquired
Synthetic
Distemper
(Paint application)
Waterproofing
products
Fevicryl, Hobby ideas
Dr. Fixit variants
Other important developments during this period

International and domestic accolades in advertisements: Fevicol continued
to launch new advertisements focused on key products such as Fevicol, Feviquik,
Fevistik and M-seal and won several awards for innovative advertising in Cannes
Lions awards and Abby awards at Indian advertisement festivals.

Packaging innovation: The company changed the packaging of its products to
improve end-user connect. Management highlighted in its FY03 annual report:
“Designs of several products were changed to give a more contemporary look.
These products include "M-Seal", "Fevicryl" and "Acron". Plus One Design of U.K.
have designed new international look containers as well as an attractive graphic
design for "Fevicol" and these are in the process of being launched.”

Manufacturing locations in Himachal Pradesh: The company set up
manufacturing units in Himachal Pradesh for production of different types of
adhesives.

Dr. Fixit institute (http://www.drfixitinstitute.com): Pidilite set up the Dr. Fixit
Institute in FY05 to train intermediaries in the construction industry. The company
continues to conduct various training programmes in this institute to educate
Indian engineers about global best standards in waterproofing, repair and
rehabilitation.

Financials: Pidilite’s sales and EBITDA expanded at a 14% CAGR and EBITDA at
a 11% CAGR over FY01-04. The company invested 70% of the CFO in capex and
generated FCF in each of the 5 years. RoEs averaged at 21% over these 5 years.
Whilst EBITDA margin contracted slightly, the company increased its CE turnover
to 2x in FY05 from 1.8x in FY01. The median EBITDA margin and ROE in this
phase were 20% and 22%.
Exhibit 23: RoE and margin remained consistently high
(%)
(%)
22
23
20
22
Fevicol continued to launch new
advertisements focused on key
products such as Fevicol, Feviquik,
Fevistik and M-seal.
Exhibit 24: Sharp pick-up in CFO/FCF and CE turnover
(` mn)
1,000
2.1
800
2.0
600
1.9
400
1.8
200
1.7
21
18
20
16
19
14
18
12
17
10
16
FY01
FY02
FY03
EBITDA margin
July 21, 2016
FY04
FY05
-
1.6
FY01
FY02
CFO
RoE (RHS)
FY03
FCF
FY04
FY05
CE turnover (X)
Page 11
Pidilite Industries
2005-10 – a bit of hubris?
With most of its expansions in India doing well, Pidilite shifted focus to international
geographies; it also entered snacks business! Mr. Apurva Parekh joined the board at
the start of this phase (2005) and was instrumental in the international expansion.
 International acquisitions: Whilst Pidilite began expanding internationally with
small ticket acquisitions in emerging markets initially, later it acquired companies
in large markets such as the USA and Brazil, where the dynamics of the business
are materially different from those in India. The company’s international
geographies, especially Brazil and the Middle East, continue to struggle.
In this phase the company
ventured in international
geographies and also ventured into
elastomer.
Exhibit 25: International expansions by Pidilite
Geography
Year of
Entry
Segment
Thailand
2006
Waterproofing
Middle East
2006
USA
2007
Brazil
2008
Comments
Acquired Bamco Ltd in Thailand
Acquired a 49% stake in Jupiter LLC, which
Adhesives
manufactures reflective coatings, tile adhesives
and plasters
Acquired Sargent Art - manufacturer of art
Art Materials,
materials in USA and acquired Cyclo Automotive chemicals
manufacturer of automotive chemicals
Acquisition of Pulvitech business in Brazil. The
Adhesives, sealants,
business continues to struggle and the company
construction chemicals has made diminution provisions due to weak
profitability
Below is a summary of performance of these subsidiaries in this phase
Exhibit 26: Performance of international subsidiaries in this phase
Year
Brazil
Bangladesh
USA
Egypt
Thailand
Dubai
Acquired Cyclo and
Sargent
Sales `882.3 Mn
Successful in
expanding its reach to
various markets
FY07
FY08
FY09
No major sales
growth due to
uncertain economic
environment
FY10
Sales growth 28%,
Manufacturing
along with reduced
operations begin
costs posted cash profit
Process of completing
construction of plants
Process of completing
construction of plants
Sales remain flat,
while losses reduced Manufacturing
by 38% due to
operations begin
reduced costs
Posted cash profits
Impacted by poor
on the back of
trading conditions,
26% growth in
resulting in losses
sales

Synthetic elastomer: In its 50-year history, the biggest mistake of Pidilite’s
capital allocation was the decision to set up a synthetic elastomer project in FY08.
The company began civil work of the plant in FY11 but in FY12 it mentioned that
construction has been put on hold as a detailed commercial review was
underway. In FY13, the company suspended the construction of the project and
mentioned that it has decided to explore induction of a strategic partner for the
project. Pidilite is yet to find a strategic partner or make any meaningful progress
in this business.
Excerpt from Pidilite’s FY08 annual report:
“The Company acquired plant and machinery, patents, trademark and technology of a
Synthetic Elastomer (Polycholoroprene Rubber) plant in June 2007. The plant was
located in Champaigner, France and was owned by Polymer Europa Elastomers,
France. The Company is in the process of dismantling & shipping the plant. The plant
will be setup in a Special Economic Zone (SEZ) in Dahej in the State of Gujarat in India.
The plant is expected to commence commercial production in March 2010 and will
have an initial capacity of 25,000 tonnes per annum. The capacity can be increased to
35,000 tonnes per annum by debottlenecking. The total capital investment in the plant
excluding debottlenecking is estimated to be ` 5.3 billion. The Company is also
considering putting up a Caustic Chlorine plant at an additional investment of ` 0.9
billion at the same location.”
July 21, 2016
The biggest mistake of Pidilite’s
capital allocation was the decision
to set up a synthetic elastomer
project in FY08.
Page 12
Pidilite Industries

Snacks business! Pidilite launched snacks under the brand Chikkers, which
failed and the company decided against expanding this business.
A few small acquisitions in India: The company continued to acquire small
brands to expand its product portfolio. None of these brands forms a significant
proportion of overall revenue or cash flows. However, they have helped the
company fend off competition.

Exhibit 27: Companies acquired by Pidilite in this phase
Company
Tristar Colman
Pagel concrete
Hardcastle and Waud
Bhimad Commercial
Madhumala traders
Year
FY06
FY07
FY07
FY07
FY07
Product
Fine arts
Industrial grouts
Sealants and adhesives
Adhesives
Adhesives

Capacity expansion: The company commissioned its fourth unit in Himachal
Pradesh for synthetic adhesives. It also set up two more plants, one for consumer
products and the other for construction chemicals.

Continued SKU addition: Pidilite continued to add SKUs in the core businesses
to increase shelf presence at the dealer shops and to premiumise its portfolio.
Adhesive
FY06
FY07
Marble Glue, Wood
adhesive(with export
variants), Fevitite Super
Fast, Cheetah Blue
Plumbing
Waterproofing
Dampfree (injection
grout), M-seal wet set
(wet surfaces)
Stationary
Motomax
Krystalline
Fevicryl ceramic colours
(premium car
(capillary waterproofing) & other products
care)
Heatshield (Exterior
heat coat)
Dr.Fixit Gapfill, Newcoat
(Terace),Raincoat
Masking Tape
(Wall)
Fevicol BWP
FY09
Dr.Fixit, Roofkote &
Roofseal, Safeguard
(Internal Tank wall)
Binders
(Water based links)
M-seal super
(DIY applications)
Construction/Industrial
Industrial colorants,
Industrial adhesives
Fevicol 1KPUR, Kwikgrab &
Vertifix
FY08
FY10
Auto
Fevicol Glue Drops, Fine
Art Colours
Dr. Fixit Waterbar
SMARTCARE Products
(Healthcare)
Woodlok acquired(Henkel
wood retail arm), Roff
products(Tile fixing)
Financials: Pidilite’s sales/EBITDA expanded at a 20%/27% CAGR over FY06-10.
EBITDA margin expanded to 18.7% in FY10 as against 14.9% in FY06. RoE averaged
at 26% over FY06-10. Note that the company’s RoE dropped below 20% in FY09 (the
only instance in the last 25 years) due to a sharp increase in capital employed due to
non-capitalised machinery of the elastomer project and decline in margins due to
increase in vinyl acetate monomer ((VAM), the key raw material) prices (11.2% in
FY09 as against 14.5% in FY08).
Exhibit 29: RoE dropped in FY09 due to sharp increase in
VAM prices
(%)
(%)
20
41
18
36
16
31
14
26
12
21
10
16
FY06
FY07
FY08
EBITDA margin
July 21, 2016
FY09
Exhibit 30: Elastomer accounted for 20% of CE in FY10
Capital employed FY10 (`13.8bn)
Elastomer,
19%
Other,
81%
FY10
RoE (RHS)
Page 13
Pidilite Industries
2010-16 – professionalizing management
Pidilite was run as a family driven organization for 5 decades. Whilst the promoters
had done an excellent job of building the franchise, rising business complexities
meant that the company needed professionals to enhance management bandwidth.
The journey towards professionalising management began in FY09 – Pidilite hired Mr.
Bharat Puri as an independent director on 28 May 2008 (elevated to MD in FY15),
who helped the company build the leadership team.
Hiring veterans in HR: Pidilite hired Manish Modi (former CEO of Datamatics
Technologies) as the head of HR function. Modi recruited over 80 top executives for
Pidilite, alongside headhunting firm Egon Zehnde.
In one of the media interviews, Mr. Modi highlighted:
"We made a list of 20 organisations we admire. We wanted to recruit professionals
from these companies, who had spent at least 12 years with the company and risen up
the ranks."
Anil Jayraj joined Pidilite as Chief Marketing Officer from Castrol-BP. In a media
article, he highlighted:
"I liked the idea of working with a great brand like Fevicol, that virtually required no
sales push." However, Pidilite's employer branding was diluted by the fact that it was
known to be a family-run company, with one or the other family member heading
every business line and function. "We were recruiting very senior people so it was a
challenge," says Parekh. "There were long conversations where I had to articulate the
company's values and convince them that family members were preparing to disengage
from day-to-day management."
The company recently hired Salil Chinchore (ex-Mondelez and Asian Paints) as
President, HR.
International businesses continued to suffer: Whilst the domestic business
continued to do well (18% revenue CAGR over FY10-15), growth of the international
business tapered (6% YoY growth) due to weak performance of subsidiaries such as
Brazil, where Pidilite continued to post losses.
The journey towards
professionalising management
began in FY09 – Pidilite hired Mr.
Bharat Puri as an independent
director on 28 May 2008.
We made a list of 20
organisations we admire. We
wanted to recruit professionals
from these companies.
Exhibit 31: International businesses did not do well in this phase
Year
FY11
FY12
FY13
Brazil
Sales growth of 10%,
but incurred loss from
operation due to high
input costs.
Sales down by 4.3%,
performance below
expectations due to
competitive
pressure.`97mn has
been provided for
diminution in value of
investment in
Company's subsidiary.
Continued to perform
Sub-par. Goodwill
impairment provision
is `97mn.Provision for
disputed tax liabilities
and other disputed
items is `46mn.
FY14
Sales grew by 18%
and margins
improved by 7.9%
over last year,
FY15
Sales growth at 3%
due to slow growth in
Brazilian economy;
but cost cutting
measures in
place.`127mn has
been provided for
impairment.
Bangladesh
USA
Egypt
Continues to gain
strength with
increased market
penetration.
Performance
Sales growth at
disturbed due to
political
11% along with
developments in the
operating profits
led to cash profits. country and
neighbouring areas.
Thailand
Dubai
Reported higher cash
profits, but sales
growth lower than
expected.
Performance impacted
due to adverse
conditions in target
markets.
Singapore
Market position
Sales down by
strengthened by
2.5%, EBITDA up
sales growth of
by 10% due to
20%, one more
cost control
manufacturing
measures.
facility being set up.
Signs of recovery
due to sales growth
of 63%.
Sales growth of 12%
despite of weak
economic situation
and floods.
Sales growth of 15%,
still company reported
a cash loss.
Facility was
expanded to
produce a wider
range of adhesives.
Sales grew by 34%.
Sales up by 10%,
EBITDA down
21% due to
higher material
costs.
Sales growth of
25%, losses
significantly
reduced.
One manufacturing
facility shut down to
reduce operating
costs. Sales growth
at 22%.
Sales decline of 42%,
losses lower than last
year due to cost
reduction measures.
Reported sales
growth of 36% in
spite of political
unrest and market
disturbance.
Improvement in
margins by
2%,Sales growth
of 2.5%, EBITDA
growth 58%
Improved margins
and controlled costs
resulting in a
Sales grew by
positive EBITDA as
14.2%,EBITDA grew
compared to
by 38.2%
marginal loss last
year. Sales growth19.6%
Losses increased due
to lower sales and
higher staff cost. Sales
fall by 7%.
Sales doubled due
to higher sales
from traded
products, losses
were marginally
higher due to
provision for slow
moving inventory.
Sales growth of
21% due to
increase in prices
and volumes.
Sales growth of
11% driven by
strong growth of
Sargent art
business in retail
segment
Margin under stress
due to devaluation
against USD.
Reported marginal
losses of `.5
million at EBITDA
level.
Expanded its business
by distributing the
products in GCC & CIS
countries. Company
also acquired the
brand "ROK" and a
new management
team.
Reported drop in
sales by 20%,
losses were lower
than last year by
10%.
Sales grew by 10%
but business was
affected due to
political
disturbance/elections
and slowdown in
economy.
July 21, 2016
Page 14
Pidilite Industries
Domestic acquisitions: Pidilite made two reasonably large acquisitions – Blue coat
and Nina waterproofing – in FY15. The company spent ~`3bn for acquiring these
companies.

Blue coat: Pidilite acquired Blue Coat as it was a strong brand in Gujarat,
especially in white glue, and Pidilite was struggling to gain market share in the
state. It acquired Blue Coat for `2.6bn – 12% of FY15 net worth and 48% of FY15
CFO.

Nina waterproofing: Pidilite acquired Nina waterproofing, a leading
waterproofing contractor in Mumbai, to enhance its presence in institutional
contracts and provide end-end solutions rather than just waterproofing material.
The company spent ~`1bn to acquire Nina waterproofing, which formed ~4% of
FY15 net worth and 18% of FY15 CFO.
22
14
20
12
18
16
10
FY11
FY12
FY13
FY14
EBITDA margin
July 21, 2016
FY15
FY16
FY16
24
16
FY15
26
18
FY14
28
FY13
20
FY12
30
100
90
80
70
60
50
40
30
20
10
FY11
22
32
FY10
(%)
FY09
(%)
24
Exhibit 33: Better inventory management led to shrinking
of working capital cycle
FY08
Exhibit 32: Sharp expansion in margins and RoE in FY16
due to lower input prices
Pidilite spent ~`3bn for acquiring
Blue Coat and Nina
waterproofing.
RoE (RHS)
Page 15
Pidilite Industries
Secret sauce: The strength of diversity
Pidilite has challenged conventions since the company began operations.
From the choice of its products to approach to the channel or branding, it has
not shown traits of a run-of-the-mill Indian corporate. Whilst brand is
Pidilite’s most apparent competitive advantage, other less-appreciated
advantages are its widest reach amongst peers, a top-class professional
management team (see exhibit 51) and strong management.
Understanding Pidilite’s competitive advantages
We scan Pidilite’s competitive advantages and its sustainability through John Kay’s
IBAS framework (Innovation, Brand, Architecture and Strategic Assets):
Despite no major complexity in
product chemistry, Pidilite’s
innovation lies in its capability to
continuously launch new SKUs.
#1: Innovation
Every large company gets into a certain kind of inertia; but if you don’t keep looking
out for new opportunities and innovating, growth will peter out in the long run
Madhukar Parekh
Product – good things in small (and simple) packages
Despite no major complexity in product chemistry, Pidilite’s innovation lies in its
capability to continuously launch new SKUs – this has helped it increase target
market. The company ties it up with innovative branding and packaging to enhance
product recall.
Product chemistry is not Pidilite’s key strength as most of its products are not
technology intensive or highly capital intensive. Pidilite has spent ~0.4% of revenues
in the last two decades for R&D, which is significantly lower than that of peers such as
3M, which Pidilite looks up to.
Exhibit 34: R&D cost is lower than that of several Indian corporates
R&D as % of sales
FY10
FY11
FY12
FY13
FY14
FY15
FY10-15
3M India
3.4
3.4
8.4
2.4
2.7
2.4
3.7
SRF Ltd
0.9
0.9
0.8
1.0
1.1
1.5
1.0
Atul Ltd
0.8
0.6
0.6
0.8
1.0
0.8
0.8
PI Industries
0.9
0.6
0.6
0.7
0.4
0.7
0.6
Asian Paints
0.6
0.6
0.6
0.6
0.5
0.5
0.6
Pidilite
0.5
0.4
0.4
0.5
0.6
0.5
0.5
Branding — a commodity product turned consumer through branding
Pidilite is a testament of innovative branding in India, starting from the 1970s when
the company launched the first-of-its-kind furniture catalogue to create its connect
with carpenters. In the past two decades, Pidilite has followed innovative television,
print and outdoor advertisements, which helped it establish a utility product such as
adhesive into one of the strongest consumer brands in India. See page 17 for details.
Innovative advertising also helped the company re-position its products in the market.
The company re-positioned M-seal from a sealant to a multi-purpose adhesive to
expand applications in 2012.
Nilesh Majumdar, president of sales & marketing (consumer products-maintenance),
in a media interview, highlighted: "MSeal has been a synonym for water leakage
sealant. Since the brand defined the epoxy putty category, the only way for us to
enhance sales was to expand the category. After the market research about the
product, we tested it extensively in-house for various other applications and shortlisted
the ones which we found were the most relevant”
Packaging — small packages, big benefits
Pidilite’s first innovation in packaging was during 1970s when it launched collapsible
tube packaging for Fevicol. Over the years, the company continued to launch smallsized packaging in multiple products which helped the company expand its reach.
July 21, 2016
Page 16
Pidilite Industries
One instance of packaging innovation by Pidilite was Fevikwik. Whilst there was an
addressable market for Fevikwik, the product wasn’t doing well because it was priced
at `20, and once opened, it would harden making the adhesive unusable. In the
early 2000s, Pidilite re-engineered the packaging of Fevikwik. The company created
a plastic packaging material that did not absorb ambient moisture and could hold
small quantities. Fevikwik was then sold in 0.5 gram packs costing `5 and is now a
market leader in the product.
The company created a plastic
packaging material that did not
absorb ambient moisture and could
hold small quantities.
Pidilite continuously launched different variants of the same product with minor
changes to increase shelf space at the dealer level and to lure consumers. It launched
Fevistik Blue and Purple in FY11, which were minor upgrades of the existing Fevistik
but positioned differently – coloured when applied but the colour disappears in a few
seconds, enabling controlled application of glue. Although this has not been a major
success, it shows the company’s ability to do micro innovations with limited capital
commitment.
Recently, the company changed the packaging of Fevicol to attract school children
(see image below).
Exhibit 35: Pidilite’s innovation in packaging of Fevicol..
Exhibit 36: …and Fevistik
#2: Brand – generic to the product category
“The success of Fevicol lies in its earthiness and its ability to connect with the consumers
across segments. All communication designed for Fevicol exploits the traditions and
culture of India and carries with it a sense of “ghar ka banaya hua Fevicol”
As a client, Fevicol likes to experiment. They always say let's do something new. They
are innovative and not risk averse. They have no problem in taking risks. They are not
formula driven and have tremendous speed of movement. There is never any delay in
work from their side. They are really quick at taking decisions, something I have never
seen in MNCs.
Piyush Pandey (chairman and creative director, O&M, India)
Yeh Fevicol se bhi mazboot jod hai (this bond is stronger than that of Fevicol)
Narendra Modi, India’s Prime Minister on Indo-Japan ties
Fevicol se…
A famous song from Bollywood movie Dabbang 2
July 21, 2016
Page 17
Pidilite Industries
For over two decades now, Fevicol is synonymous with adhesives in India. The
company hired Ogilvy and Mather in 1980s for its mass branding and advertising
exercise. From its iconic logo in the 1970s to catchphrases in the 1980s to highly
successful television commercials during the 1990s and 2000s, Fevicol continued to
innovate in branding, which now makes it the 45th most trusted Indian brand and 3rd
most trusted Indian brand in household care. For several years, Pidilite’s
advertisements won awards at the Cannes Lions awards and the Abby awards for its
advertisements.
For
several
years,
Pidilite’s
advertisements won awards at the
Cannes Lions awards and the
Abby
awards
for
its
advertisements.
The company’s ad-spending over the last decade has been the highest amongst key
building material franchises in India, which depicts the focus of the company in
strengthening its brand.
Exhibit 37: PIDI’s ad-spend as a percentage of sales is one of the highest in the
building material companies’ space
Ad expense as a % of sales
6%
5%
4%
3%
2%
1%
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Asian
Cera
Havells
Kajaria
Pidilite
Supreme
FY14
FY15
Exhibit 38: Legendary advertisements of Pidilite
Source: Media, Ambit capital research
July 21, 2016
Page 18
Pidilite Industries
#3: Architecture
Channel connect – akin to no other Indian company
No other Indian company has a channel connect similar to that of Pidilite. The
company sells its products through mom and pop grocery shops, paan (betel) shops,
stationary shops, hardware shops, automotive spare part shops and wood marts.
Below is a depiction of the channels through which the products are sold. We visited
each of these shops to understand Pidilite’s competitive advantages. The following
table summarizes the key takeaways.
Exhibit 39: Pidilite has the maximum channel coverage
Company
Grocery
Paan shops
Stationary
Hardware Wood marts Automotive
Electricals
Cement
Pidilite







- Fevicol









- FeviKwik








- M-seal








- Fevistik








ITC








FMCG Brands (HUL)








Paints (Asian, Berger)









Tiles/Sanitaryware (Kajaria, Somany)







Ply/Laminates (Century, Green)








Electricals (Havells, Bajaj)
























Adhesive (Araldite, Resinova)
Pipes (Supreme, Astral)
Exhibit 40: Channel penetration of Pidilite’s products
Channel
Ply &
Laminates
Hardware
Electrical
Pidilite's
Products
Competition
Rank
1) Carpenters prefer Fevicol given its well-established
brand and quality
2) The switching cost for the dealers is very high;
Eurobond,
1-Pidilite
previously they have been stuck with slow-moving
Araldite
Fevicol SH,SR,
2-Araldite inventory of other brands
(Carpenter),
Fevicol Marine
3-Falcofix
3) Given the low cost of adhesive in furniture making,
Falcofix &
4-Eurobond carpenters do not down-trade
Falcobond
4) Shop owners say "They have been selling Pidilite for
generations and have built a relationship beyond
business, there is no other reason than Company shutting
down that they will stop selling Pidilite"
1) Roff is doing well for tiling and grouting applications
Fevikwik,
2) Fevicol remains the preferred brand for wood
Fevicol,
1-Araldite applications
Astral-Resimet,
Fevitite,
2-Astral
3) Multiple SKUs, hence the company always gets shelf
Bondtite
M-seal,
3-Pidilite
space
Roff, M-seal
4) M-seal remains the preferred sealant for leakages at
home
1)
Only
brand
that
shops
keep
usually.
Unorganised
Steelgrip
1- Pidilite
2) Steelgrip is directly requested by the customer i.e.
brands
consumer's favourite & trusted product.
Fevikwik,
Fevicol
No
Competition
1- Pidilite
General
Fevicol,
Stores, Grain
Fevikwik
stores
No
Competition
1-Pidilite
Paan Shop
Positives
Repairs
Fevikwik,
Fevitite
1-AstralAstral-Resimet, Resimet
Bondtite
2-Pidilite
3-Araldite
Stationary
Shop
Fevikwik,
Fevicol,
Pidilite's
stationary
products
Kores, Camlin,
Camel
1-Pidilite
2-Kores
1) Ease of access to consumers
2) Only adhesive that paan shops keep
3) Never ending applications make it a universal product.
Negatives
1) Smaller dealers aren't happy with the
distribution network due to large delays
in delivery
2) Araldite gives 1 month credit to
retailers whereas Pidilite gives 15 days
credit.
1) Not been able to build a brand for
epoxy adhesives
2) Araldite specializes for stronger
bonding and also for marble and tile
applications.
3) Astral is the consumer's favourite for
Pipe applications and solvents.
1) Threat from competing products of
Araldite and Astral.
1) Low contribution to earnings of the
paan shop
1) Basic utility adhesive
2) Pidilite is the only brand of adhesives that shops keep
i.e. a near monopoly
3) Expansive SKU count and continued innovation in
product launches
1) Low margin for shops, competitors
offer higher margins and credit as a bait
to gain market share
1) Repairers identify various applications only possible with
Fevikwik if in case they want to reverse.
1) Resimet has a much stronger
&unbreakable bond then Pidilite, hence,
repairers prefer Resimet over Pidilite.
1) Consumer's favourite brand for Home and Office
products.
2) No major competition in this segment.
1) Low margin for shops, competitors
offer higher margins and credit as a bait
to gain market share
Source: Channel checks, Ambit Capital research
July 21, 2016
Page 19
Pidilite Industries
Distribution architecture — timely deliveries leading to low working capital
investments by distributors?
Pidilite has a robust distribution management structure, which helps the company
manage its inventory (43 inventory days) despite an extensive SKU count. The
company transports its products from its plant to mother godowns. Thereon, the
goods are transported to C&F agents/company depots, from where the wholesale
dispatches are managed.
The company has appointed TSI (territory sales managers) who gauge demand at the
retail shops, based on which they give the orders to the wholesalers. The wholesalers
then place the order on an online portal for the goods, which are dispatched within
36 hours. The entire distribution is managed through trucks and the last mile
transportation is managed through mini-vans.
Despite extensive inventory count,
Pidilite maintains low inventory
days
Exhibit 41: Distribution and sales structure of Pidilite
Primary
Distributor
Mother godown
Transport
Factory
Online portal
Places order
Territory sales
incharge
Secondary
Company
depot/c&f agent
Retailer
Tertiary
Distributor
Retailer
End consumer
Retailer
Exhibit 42: Pidilite’s products are sold through multiple channels
July 21, 2016
Page 20
Pidilite Industries
End-use connect across the value chain
Pidilite in the only company in India which has a strong influence across users:

B2C business: Stationery (including hobby ideas and Fevicryl) and general
purpose adhesives (Fevicol, Feviquik, Fevistik etc),

B2I business: Most of its core products – Fevicol, M-seal, Steelgrip, etc. – are
dependent on intermediaries (as explained in exhibit 32)

B2B business: Industrial and specialty chemical division is largely a B2B business
wherein clients are real-estate developers or manufacturers of products such as
footwear and other industries.
Exhibit 43: Influence on the end-users
B2C
B2I
B2B






Tiles
Pidilite



Ply



Adhesive






Sanitaryware



Laminates



Presence across several consumer
bases
Source: Ambit capital research
Employee architecture – a top class senior-level management
Pidilite has hired a strong set of professional managers with most of the senior
employees having over 20 years of experience in top corporates such as Asian Paints,
Mondelez and Saint Gobain.
Also, Pidilite has a high quality of independent directors – a trait not seen in most
Indian corporates. The promoter family recently appointed Mr. Bharat Puri as
Managing Director; he has over 30 years’ experience in managing consumer
businesses. Mr. Puri started with Asian Paints in the 1980s and worked with Mondelez
during 1998-2015, where he was the President, Global chocolate, Gum and Candy.
Hired a strong set of professional
managers with most of the senior
employees having over 20 years of
experience in top corporates
Note, in the table below, that the independent directors in Pidilite are senior industry
professionals with several years’ experience in large Indian corporates and
professional firms.
Exhibit 44: The board members (non-family members) of Pidilite have a wealth of experience in senior positions
Name
Designation
Experience
Credentials
Bansi Mehta
Independent Director
50+ years
Taxation expert with over five year experience. Also an independent director at
companies such as Gillette, Procter and Gamble, Atul Ltd, HDFC and SBI
Sanjeev Aga
40+ years
Operating partner at Kedaara Capital. Also an independent director at Idea Cellular
and UFO Moviez
Ranjan Kapur
40+ years
Chairman at Bates India. Also an independent director at Abbott India
Uday Khanna
40+ years
Served as Managing Director of Lafarge India during FY05-12. He was also the senior
vice president of Group strategy at Hindustan Unilever, where he spent 30 years
40+ years
She is an independent director in other Indian companies such as ITC and Adani
transmission. She has served as the Ambassador of India to Germany from 2005-09
and to the United States from 2009-11. She has had extensive experience in South
Asia having worked on Bangladesh, Sri Lanka and Maldives as Under Secretary and
Deputy Secretary in the Ministry of External Affairs. She headed divisions as Joint
Secretary dealing with neighbours, Nepal and Bhutan, and the South Asian Association
of Regional Cooperation (SAARC)
Meera Shankar
July 21, 2016
Page 21
Pidilite Industries
#4: Strategic assets
Intermediary connect – bonds will all
One of Pidilite’s biggest strengths is the connect it has across intermediaries. Pidilite
is the only company in India which has a direct connect with all the home building
intermediaries – carpenter, mason, electrician and plumbers. Other building material
companies have an influence only on a specific intermediary; for example, the paint
companies only influence painters.
Exhibit 45: Pidilite has the maximum intermediary coverage
Intermediaries
Pidilite
Carpenter

(Fevicol)

Plumber

(M-seal, Dr Fixit)

Painter

(Dr Fixit)

Mason

(Roff, Dr Fixit)

Electrician

(Steelgrip)

Tiles/Sanitaryware (Kajaria, Somany)





Ply/Laminates (Century, Green)





Electricals (Havells, Bajaj)





Adhesive (Araldite, Resinova)










This advantage not only helps create brand equity with the intermediaries but also a
reverse feedback mechanism wherein the intermediaries feed ideas into the
company, which has led to creation of opportunities. For example, the company
launched variants of Fevicol like HeatX, SpeedX and Marine based on feedback from
carpenters. These value added products now account for ~50% of Fevicol sales.
Exhibit 46: Thanks to inputs from carpenters, Pidilite premiumised Fevicol portfolio
Loyalty and reputation with users and intermediaries
Pidilite has built a strong loyalty with the entire ecosystem through its continued
branding exercise for decades and consistently high quality products:
End-Users: Carpenters prefer Fevicol given the strong recall and most of them refer
to adhesive as Fevicol. One of the shopowners told us, in case we run out of Fevicol
inventory the carpenter says “Koi aur brand ka Fevicol hai?” (give me Fevicol of
another brand). Since adhesive is not a major cost for furniture making, carpenters
are reluctant to shift from Fevicol to other brands.
In a media interview, Mr Madhukar Parekh highlighted:
“We have maintained a norm of sending furniture design and books to carpenters
every quarter. The idea is to add value to the carpenters' jobs. We knew this was a
good way of connecting to carpenters, as they would have a wide variety of designs.
This is one strategy the company adopted of identifying with the customer and
providing wings to his creative imagination, thereby selling our products. For the
carpenter community, we have formed the 'Fevicol Champion Club'.
July 21, 2016
Page 22
Pidilite Industries
This is an exercise to bring them together, and, more importantly, to add value to their
life. We bring these carpenters to our office and demonstrate each product. We invite
them by rotation. Club members from all over the country come here and are received
at the railway station like people from the bridegroom's side. We also organise kite
festivals for them. All these are a token of appreciation from our side towards this
community, which has helped us grow.”
Intermediaries’ training: Pidilite continues to train intermediaries to use its
products effectively and to educate them about new launches. These programmes
also help the company to further strengthen its ties with the intermediaries.
Exhibit 47: Training initiatives by Pidilite
Influencer
reached
Product
Programme
Comments
Fevicol
Fevicol champions club Carpenter
M-seal
Regular training
programmes
Plumber
Dr. Fixit
Dr. Fixit Institute
Plumbers, Masons,
Contractors
FCC Was Founded In 2002 By Pidilite Industries Ltd. Exclusively For The Wood-Working
Contractor Community, With More Than 300 Chapters In Over 120 Towns And About 35,000
Members Across The Country. http://fcc.pidilite.com/
Tied-up with Indian Plumbing Skill Council (IPSC) for organising skill development workshops
for plumber. Pidilite has been training plumbers through one of the largest contact programs
on safe plumbing practices, besides providing solutions to their day-to-day problems by
offering a range of well-suited products.
Use global standards of waterproofing in India. Conducting several programmes all over the
country for creating awareness and skill development http://www.drfixitinstitute.com/
Channel and dealers: Most dealers of Pidilite have been associated with the
company for over two decades and hence have a strong sense of loyalty to the
company. Strong IT systems and robust deliveries make transacting with the company
easier than at other companies. Continued innovation in products enhances the
addressable opportunity of the channel (without any incremental cost to the channel),
which no other adhesive company in India enjoys.
Also, unlike its peers, the company does not force the channel to over-stock
inventory. The dealers work on minimal inventory (10-11 days) which enhances the
RoCE for their business.
Unlike its peers, the company does
not force the channel to over-stock
inventory.
IBAS mapping with other leading franchises
We map the leaders across building material categories with Pidilite to ascertain the
strength of Pidilite’s franchise. We compare Pidilite with Asian Paints in paints,
Supreme in pipes, Kajaria in tiles and Havells in electricals.
Exhibit 48: IBAS framework for top building material franchises in India – Asian Paints
and Pidilite – almost flawless
Innovation
Brand
Rural
Urban
Architecture
Strategic Overall
asset
rank
Manufacturing Distribution
reach
reach
Asian Paints
Pidilite Industries
Havells
Supreme Industries
Kajaria Ceramics
Source: Ambit Capital research;
Note :
- Strong;
- Relatively Strong;
- Average;
- Relatively weak.
Innovation: Asian Paints and Pidilite are the champions of innovation. The
innovation of these companies does not stem from product but the ability to create a
unique positioning for the product through packaging, branding and expanding
application. Asian Paints opened a new market for itself with its aggressive entry in
external paints, which hitherto did not exist in India. Pidilite has created multiple
sub-segments, which previously did not exist as an established category. Havells
carved a large chunk of the highly competitive electricals industry for itself through
focus on differentiated products and selling propositions. Supreme Industries has
shown exceptional innovation in plastic processing and built a strong portfolio of
products. Kajaria’s innovation has been limited to early entry in premium tiles and
entering into JVs with the smaller players.
July 21, 2016
Innovation of Asian Paints and
Pidilite does not stem from product
but the ability to create a unique
positioning for the product through
packaging, branding and
expanding application.
Page 23
Pidilite Industries
Brand: Again, Asian Paints and Pidilite rule the roost. Few Indian companies can
credit themselves with being able to build brands in commoditized businesses and
being able to create a strong brand with the entire ecosystem with the vigor that
these companies have done. Havells has also built a premium brand recall in
electricals though it lacks in rural connect. Supreme and Kajaria are way behind in
terms of their brand recall compared to the other mentioned companies.
Architecture: Asian Paints and Pidilite’s architecture is centered not only on
manufacturing and distribution but also the level of influence these brands have on
the channel and the intermediary, which has made their businesses less susceptible
to volatility. It has also helped restrict entry of competition. Havells stands apart in its
dealer relationships. Qimat Rai Gupta’s origin as a trader has helped him understand
the needs of dealers and this has helped Havells build unique, long-term
relationships with its dealer community. Supreme and Kajaria’s architecture
strengths are scale and distribution that are akin to no other brands in their
respective categories.
Strategic assets: Strategic assets in most of the top building material franchises is
their reputation in the ecosystem, which helps these brands expand in existing
products and launch new products with relative ease compared to competitors. A topnotch professional management is a strategic asset for Asian Paints, and Pidilite
has also taken steps to building a similar asset. Most other companies are way
behind in building an employee ecosystem as Asian and Pidilite.
July 21, 2016
Page 24
Pidilite Industries
Exhibit 49: SWOT analysis of the adhesive and sealant industry
Bargaining power of suppliers
Bargaining power of buyers
MEDIUM
LOW

VAM accounts for ~15% of overall raw materials of the
company, the prices of which are crude linked. Hence,
procurers have limited bargaining power

Bargaining power with outsourcing partner is high, given that
incumbents are a major proportion of the former’s revenues

Adhesive/Sealants is not a major cost of construction,
hence intermediaries are not price conscious

Bargaining power of buyers in construction
chemicals/waterproofing is high, due to high
competition and fragmentation
Competitive intensity
MEIDUM

Competitive intensity is low in white glue and epoxy
sealants, where Pidilite is the undisputed leader

Competitive intensity is high in waterproofing, wherein
several manufacturers (from global and domestic
manufactures) compete in a small market (`25bn)
Barriers to entry
Threat of substitution
HIGH
LOW

Intermediaries are highly brand conscious which is a significant
barrier to entry for a new player


Dealers have been associated for long with category leaders and
have a high switching cost to other brands
Adhesives is a basic construction material and hence has
little substitutes


Barriers to entry is relatively lesser in institutional products such
as as construction chemicals
Change in product chemistry can lead to innovation in
new products which could be substitutes
Improving
Unchanged
Deteriorating
Exhibit 50: Pidilite Industries’ SWOT analysis
Strengths
Weaknesses
Pidilite’s strong brands such as Fevicol, M-seal, Fevikwik are leaders
in their respective categories and have a high loyalty with
consumers. The company has six brands >`1bn in revenue
 Pidilite has built strong ties with channel and intermediaries which
helps the company fend off competition.
 Pidilite has not managed to build a strong epoxy adhesive franchise,
Araldite and Resinova have a superior franchise
 Elastomer business (~13% of FY16 capital employed), continues to remain
a drag on RoCE with nil revenue contribution.
 International subsidiaries, especially Brazil and Middle East continues to
 A long history of FCF generation and continuing WC improvement
 Strong unlevered Balance sheet helps the company mothball
struggle with weak profitability
competition from fragmented peers and invest in products and
reach expansions
 Pidilite has established a strong professional management team in
the last five years to ensure growth longevity
Opportunities
Threats
 Construction chemicals in India is a currently a small market but is a
 Disruption in furniture construction pattern, with rising usage of ready-
large opportunity, given rising penetration as quality of building
construction improves. The current market size in India is `40bn and
has been growing at a 15% CAGR for the last decade, yet less than
1% of Indian households have waterproofing
 Growth in international markets such as Asian and MENA markets,
the company recently hired Bain capital to chart out its international
plan
made MDF furniture wherein carpenter intervention is limited
 Rising competition from cross category players, such as Asian Paints and
Astral, which could impact Pidilite’s market share
 Rising competition in waterproofing from domestic majors – Asian and
Berger, international chemical companies (BASF, Sika etc) and small
fragmented players
 Possibility of extension of product portfolios by tile players into grouts etc,
which will impact sales of Roff products
Source:, Ambit Capital research
July 21, 2016
Page 25
Pidilite Industries
Gauging longevity of PIDI’s growth
Pidilite’s transition from a family run organization to a professional set-up
has been gradual and over a period of time, the company has built a team of
strong professionals. Moreover, the company has institutionalized processes
such as distribution, inventory management etc, which is also resulting into
reduction in working capital investments and capital intensity. Its adhesives
and sealants business is well-guarded against competition, due to its moats
such as brand, scale, distribution and relationships with the intermediary.
Lastly, construction chemicals is a nascent opportunity in India and Pidilite is
built a leading franchise, which will support growth in the future, another
Pidilite-like-scale-business in the making.
The last five decades of Pidilite’s success story were largely orchestrated by the
promoter family, which built the brands and concluded successful domestic
acquisitions. The key concerns on the next leg of Pidilite’s growth are:

Promoters taking a back seat in operations could impact sustainability of
growth: We believe the company has done a credible job of inducting senior
industry professionals with experience at top companies in India which are
involved in mass consumer brands and businesses dependent on supply-chain
management such as Asian Paints, Castrol, Mondelez, etc.

Competition by domestic majors in adhesives for the first time: About 70%
of Pidilite’s adhesive/sealant portfolio is well-guarded against competition given
its brand, scale and intermediary connect. Since adhesive is a small proportion of
overall cost, competitors will have little to offer to the intermediary to gain share.

Over-crowding in construction chemicals: Construction chemicals is still a
nascent market in India (~`4bn in size) and has a lot of room to grow. Entry of 23 high quality players usually leads to expansion in the market size. The globals
are largely focused on the institutional business and Pidilite has a significant lead
over the domestic manufacturers in terms of influence on the intermediary,
product positioning/portfolio and channel presence; hence, we do not think that
the company’s positioning can be challenged easily.

Struggling international business: Whilst the profitability of the international
subsidiaries has been sub-par (low single-digit margins and RoCEs), we note that
management has managed to improve operational performance in the last few
years. Brazil (17% of overall revenue) remains the only geography where the
company is posting losses at EBITDA level. The company’s future strategy in
international markets will largely to build brands, rather than operate as a
commoditized product seller.
Hired talent, set up processes to
effectively tackle competition
The section below addresses the abovementioned apprehensions in detail
I] People, process and product planning in place
We came to the conclusion that the role of professionals from the family should be at
the strategic and directional side and on the operational side we would have set of
professionals. Considering the size and complex nature of the business we are in, this
was indispensable. All these years, we didn't have much of a talent pipeline and we
were looking for professionals. Hence, a conscious decision was taken to change the
structure on the operational side having division heads and CEOs.
These recruitments would be done in such a way that the core values and the
functioning of the company are not compromised. We are very careful about hiring
people. We look for our own values in prospective candidates. We ask for feedback on
our company. Those candidates who look for flamboyance in our way of functioning
don't conform to our work ethics and hence are not considered at all. These are not
long-term employees for us
Madhukar Parekh, Oct-10
July 21, 2016
Page 26
Pidilite Industries
People – building longevity and sustainability through management:
For five decades, Pidilite has been a family-driven organization, wherein the
promoters managed capital allocation, product launches, etc. However, given the
significant increase in scale of operations alongside rising complexities (entry in
multiple international geographies and expansion in product portfolio, especially
waterproofing), the company is professionalizing its management to ensure longevity
of the business.
#1: Hired Mr. Bharat Puri as managing director. Mr. Puri is experienced in
running a champion Indian building material brand given his 16-year association
with Asian Paints. The decision to hire Mr Puri was well evaluated since he spent
seven years as an independent director in the company before taking over as MD.
Hiring the best talent in the
business for the next leg of growth
#2: Set up executive committee in the last five years. This comprises ex-senior
employees of champion Indian franchises such as Asian Paints (See Exhibit 51)
#3: Young talent management programme (YTM). The company started hiring
young professionals from top business schools and chartered accountants to nurture
talent and create management bandwidth given the increasing size of the business.
The company realized it had a deficit of young talent compared to other franchises
such as Asian Paints and Marico.
In the table below, note that most of the senior management members of Pidilite
previously held leadership positions in well-established companies in India.
Exhibit 51: A strong management team, with experience from strong Indian franchises
Name
In Pidilite
Total
since
Previous Employers
experience
(years)
Previous Experience
Bharat Puri
1
33
Mondelez International,
Cadbury, Asian Paints
Vivek
Subramanian
2
22
Asian Paints
10
25
Subhiksha, Onida, Asian
Paints
Salil Dalal
4
19
Nokia, Future Group,
Asian Paints, Godrej GE
Appliances
Anand Jain
6
20
Saint Gobain,
NAPCO(Oman), Terrazzo
Limited
Nilesh Mazumdar
Vishal Malhan
17
17
Prabhakar Jain
7
21
Pradeep Jain
6months
26
Salil Chinchore
7months
19
Rajesh
Balakrishnan
3
23
Sanjay Panigrahi
8
34
Ashish Prasad
5
19
President Global Chocolate, Gum and Candy division - Mondelez
Director - Sales and Marketing - Global Chocolate (Cadbury)
Spent 16 years in Asian Paints - General Manager-Marketing.
Head of the Industrial Coatings and Chemicals' businesses at Asian Paints.
National Head of Sales of Decorative Paints at Asian Paints.
National Sales head (CTV, AC) , Business head and Chief operating officer of Mirc group
company.
Awarded Economic Times - India's Hottest Business Leaders 2013-14 - India's Top 40
under40.
Experienced in varied functions like Marketing, Sales, IT implementation, Production at
middle and senior management levels.
Head of Institutional and coated glass businesses in Saint Gobain - spent 10 years in the
company
He has experience in interfacing with various government & non government bodies.
Launched the 2 variants of Fevicol - Fevicol Marine and Fevicol Speedx.
NA
Developing the wood preservative category and establishing Terminator Wood
Preservative.
Goodyear India, Akzo
Ex- Chairman and Managing Director of Goodyear India
Nobel, ICI Speciality
Ex- Chairman and Managing Director of Akzo Nobel
chemicals & Paints, Asian Been in the building material industry since 1981
Paints
Portfolio Program Management of key projects across PepsiCo business footprint in Asia,
Pepsico, Eicher Motors
Middle-East and Africa
CFO-Beverage Business Unit(Pepsico)
TE Connectivity, Mondelez HR responsibilities in areas of Organization Strategy & Design, Talent & Leadership
International, Cadbury,
Development, Employee Engagement, Global HR, Labor Relations & Collective
Asian Paints
Bargaining, Change Management, Mergers & Acquisitions.
Several positions in BASF starting with Business Development Manager in BASF India
Ltd., Regional Technical Marketing Manager, Asia Pacific with PT. BASF Indonesia,
Dystar, BASF, Hindustan
Manager Asia Pacific Innovation and Strategy with BASF South East Asia Pte. Ltd at
Spinning and Weaving
Singapore, Manager Asia Pacific, Global Strategic Management, Performance Chemicals
Mills Limited
for Textiles and Leather with BASF East Asia Regional HQ., Hong Kong
He is also the Vice President of the Textile Association Of India (Mumbai Unit).
He has have handled Business leadership, Sales and Marketing leadership, TQM and HR
leadership roles across Consumer Products and Services Sector in FMCG and ICT
SREI Sahaj, Pidilite
enabled e Commerce Domains both in Urban and Rural Diaspora.
Industries, Amul
Turned around Srei-Sahaj, successfully building New market segments in Pidilite,
building a strong Amul Brand in India.
At IIJT, executed merger with TeamLease, India's largest staffing company.
IIJT, Madura Garments
Founding Member of the team responsible for launch of High End Speciality Fashion
Lifestyle(Aditya Birla),
Brand "The Collective" which is part of the Aditya Birla Group.
Coca Cola, Asian Paints At Coca Cola India, he managed a P&L of INR 150 crores, having 2 production units and
managerial strength of 30 managers, 150 staff and 500 workers.
July 21, 2016
Page 27
Pidilite Industries
Over FY06-10, Pidilite’s employee headcount increased by 55% and employee cost
CAGR in this period was 31% as the company aggressively invested in the employee
architecture. Employee addition of 3.5% CAGR in the last five years has been
accompanied
by
significant
improvement
in
employee
productivity
(revenue/employee increased to `10mn from `3mn in FY06).
Exhibit 52: Sharp increase in total employee cost over
FY06-09…
Exhibit 53: ..as the company increased employee count and
improved employee productivity
(` mn)
7,000
60%
6,000
Nos
6,000
50%
5,000
40%
4,000
30%
3,000
20%
2,000
10%
1,000
YoY growth (RHS)
No of Employees
FY15
FY14
FY06
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
Employee cost
FY13
-
0%
FY12
-
FY11
1,000
FY10
2,000
FY09
3,000
FY08
4,000
11
10
9
8
7
6
5
4
3
2
FY07
5,000
(` mn)
Revenue/Employee (RHS)
Process – improving architecture
#1: Distribution: As per our checks with distributors, the company has significantly
improved its distribution architecture in the last few years through online
procurement, which facilitates better inventory management. Improvement in
distribution is also evident in the contraction of the working capital cycle from 87 days
in FY08 to 47 days in FY16.
As per our checks with distributors,
the company has significantly
improved its distribution
architecture in the last few years
through online procurement
Exhibit 54: Working capital cycle contracted sharply over FY08-16
90
80
70
60
50
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
40
#2: Kaizen: The company adopted Kaizen in FY11 at its manufacturing unit to
improve the process to enhance plant level efficiencies.
#3: Implemented TOC: As per media articles Pidilite is implementing theory of
constraints (TOC), under the guidance of consulting group Vector, to improve
distribution and better SKU/inventory management.
#4: Employee incentives: Our checks suggest that the company has streamlined its
HR processes to ensure improve incentive/bonus management to better motivate its
employees.
July 21, 2016
Page 28
Pidilite Industries
Products – continuous brand flanking
In the last five years, Pidilite has continued to expand product portfolio (see table
below). It also premiumised its Fevicol portfolio by launching variants like Marine and
Heat-x, which now account for half of Fevicol sales. Moreover, it repositioned M-seal
as an all-purpose home adhesive as against only a water leak sealant.
Adhesive
Plumbing
Waterproofing
Stationary
Auto
Construction/Industrial
Wudfin Ezeestein(Water based wood
stainer) DDL XT Booster(Durability to
paints)
FY11
Fevicol
Marine(Waterproof)
FY12
Wudfill (cynoacrylite
wood adhesive)
Sparkling Pearl Rustolene Maintenance
colours
Spray (Multipurpose)
Variants of Industrial colorants&
industrial adhesives
FY13
FY15
Dr.Fixit Kwikflor Cementitious
(Industrial Flooring)
Fevicol Hi-per
(Waterproof adhesive)
M-seal PV
seal(solvent
cement to join
pipes)
Motomax Instashine
(polish sponge)
Dr.Fixit Blueseal
(spray for roofs)
II] Adhesives
overstated
and
sealants
–
competition
threat
Whilst Pidilite has been able to effectively deal with competition across most of its
products so far, the key worry in investors’ minds is how it will tackle entry of large
players such as Astral in adhesives (through acquisition of Resinova and Seal IT) and
Asian Paints (through partnership with Henkel for Loctite). Also, given high
penetration of Pidilite in legacy products (Fevicol, Fevikwik, M-seal, etc), growth of
these products is also a worry.
Competitive threat is not as significant as it seems: We believe ~70% of
Pidilite’s portfolio is well-guarded against competition and we do see any significant
risk of market share losses there.
Pidilite already faces competition from international peers such as Henkel, 3M and
Sika and domestic peers such as Resinova, Atul, etc. Hence, competition from new
entrants such as Asian Paints (tie-up with Henkel) and Astral (with Resinova) is not
new for Pidilite. Moreover, the competition is in categories, where Pidilite does not
have a strong presence – epoxy adhesives. In its core categories, we believe that
Pidilite has a significant lead, which cannot be disrupted easily. Lastly, we believe that
innovators like Asian Paints will not fight for market share in Pidilite’s legacy products
(as they won’t make a large contribution to Asian’s revenue) and will look for
emerging opportunities in adhesives and construction chemicals.
~70% of Pidilite’s portfolio is wellguarded against competition and
we do see any significant risk of
market share losses there.
Exhibit 56: Rising competition – we do not see any major risks to Pidilite’s core portfolio
Segment
Polyvinyl acetate
(Fevicol)
Market
Size
(` bn)
Pidilite's
Risk of
market
Competitor
competition
share
23
70%
Low
Karpenter – Huntsman
Jivanjor – Jubilant
Cyanoacrylates
(Fevikwik)
5
60%
Low
Polyfix
Vetra – Resinova
Glue stick (Fevistik)
3
70%
Low
Kores
Faber Castell
11
45%
Moderate
7.5
7%
High
3
60%
Low
Rubber Adhesives
(Fevibond)
Epoxy Adhesives
(Fevitite)
Epoxy Sealant (Mseal)
Bostik
Chandra Chemicals
Araldite- Huntsman
Bondtite – Resinova
Araseal – Huntsman
Bondset – Resinova
Pidi's competitive advantage

















Connect with carpenters
Legendary brand
Low cost in overall construction, high cost of failure
Influence and relationship with the channel
Scale - sourcing advantage, bulk purchase from China
Unparalleled retail reach
Scale - sourcing advantage bulk purchase from Korea, China
Superior distribution with depots spread across the country
Strong relationships with end-user industries
An industrial product, hence competition could impact Pidilite
No major presence, Huntsman is the leader
Expansions by Astral could impact Pidilite’s market share
Strong connect with plumbers
Low unitary cost and hence little incentive for plumbers to shift
Astral’s aggressive entry could impact market share
July 21, 2016
Page 29
Pidilite Industries
Under-penetration across end-user industries
Adhesive is an ancillary product and mirrors growth of related industries.
Industries/segments wherein adhesive is a key raw-material still have very low
penetration in India. For example, the penetration of furniture in Indian households is
~10% of overall adhesive consumption and flooring only 11%. Similarly, the footwear
industry in India still has a lot of room to grow given rising income levels and
aspirations. Lastly, innovation in segments such as disposable hygiene, packaging,
etc., will lead to further expansion in the addressable opportunity.
Exhibit 57: Significant penetration scope across end-user industries
% of overall
adhesive
consumption
End-user
Industry
Comments
 Furniture penetration in India is significantly lower than global economies. Pick up in organised housing and increase
Woodworking
~10%
in nuclear families will keep the growth rates of the industry buoyant.
 Industry experts expect a 20% CAGR in furniture construction over the next decade as against ~30% CAGR in the
last decade
Packaging
Construction
~25%
 As per the recent research note published by FICCI and Tata strategic management, Indian packaging industry is
~10%
 Adhesives used in construction are largely tile bonding, coating, repairing and gap filling.
 Whilst GFCF growth in India has been weak for the last five years, government's impetus on infrastructure
likely to expand at an 18% CAGR with flexible packaging and rigid packaging growing at 25% and 15%, respectively
development and gaps in infrastructure quality gives visibility of growth of this sector
Automotive
~10%
 Adhesives in the auto industry are used for gasketing, sealing and bonding.
 Penetration of two-wheelers and passenger vehicles is still very low in India compared to other developing
economies.
 Moreover, affordability of automobiles in India has increased given no major price inflation in the last decade
 As per the 2011 census only 11% of households have flooring material such as tiles, mosaic etc. Rest of the houses in
Flooring
~5%
India either have a mud, bamboo or cement flooring.
 As organised housing picks-up, quality of flooring materials and penetration of tiles will increase
Source: Industry sources, Ambit capital research
III] Waterproofing – a lot of leaks to be plugged
Despite strong growth in the last two decades, the usage of construction chemicals in
India is way inferior compared to China or western countries due to lack of
awareness and construction standards. Reliance on conventional and outdated
systems and lack of trained expertise in using modern products are some of the
reasons that have restricted penetration of water-proofing in India. Since more than
85% of the concrete produced in India is still made by volume batching, there is
hardly any control on the water to cement ratio at these sites. In a knowledge paper,
FICCI estimated the market size to double in the next five years. Whilst it is difficult to
estimate the growth of the Industry given paucity of data, we note that historically as
the ecosystem gets aware of the benefits and applicators learn how to use the
product, innovative building material products go through a non-linear growth phase.
We have seen this dynamic play out in plastic pipes (Astral launched CPVC which was
earlier non-existent in India) and in external paints (where Asian Paints created a
market). Hence we believe waterproofing could be a large opportunity in India.
Exhibit 58: Construction chemicals…
Infra
6
3.0
3
2
Housing
5
5.0
5
4
…usage is way lower in India…
0
5
3
3
2
1.5
China
US/EU
Source: BASF presentation, Ambit Capital research
July 21, 2016
4.5
2.0
1.0
1
0.5
0
0
India
Overall
4.0
4
1
1
...compared to China and US/EU
4
2
1.5
As the ecosystem gets aware of the
benefits and applicators learn how
to use the product, construction
chemicals could go through a nonlinear growth phase
India
China
US/EU
India
China
US/EU
Units – US$/m3 of concrete
Page 30
Pidilite Industries
Waterproofing sales in rural houses are close to nil as rural consumers use cowdung for waterproofing due to lack of awareness. Similarly, IHB houses with sitemixed concrete do not use waterproofing materials. As awareness increases and
companies innovate in reach, right-sized packaging (as seen in paints), the size of the
market can expand significantly.
Low awareness of the builders and applicators: Most Indian households,
especially in tier II/III cities, have a water leaking problem in old brick and mortar
construction. The conventional solution for plugging water leakages in India has been
bitumen sheets, which is a temporary cheap-fix. Lack of awareness of construction
chemicals and the long-term savings that accrue due to that are yet to be appreciated
by the builders. Also, given that masons in most parts of India are still unskilled, the
proliferation is limited.
Weak regulation: Construction in India lacks regulation, due to which most
contractors avoid spending on better quality construction chemicals to save the costs.
Just what the Dr. (Fixit) ordered
Pidilite is using its tried and tested formulae for building its franchise in
waterproofing, which can be understood as follows. Pidilite has posted 20% revenue
CAGR in this segment in the last 13 years and is currently the largest retail
waterproofing chemicals brand in India.
Exhibit 59: Pidilite has posted strong growth in waterproofing segment in the last 13
years
Pidilite's construction chemicals revenue
(` mn)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
Construction/Paint chemicals
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
40%
35%
30%
25%
20%
15%
10%
5%
0%
YoY growth (RHS)
Product innovation: As per our checks, the company has built a strong product
portfolio with presence across the construction chemical range. Its product Dr. Fixit
LW+ is the leader in retail waterproofing in India. Apart from its R&D centre in India,
Pidilite has also established a research centre in Singapore, which is a member of
Singapore Chemical Industry Council (SCIC).
Branding: Dr. Fixit is the most aggressive player in retail waterproofing in India in
terms of brand-building. Apart from mass media advertisement programmes, the
company has been doing innovative advertising such as printing on rickshaws and
raincoats of the Mumbai traffic police (see images below). The company has been
aggressively marketing Dr. Fixit in small cities in India as a product which is sold
alongside cement for better quality construction.
Sanjay Bahadur, Global CEO, construction chemicals division of Pidilite highlighted:
“The marketing challenge was to make the target audience (trade dealers) aware of
the benefits of this product, as well as to position 'Dr. Fixit LW+‘ as a must-use
component with cement. The wedding between cement and LW+ communicates it
beautifully. The activation not only met with our set objectives, but also gained high
recall value in the minds of our target audience.
July 21, 2016
Page 31
Pidilite Industries
The activity was divided into two phases. In the first stage, invitation cards for the
‘marriage' were distributed among dealers by traditionally dressed promoters who
invited and educated the target audience about the event. A lucky dip contest also
featured in this stage. The second stage saw the actual marriage between Dr Fixit
Pidiproof LW+ and cement, wherein a pandit spoke about the concept of marriage in
general, interwoven with the bond between the two products. This was followed by an
AV session featuring a demonstration of the product along with LW+ commercials. The
attendees then proceeded for dinner where the winners of the lucky dip were
announced. All the guests were given a gift bag consisting of the LW+ brochure, along
with a gift and a small LW+ bottle.”
Exhibit 60: Dr. Fixit advertisements during monsoons on
rickshaws…
Exhibit 61: …and on raincoats of Mumbai traffic police
Source: Google, Ambit Capital research
Channel building: Dr. Fixit has been expanding its reach. Whilst the product was
initially sold at hardware stores, the company started selling Dr. Fixit in cement
channels in the last few years. As per our checks, Dr. Fixit is the strongest brand in
the cement channels in India.
Intermediary connect: Pidilite regularly conducts intermediary training programmes
to educate them about the quality and the application of the product, a process very
similar to the way the company established M-seal. The company has also set up a
knowledge centre called Dr. Fixit Institute to educate the ecosystem about global
standards and practices of waterproofing, repaid and rehabilitation. Under this, the
company conducts seminars and trainings at a corporate (builder) level and also
workshops in engineering practices across various colleges in India. It also does
research and publishes papers to increase awareness of waterproofing.
From product to application: The company recently acquired two leading
waterproofing contractors – Nina waterproofing in Mumbai and Percept
waterproofing in Bangalore – to provide end-to-end solutions to institutional
consumers rather than just selling the raw materials. Given that penetration of
organized real estate construction in these cities is significantly higher than in smaller
cities, the company has adopted this strategy in these tier I cities.
How worrying is the rising competitive intensity?
Whilst waterproofing is a large opportunity, the competitive intensity in the segment
has risen sharply given that international peers have been aggressively launching
new products, domestic paint companies such as Asian Paints and Berger have
entered this segment, and small fragmented players also have a sizable presence in
specific segments.
July 21, 2016
Page 32
Pidilite Industries
Exhibit 62: Key competition in waterproofing in India
Company
Comments
New admixture solution, sureTEC for durability of finished concrete structures.
BASF
Launched new products like MasterEase, MasterSeal spray-applie polyurea and MasterSeal Traffic System.
Built its largest construction chemicals plant in India (Nellore, Andhra Pradesh).
Been in India since 1981, with three manufacturing facilities at Bangalore, Ankleshwar and Rudrapur.
In June 2014, Fosroc commenced production at its 4th plant in India located at Uluberia in Howrah, West Bengal.
Fosroc
Aims to make India an export hub and export products to Sri Lanka, Bangladesh and Nepal as these countries are also facing
increasing demand for construction chemicals. Also exports to Malaysia, Thailand and Africa.
Specialises not only in above ground waterproofing solutions but also in underground waterproofing solutions for construction activities
on contaminated land.
In 2014, Sika India started its 6th R&D centre and manufacturing facility in Jhagadia, Gujarat. This plant focusses on concrete
admixtures, mortars, resin floors and adhesives for the booming construction markets
Sika
Company has an experience of over 100 years in waterproofing
Waterproofing is included in the core target markets of Sika. Divides products based on area of usage, e.g. pool, tank, wet rooms,
podium, terrace etc.
The waterproofing products are in the brand name of 'Smartcare' and mainly aim at the problem of dampness.
Asian Paints is focussing on in-house product development of waterproofing products.
Asian
Paints
Berger
Paints
Company gives a separation of preventing solutions & solving solutions for almost all problems and they distinguish their products on
basis of place of usage.
Company has 2 manufacturing facilities at West Bengal and Gujarat. It had started waterproofing products with cement-related
products.
Company aims to launch various new products in the construction chemicals segment and improve its packaging in order to gain market
share.
Company sells construction chemicals under the brand name "Homeshield".
Company's construction chemicals products mainly include wall repair, water proofing and tile adhesives for various surfaces and
conditions.
It had started in 1930; hence it has more than 80 years of experience in waterproofing. Waterproofing is the only segment in which the
company operates.
It has 4 manufacturing plants strategically located in Mumbai, Kolkata, Delhi and Chennai.
The parent company of SWC is CHRYSO - a leader in innovation. CHRYSO, a 100% shareholder of SWC, is one of the largest in Europe
Structural
Waterproofing in the line of construction chemicals.
Company
Won largest waterproofing contract ever awarded to a construction chemical company – the DELHI METRO.
In 2005, SWC had started its new manufacturing plant at Chennai with large orders pending.
Extensive range of products. Waterproofing is the only market in which the company functions. Distinguishes products based on type of
waterproofing products (sealants, cement aid, coating etc.) and material on which it is to be used ( cement, tile, flooring etc.).
Source: Industry Sources; Ambit Capital research
Pidilite vs international companies – different focus
The international waterproofing companies are global chemical giants, with strong
product innovation and experience of waterproofing for decades. However, we do not
think that these companies pose a major threat to Pidilite, because:

Their focus is largely on the institutional segment, where they supply the chemical
in bulk, and have limited presence in retail where Pidilite is the leader.

None of the global manufacturers are investing in brand-building or intermediary
training, which is a must to build a retail recall in India.

A few global manufacturers like Fosroc view India as an exports hub and
manufacture here but sell in other countries.
Pidilite vs Indian competitors – Pidilite has the lead
Pidilite has been in waterproofing for close to a decade and has built a strong
architecture in this segment. Not only does the company have the strongest brand,
but the widest range of products across waterproofing segments. Moreover, the
company has been strengthening its positioning through pre-active intermediary
training and also through set-up of knowledge centres such as the Dr. Fixit institute.
Lastly, we believe the market is still small in India but there is significant latent
opportunity, which makes us believe that the market size there is enough room for 23 champion franchises to co-exist. We do not think that the fragmented regional
manufacturers pose a significant threat as neither do they have strong product
chemistry nor established brands.
July 21, 2016
Page 33
Pidilite Industries
IV] International business – cutting the slack
International foray has been a bitter-sweet experience for Pidilite. Whilst international
revenue expanded at a 12% CAGR over FY11-16, led by strong growth in South-East
Asia, Middle East and North America, EBITDA margin remained low (1-4.5% over
FY14-16; losses prior to that) due to the weak margins of its Brazil and Middle East
subsidiaries.
Exhibit 63: North and South America account for ~60% of
Pidilite’s international revenue
MEA, 18%
North
America,
42%
SEA, 9%
SAARC, 14%
South
America,
17%
Exhibit 64: International subsidiaries account for ~10% of
Pidilite’s overall revenues
(` mn)
7,000
12%
6,000
12%
5,000
11%
4,000
11%
3,000
10%
2,000
10%
1,000
9%
Int'l revenue split (FY16)
FY12
Subsidiary revenue
FY13
FY14
FY15
FY16
as a % of overall revenue (RHS)
Exhibit 65: Improving EBITDA of international businesses
(` mn)
Exhibit 66: EBITDA margin/RoCE has picked up from the
trough
6%
250
200
150
100
50
(50)
9%
FY11
FY11
FY12
FY13
FY14
(100)
Subsidiary EBITDA
FY15
FY16
3%
3%
2%
2%
1%
1%
0%
-1%
-1%
-2%
4%
2%
0%
-2%
-4%
FY11
FY12
FY13
EBITDA margin
as a % of overall EBITDA
FY14
FY15
FY16
RoCE (RHS)
Acquired businesses/brands in Brazil struggling: Weak performance of
international business has largely been on account of inability to grow or control
costs in Brazil. The company acquired an existing company and struggled due to
increase in competition. Since adhesives in these markets are sold as a commodity,
the company could not implement its strategies (branding, packaging) that have
worked well in Indian and other emerging markets. That said, the company has
managed to cut Brazil’s EBITDA losses from `178mn in FY14 to `19mn in FY16.
Emerging markets have continued to do well: The company’s sales in South-East
Asia expanded at 27% CAGR over FY11-16 and EBITDA margin averaged 11% in the
last six years. Similarly, in SAARC, the company more than doubled its sales in last
two years with healthy EBITDA margin of 13%. The better success in EMs is because
these markets are similar to India and the company has been able to sell its products
as brands and through retail channels.
Improvement in North American operations: Whilst revenue growth of North
American operations has been fairly strong at 15% CAGR over FY11-16, margins
were weak initially (1-3% over FY11-13). The company managed to improve margins
to 9% by end-FY16. Management, in the 4QFY16 conference call, highlighted that
the US subsidiary operations have improved due to better acceptance of products in
online domestic chains in America and other international geographies.
July 21, 2016
Page 34
Pidilite Industries
Exhibit 67: Whilst the South America and Middle East operations have not done well,
the other international geographies has performed well
Revenue (` mn)
FY11
FY12
FY13
FY14
FY15
FY16
CAGR
FY11-16
North America
1,227
1,276
1,610
1,811
2,098
2,432
15%
South America
1,255
1,261
1,218
1,406
1,254
1,002
-4%
-
-
-
-
93
216
NA
South east asia
339
417
603
811
854
1,139
27%
Middle east and Africa
199
296
297
346
635
1,027
39%
SAARC
EBITDA (` mn)
North America
57
62
28
98
137
221
31%
South America
33
(93)
(178)
(154)
(75)
(19)
NA
SAARC
-
-
-
-
14
26
NA
31
45
89
135
41
108
28%
(81)
(49)
(23)
(54)
64
(134)
11%
North America
4.6%
4.9%
1.8%
5.4%
6.5%
9.1%
6%
South America
2.6%
-7.4%
-14.6%
-10.9%
-
-
9.1%
10.8%
14.8%
-40.7%
-16.7%
-7.9%
South east asia
EBITDA margin
SAARC
South east Asia
-6.0%
-1.9%
-7%
15.1%
12.0%
13%
16.7%
4.8%
9.5%
11%
-15.7%
10.0%
-13.0%
-10%
Recent acquisitions: The company recently acquired the PVA business of Sri-Lankabased CIC Holdings along with its brand Chemifix, which is the leader in white glue
in the market.
Global strategy: Pidilite will continue to explore entry into other emerging markets
where the adhesives industry is fragmented and it can sell its product as a brand
rather than a commodity. As in its previous international forays, the company will
keep capital intensity low. The company recently hired Bain Capital to grow its
business in North Africa, Asian and Middle Eastern markets.
July 21, 2016
Page 35
Pidilite Industries
Financial assumptions
Pidilite’s revenue growth has been tepid for the last two years due to slowdown in end-user industries such as furniture, footwear etc. Pick-up in
growth rates of the end user industries (as discretionary consumption revives
in India), will catapult revenue growth rate in the next few years. We
estimate 18% revenue/EBITDA CAGR over FY16-18.
Revenue linked to growth of end-user industries
Given the expansive SKUs and limited data around products, it is difficult to project
Pidilite’s product-wise revenues. Hence, we project revenue based on reported
segments, which are:
Adhesives and sealants: Revenue growth of this segment was 14% in FY16 and
five-year CAGR was ~17%. We expect revenue growth of 15% in FY17 and 14% in
FY18. We note that sales of adhesive are closely linked to other ancillary construction
such as furniture, flooring, footwear, etc. and all these segments’ growth decelerated
significantly in FY16. Hence, growth acceleration in these end-user industries will
lead to a pick-up in revenue growth for adhesives and sealants. Whilst we do not
think that Pidilite will take any major price hikes, realisation growth will be a function
of premiumisation of products – for example, higher penetration of Fevicol’s premium
variants such as Heat-x etc.
Construction/paint chemicals: Whilst the five-year revenue CAGR of this segment
has been ~15%, the growth rate receded to 2% in FY16 due to a sharp deceleration
in real-estate construction and increased competition. Ramp-up in construction
activities and rising penetration in smaller markets, which is largely untapped, will
support the longevity of this segment’s growth. We estimate 10% revenue growth in
FY17 and 15% in FY18 as construction ramps up in India.
Art materials: We build in 10-12% revenue growth in this segment, in line with
historical growth rates.
Specialty industrial chemicals: Due to slowdown in industrial output, revenue of
this segment declined by 4%. Building in a marginal recovery, we expect revenue
growth of 7% and 10% in FY17 and FY18, respectively.
International businesses: International subsidiaries posted stellar growth in FY16
(+21%) due to strong growth in the USA, SAARC and Middle East. We expect 11%
and 10% revenue growth in FY17 and FY18, respectively.
Exhibit 68: Revenue assumptions
Revenue
Adhesives & Sealants
YoY growth
Construction/Paint chemicals
YoY growth
Art material & others
YoY growth
Specialty Industrial Chemicals
YoY growth
International
YoY growth
Consolidated revenue
YoY growth
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
11,519
15,085
17,996
19,280
21,874
25,093
29,610
36,124
22.3%
31.0%
19.3%
7.1%
13.5%
14.7%
18.0%
22.0%
4,467
5,916
7,057
7,327
8,750
8,996
10,255
12,306
29.1%
32.4%
19.3%
3.8%
19.4%
2.8%
14.0%
20.0%
2,116
2,366
3,529
4,627
5,250
5,681
6,477
7,643
10%
12%
49%
31%
13%
8%
14%
18%
5,334
6,405
6,204
7,132
7,875
7,575
8,281
9,223
23%
20%
-3%
15%
10%
-4%
9%
11%
2,902
3,102
3,491
4,045
4,456
6,069
7,286
8,326
10%
7%
13%
16%
10%
36%
20%
14%
26,338
32,874
38,277
42,411
48,204
53,414
61,908
73,622
20.5%
23.6%
18.7%
9.9%
13.1%
10.8%
17.1%
18.9%
July 21, 2016
Page 36
Pidilite Industries
Margins – peak margins will not sustain
In FY16, Pidilite posted its highest ever gross margin of 51.8% (up 720bps YoY)
driven by a sharp reduction in crude prices which led to lower procurement costs of
key raw materials such as Vinyl acetate monomer (VAM). We believe the recent
increase in crude prices will dilute some of the savings and, hence, build in a 100bps
margin contraction in FY17; we build in 30bps expansion in FY18 led by operating
leverage as revenue growth recovers. Our estimates imply 14% EBITDA CAGR over
FY16-18.
Exhibit 69: Increase in RM costs...
Exhibit 70: …will lead to slight margin contraction
24%
56%
22%
54%
20%
52%
18%
50%
16%
48%
RM costs (as a % of sales)
FY18E
FY17E
FY16
FY15
FY14
FY13
FY11
FY18E
FY17E
FY16
FY15
FY14
FY13
10%
FY12
44%
FY11
12%
FY12
14%
46%
EBITDA margin
Strong FCF generation likely to sustain
Pidilite’s cumulative FCF as a percentage of cumulative CFO is ~60% over FY11-16.
We expect FCF generation to remain strong in FY17 and FY18 as well (63-64% of
CFO) assuming that it will reinvest `3bn-3.5bn annually for expansions. Whilst PAT
growth will be in single digits in FY17, we expect ~20% PAT growth in FY18 as
revenue growth picks up and margins improve slightly.
Exhibit 71: FCF generation likely to remain strong
Exhibit 72: PAT growth likely to accelerate in FY18
(` mn)
12,000
100%
(4 mn)
12,000
80%
10,000
80%
10,000
60%
8,000
40%
6,000
20%
4,000
0%
2,000
-20%
CFO
FCF
-40%
FY11
FY18E
FY17E
-
FCF as a % of CFO (RHS)
July 21, 2016
FY16
FY15
FY14
FY13
FY12
0%
FY11
-
PAT
FY18E
2,000
FY17E
20%
FY16
4,000
FY15
40%
FY14
6,000
FY13
60%
FY12
8,000
YoY growth (RHS)
Page 37
Pidilite Industries
Exhibit 73: Summary of financial assumptions
Actual
Particulars (` mn)
Estimates
Growth
Comments
FY16
FY17
FY18
FY17
FY18
Revenue
54,214
62,845
74,703
16%
19%
Consumer and Bazaar
39,770
46,341
56,072
17%
Industrials
7,575
8,281
9,223
9%
International
6,069
7,286
8,326
20%
We expect revenue growth to recover from the
21% trough of FY16 as building material construction
ramps up. We expect revenue growth in
11%
construction chemical to pick up sharply
14%
800
937
1,081
17%
15%
11,792
13,385
16,341
14%
22%
21.8%
21.3%
21.9%
(45)
58
10,971
12,742
16,087
16%
26%
20.2%
20.3%
21.5%
4
10,839
12,625
15,986
16%
PBT margin
20.0%
20.1%
21.4%
10
PAT
3,221
4,040
5,116
25%
27%
6%
6.4%
6.8%
49
42
29%
27%
28%
(218)
139
124
16% Lower margin will lead to contraction in return
ratios and improve thereon. We build in 1 day
reduction in FY17 and 3 days in FY18
17%
Income statement
Others
EBITDA
EBITDA margin
EBIT
EBIT margin
PBT
PAT margin
We expect margins to contract in FY17 led by
126 higher cost of procurement of input costs.
27% Thereon, we expect margin expansion driven by
operating leverage
131
Profitability and cash flows
RoCE
RoE
30%
28%
29%
(218)
8,421
8,928
10,345
6%
(2,457)
(2,000)
(2,250)
5,964
6,928
8,095
16%
47
46
43
(1)
CFO
Capex
FCF
Working Capital days
(3)
Bloomberg, Ambit Capital research
Exhibit 74: Ambit Vs Consensus
Particulars
(` mn)
Actual
FY16
FY17
FY18
FY17
FY18
FY17
Revenue
53,695
62,845
74,703
61,439
71,282
2.3%
growth
10.8%
17.0%
18.9%
14.4%
16.0%
262bps
EBITDA
11,792
13,385
16,341
13,280
15,231
0.8%
22.0%
21.3%
21.9%
21.6%
21.4%
(32 bps)
PBT
10,839
12,597
15,923
12,294
14,304
2.5%
PAT
7,615
8,606
10,867
8,616
9,892
-0.1%
EBITDA margin
Ambit
Ambit
Divergence
FY18
Comments
4.8% Our revenue estimates are higher than consensus as
we expect the construction chemical business to scale
285bps up and pick-up in growth of adhesives and sealants as
demand for end-user industries improve
7.3% Our margin estimates are lower than consensus in
FY17 since we expect dilution due to higher cost of
51bps input materials. Our margin estimates are higher in
FY18 led by operating leverage
11.3% Our PAT estimates are higher in FY18, due to higher
9.9% revenue growth and margin expectations
Source: Bloomberg, Ambit Capital research
Exhibit 75: Description of flags on the first page
Segment
Score
Comments
Accounting
AMBER
Pidilite falls is the fourth decile of our accounting model. Whilst its CFO/EBITDA is ~100%, it gets a low score due
to high contingent liabilities, high CWIP as a % of GB (due to elastomer) and mediocre cash yield.
Predictability
GREEN
Whilst the business has several moving parts, the management has been fair in giving guidance and does not have
a reputation of being over-optimistic.
Earnings momentum
GREEN
Consensus EPS estimates have been increased by 5% in the last 3 months
July 21, 2016
Page 38
Pidilite Industries
Valuation: Near-term valuations the right
parameter for this franchise?
Like all great Indian companies, Pidilite looks expensive on one-year
forward earnings. However, authors of Ambit’s Coffee Can portfolio notes
opine: “Over long periods, it is how the underlying fundamentals evolve for
the firm that plays a more important role in determining returns than the
beginning of the period valuation itself. In our building material notes,
published in the past, we made a similar point”. Hence, the key question is
whether Pidilite can sustain earnings momentum in the long term. Growth of
adhesives will be driven by penetration in end-user categories and in
construction chemicals/waterproofing as awareness on construction
standards improve; this gives us confidence on the longevity of Pidilite’s
revenue and earnings growth. Our target price implies 40x FY18 EPS, similar
to trading multiples of other champion franchises such as Asian Paints.
DCF based valuation – `835/share
We value Pidilite based on discounted cash flows, given stable cash generative traits
of the business. Revenue growth, EBIT margin, capital expenditure and working
capital turnover are the key variables in our DCF model.
Revenue growth: Our revenue growth assumption builds in a demand recovery of
end-user industries over the next five years, which will catapult the growth rates for
Pidilite (18% CAGR over FY16-20). For the next 20 years, we expect a12% revenue
CAGR as penetration of furniture, flooring, automobiles, etc. increases in India and
also through harnessing opportunity in nascent sectors such as construction
chemicals.
EBIT margin: We expect a 100bp moderation in FY17 due to higher prices of input
material. We build in 200bps expansion over FY17-20, led by operating leverage.
Thereon, we marginally reduce our margin assumption till the end of the DCF term –
by 200bps over FY22-40.
Working capital turnover: Pidilite’s working capital days reduced from 90 days in
FY05 to 41 days in FY16. We gradually reduce working capital cycle to 20 days by the
end of the DCF term. Management highlights that the company will reduce its SKU
count to better manage working capital.
Capex and depreciation: Pidilite will not have to invest significantly to grow
revenues as most of its products are not capital intensive. Moreover, products such as
Feviquik and Fevistik are imported and half of Fevicol production is outsourced.
Capital deployment will largely be towards new products. We build in 1.5-2% of sales
for capex (or ~10% of gross block). We build in depreciation at 7% of gross block.
We extend the term of the DCF till FY40 since we view Pidilite as a consumer brand
business wherein the tail of earnings is longer than that of non-branded businesses
and Pidilite’s well-established brand, architecture and management bandwidth
ensure that it is set for a long innings.
Our DCF valuation is split into two phases
Phase I – FY16-20: recovery from the trough
Pidilite’s revenue growth moderated in the last three years to 9-10% from 19% CAGR
over the last decade. In our view, deceleration in revenue growth was largely a
function of slowdown in end-user industries such as woodworking, automotive, etc.
We expect revenue growth trajectory to improve in the next five years and hence
build in revenue CAGR of 17.6% and EBIT CAGR of 20%. We build in cumulative
capex of `7.5bn. We expect WC cycle to reduce by 6 days to 44 days by FY20.
July 21, 2016
Page 39
Pidilite Industries
Exhibit 76: We expect 18% revenue CAGR and 21% EBIT
CAGR over FY17-20
Exhibit 77: We expect working capital cycle to reduce by six
days by FY20
30%
23%
52
25%
22%
50
20%
48
21%
15%
46
20%
10%
44
5%
0%
FY17
FY18
FY19
Revenue growth
EBIT margin (RHS)
19%
42
18%
40
FY20
FY16
FY17
EBIT growth
FY18
FY19
FY20
Working capital cycle (days)
Phase II – FY20-40: Fade period
We expect revenue CAGR of 12.5% in this phase vs 18% CAGR over the last two
decades. Whilst penetration and growth will stagnate in legacy adhesive products, we
expect Pidilite to grow sharply in opportunities like construction chemicals. Pidilite has
a strong history of innovation, which gives us comfort that the company can re-invest
cash flows to expand the addressable opportunity. Moreover, rising penetration in
emerging markets could also be another for long-term growth of the company. We
expect gradual reduction in EBIT margin by 100bps by the end of the DCF term.
Exhibit 78: We expect gradual moderation in EBIT growth and margins; we assume
Pidilite will reach Asian Paints’ FY16 EBIT of `25bn in FY21
250,000
25%
200,000
20%
150,000
15%
100,000
10%
50,000
5%
EBIT (Rs mn)
EBIT growth (RHS)
FY40
FY39
FY38
FY37
FY36
FY35
FY34
FY33
FY32
FY31
FY30
FY29
FY28
FY27
FY26
FY25
FY24
FY23
FY22
0%
FY21
-
EBIT margin (RHS)
Source: Ambit capital research
Sensitivity to WACC and terminal growth: We have assumed 13% WACC, similar
to other consumer businesses in India. We build in 6% terminal growth rate, which is
the long-term nominal GDP growth rate of India.
Exhibit 79: Sensitivity analysis to WACC and terminal growth rate
Terminal growth
rate
WACC
11%
12%
13%
14%
15%
4%
1,071
880
738
630
545
5%
1,149
928
769
650
559
6%
1,258
992
809
676
576
7%
1,421
1,082
861
708
597
8%
1,693
1,216
935
752
624
Source:, Ambit capital research
July 21, 2016
Page 40
Pidilite Industries
Displays traits of two stellar franchises
Pidilite’s business model is not comparable to any other company’s in India or
abroad. Hence, relative comparison for the company is difficult. We believe that in
India the business model is partially comparable to Asian paints – both have a high
level of intermediary influence and largely commoditized products internationally but
consumer brands in India. Moreover, both these companies’ have evolved from a
utility product to a discretionary brand and now to a staple product. Internationally,
the only company that we think is comparable to Pidilite is 3M as both have a large
presence in adhesives, consumer franchises in stationary, and caters to various
industries, end-use segments and intermediaries.
Pidilite vs Asian Paints – two legendary Indian brands
#1: Business comparison
Pidilite and Asian Paints are examples of Indian companies that have successfully
transitioned commoditized products into consumer brands through innovative
advertising, packaging and creating a strong connect with the intermediaries
(carpenter and painter, respectively).
However, the key difference between the two companies is that paints is a primary
product whereas adhesive is an ancillary product. Moreover, repainting cycles are
significantly shorter that replacement cycles for furniture.
Exhibit 80: Similarities and differences between PIDI and APNT
Pidilite and Asian Paints
Similarities
Differences
Brand: Both companies have created a strong brand recall in products
which are globally considered as commodities
Intermediary connect: Asian Paints has a strong connect with painters,
whereas Pidilite has a strong connect with carpenters/plumbers - a moat
which is not easily replicable by competition
Professional management: Whilst Asian Paints started recruitment of
top quality management as early as 1980s, Pidilite began its journey of
professionalizing management in the last decade and now has a strong
talent pool
Product overlap: Whilst the core products of both the companies are
based on simple chemistry, these brands are now deploying capital in
building waterproofing franchise
End-use: Paints is a primary product for exterior and interior walls and is
visible, whereas adhesive is an intermediary product for furniture
construction, which is not visible
Replacement cycle: Repainting cycles are 2-3 years and are shortening
further. However, replacement cycle of furniture is 10-12 years, which makes
growth dependent on new construction
Channel: Asian Paints' products are available only in 1-2 channels (hardware
and paints shops), whereas Pidilite has a coverage across the spectrum of
channels
Intermediary coverage: Asian Paints only influences the painter, whereas
Pidilite influences several intermediaries - carpenters, electricians, plumbers,
painters, etc
#2: Financial comparison – little to choose between the two
Sales growth: Whilst Pidilite’s revenue growth over FY97-FY16 was 17%, Asian
Paints’ was a tad lower at 15%. However, both the companies have been fairly
consistent in growing sales, with no major volatility in growth rates.
Exhibit 81: Sales CAGR over FY96-16 of Asian Paints (15%) has been slightly lower than Pidilite (17%) though Asian Paint’s
scale is higher
(` mn)
160,000
40%
120,000
30%
80,000
20%
40,000
10%
Pidilite rev (LHS)
Asian rev (LHS)
Pidilite rev growth
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
0%
FY97
-
Asian revenue growth
July 21, 2016
Page 41
Pidilite Industries
EBITDA margin: Pidilite’s EBITDA margin was significantly higher than Asian Paints’
over FY97-FY06. However, margin for Pidilite contracted as it incubated multiple
products and entered international geographies. On the other hand, Asian Paints
focused on the core product and gained scale which led to margin improvement.
Margins of both the companies converged in FY16.
Exhibit 82: Asian Paints’ EBITDA margin has been higher than Pidilite in recent years
24%
EBITDA margin
22%
20%
18%
16%
14%
12%
Pidilite
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
10%
Asian
RoCE comparison: Asian Paints’ RoCE has been higher than Pidilite’s since FY02.
Pidilite’s RoCE dipped due to investments in the elastomer business, which accounts
for 13% of the capital employed, but did not contribute to revenue or earnings.
Exhibit 83: Asian Paints’ RoCE has been significantly higher than Pidilite’s due to
superior margins
60%
RoCE
50%
40%
30%
20%
10%
Pidilite
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
0%
Asian
Valuations – both have moved in sync
Pidilite and Asian Paints’ P/E multiples have been largely moved in sync over the last
two decades. The multiples of these companies evolved as investor perception of
these companies changed from commodities to consumer discretionary to consumer
staples.
FY97-FY05 – commodity business: During this phase, the valuation multiples of
both Pidilite and Asian were in the range of 10-15x. Valuation multiples mirrored a
commodity franchise as investors perceived these companies as manufacturers of
commodities. In this phase, Fevicol’s largest competing brand VAMICOL did a
rebranding exercise, leading to apprehensions around market share losses, which
also contributed in restricting multiple expansion.
FY05-FY09 – consumer discretionary: Pidilite expanded its product range and built
multiple brands such as Fevistik, Fevikwik and M-seal, which led to stable earnings
growth and RoE expansion. Pidilite’s valuation multiples converged with those of a
discretionary business, with consistent revenue growth and margins alongside stable
cash flows. Valuation multiples reached the peak in FY08, but by the end of FY09
they shrank due to the global economic crisis.
July 21, 2016
Page 42
Pidilite Industries
FY09-16 – consumer staples business: A sharp pick-up in building material usage
in India meant that Pidilite posted strong revenue growth over FY10-13, continued to
generate strong free cash flows, and set up a professional management team, which
led to a sharp multiple expansion. The company posted 32% EPS CAGR alongside
>30% RoEs, which led to a sustainable re-rating.
Exhibit 84: Valuation multiples of PIDI and APNT have largely moved in sync
60
50
40
30
20
10
PIDI
APNT
PIDI One yr fwd P/E
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Apr-00
Oct-00
Apr-01
Oct-01
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Apr-97
Oct-97
Apr-98
Oct-98
Apr-99
Oct-99
0
APNT One-yr fwd P/E
Source: Bloomberg, Company, Ambit Capital research
Pidilite Vs 3M (Global) – the supreme innovators
#1: Business comparison
Pidilite and 3M have an overlap in products as both have relatively large presence in
adhesives and have well-established consumer brands like Fevicol and Fevistik for
Pidilite and Post-It and Scotch for 3M.
However, 3M is way ahead of Pidilite in terms of product innovation and spends 5-6%
of its revenue for R&D as against 0.5-0.6% by Pidilite. In the BCG survey of 2015, 3M
was listed as the 40th most innovative company in the world. 3M is over a century old;
it started as an abrasive manufacturer but later established its brand in multiple other
categories such as healthcare, industrials, electronics and consumer goods. 3M’s
consumer business accounts for ~24% of revenue, significantly lower than Pidilite.
Exhibit 85: Similarities and differences between Pidilite and 3M (Global)
Pidilite and 3M
Similarities
Differences
Consumer brands: Both the companies have strong established enduser consumer brands. The companies also have overlapping products
such as glue sticks, instant adhesives, etc in DIY segment
Innovative advertisement: Both the companies have relied on
innovative advertisements and intermediary education to build their
consumer brands
High SKU count, multiple end-users: Both the companies have a high
SKU count through which they service a wide number of industries and
end-users
R&D: 3M spends 5-6% of revenue for R&D expenditure, whereas Pidilite's
spending on R&D is significantly lower
Industries serviced: 3M has a much wider coverage than Pidilite. 3M supplies
to healthcare, electronics and energy segments
#2: Financial comparison – Pidilite is still way behind 3M
Sales growth: 3M’s sales growth has been significantly lower than Pidilite’s – 4%
CAGR over FY97-16 as against 17% of Pidilite. Note that 3M’s revenues are 40 times
the size of Pidilite. Majority of 3M’s revenues are from developed countries, which
explains lower revenue growth for the company.
July 21, 2016
Page 43
Pidilite Industries
Exhibit 86: Sales CAGR of 3M has been lower than Pidilite’s
Sales growth
40%
30%
20%
10%
-20%
Pidilite
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
-10%
FY97
0%
3M
EBITDA margin: 3M has consistently maintained 20%+ EBITDA margin for the last
20 years (20-28% range) given its specialized and branded products where it has
strong pricing power. Pidilite’s margins have been significantly lower than 3M’s and
have been volatile as the company incubated multiple brands in the last two decades
and, hence, had to incur significant expenses in building those brands.
Exhibit 87: 3M’s EBITDA margin has been significantly higher than Pidilite’s
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
10%
Pidilite
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
EBITDA margin
3M
RoCE comparison: RoCE levels of both Pidilite and 3M have been largely similar, at
~20% average over the last two decades.
Exhibit 88: Asian Paints’ RoCE has been significantly higher than Pidilite’s
30%
RoCE
25%
20%
15%
10%
5%
Pidilite
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
FY97
0%
3M
July 21, 2016
Page 44
Pidilite Industries
Are the expensive multiples justified?
Pidilite vs global chemical manufacturers: Globally, adhesive manufacturers are
chemical giants and sales are largely B2B in nature. Hence, intermediary influence is
limited, thereby limiting brand recall. On the contrary, in India, intermediaries are
brand-conscious and companies such as Pidilite have a strong influence on them.
Hence, their business displays traits of a branded consumer business.
Since Pidilite is more like a B2C franchise, it is highly cash generative and its drivers
of competitive advantages include brand recall, distribution and supply-chain
management. Pidilite has built formidable strengths in each of these facets, which set
it apart from most other building material franchises in India and adhesive
manufacturers globally.
Exhibit 89: Relative valuation summary
Companies
Indian Building
Material Cos
Pidilite Industries
Mcap EV/EBITDA (x)
P/E (x)
P/B (x)
RoE (x)
CAGR (FY12-15)
US$ mn
FY17
FY18
FY17
FY18
FY17
FY18
FY17
FY18
Sales EBITDA
27,554
20.9
18.3
34.2
29.6
9.4
7.7
27.5
27.3
23.2
CAGR (FY16-18)
EPS
Sales
EBITDA
EPS
23.2
25.2
15.6
14.7
17.0
5,552
27.8
24.2
43.4
37.7
11.3
9.4
27.4
26.5
24.8
24.7
25.1
15.5
13.7
14.5
14,389
29.5
25.3
46.3
39.4
14.7
12.5
33.6
33.4
20.8
21.9
18.8
15.6
15.8
19.4
3,315
22.7
20.1
34.7
30.0
10.3
7.0
24.2
24.7
2.6
2.1
2.1
(3.7)
14.0
(21.5)
Supreme Industries
1,696
14.1
12.1
26.1
22.1
NA
5.8
27.7
28.5
3.4
3.2
3.0
1.4
1.9
1.7
Kajaria Ceramics
1,448
18.4
15.8
34.1
28.2
8.4
6.2
26.6
26.0
29.1
30.7
43.8
15.6
17.2
22.8
Cera Sanitaryware
472
18.3
NA
30.0
NA
6.2
NA
22.1
22.1
60.4
47.3
NA
18.6
21.1
24.2
Century Plyboards
Global
chemical cos
683
15.6
12.0
24.4
20.1
5.6
5.3
30.9
30.1
21.5
32.7
58.6
19.5
21.1
16.7
282,047
9.1
8.8
15.4
14.1
5.1
4.7
30.1
32.2
(3.3)
10.7
47.0
4.7
5.9
9.1
106,061
12.5
11.9
19.6
17.9
10.6
11.2
53.3
64.3
0.6
3.9
9.8
3.5
4.7
9.0
67606
7.0
6.5
13.2
12.0
1.8
1.8
14.3
15.2
-1.2
5.6
-9.1
4.3
7.3
10.1
Dow
54,264
7.2
7.3
12.2
12.1
2.2
2.0
17.6
16.9
(7.3)
25.9
201.4
4.5
2.8
6.6
SIKA
NA
NA
NA
NA
NA
NA
NA
NA
NA
6.6
20.9
NA
6.6
8.7
10.7
(2.7) (14.1)
NA
NA
NA
Asian Paints
Havells India
3M
BASF GR
Du Pont
Global building
material cos
Sherwin Williams
54,116
9.7
9.2
16.8
14.5
5.7
3.9
35.1
32.6
(15.0)
58,932
12.0
11.1
19.7
17.8
6.8
5.2
33.7
31.5
3.9
12.6
18.9
6.7
8.6
9.8
27,943
13.4
12.6
21.3
19.5
11.1
8.6
63.4
56.8
9.1
27.5
36.0
5.2
7.8
10.6
Akzo Nobel
15,066
6.9
6.7
13.9
13.1
2.1
1.9
14.9
14.7
(1.7)
NA
NA
3.1
3.9
4.9
683
15.0
12.6
24.6
20.2
6.8
5.3
30.4
29.0
(2.4)
(6.3)
10.1
16.7
17.1
16.6
Valspar Corp
8,587
13.4
12.6
20.5
18.9
9.1
6.2
37.7
35.3
4.5
13.4
24.6
4.5
6.6
8.4
RPM International
6,654
11.4
10.7
18.2
17.0
4.8
4.0
22.0
21.9
10.3
15.8
4.7
3.9
7.3
8.5
PPG Industries
July 21, 2016
Page 45
Pidilite Industries
Key catalysts

Recover in growth of end-user industries: After two years of tepid growth in
building material sales, pick up in home-improvement expenditure – furniture,
tiling etc, will drive volume growth for adhesives. We have built in 17-18%
revenue growth in the next two years as against 9-13% in the last three years.

Success in construction chemicals: We build in strong revenue growth in
construction chemicals over the next few years (17% CAGR over FY16-20), since
we believe that the market size will expand as awareness rises. We believe that
construction chemicals can drive non-linear earnings growth for Pidilite.
Key risks

Market share losses in adhesives: Pidilite has a market leadership in most
adhesive sub-segment in India. In our DCF model, we assume that the company’s
competitive advantages will be able to combat competition from new entrants
and maintain market share. If peers such as Astral and Asian Paints aggressively
gain market share from Pidilite, our revenue estimates will have to be
downgraded

Inflation in RM prices: We have built in 100bps EBITDA margin contraction due
to increase in adhesive inputs. A higher cost inflation will lead to earnings
downgrades.

Weak performance of international subsidiaries: We expect international
geographies’ performance to improve in the next few years – 16% CAGR over
FY16-18. If the revenue growth tapers off in the international markets, we will
have to moderate our growth expectations.
Capital allocation
Pidilite’s capital allocation analysis during the last two decades suggests the
following:

Generation – CFO funded entire cash needs: For 20 years, the company has
funded its entire cash needs from CFO.

Deployment – largely prudent barring a few forays: Pidilite remained
focused on its core portfolio and built 4-5 strong brands. International forays
have included both hits and misses, with the company struggling in developed
markets but doing relatively well in developing markets. Synthetic elastomer is
the only flawed capital deployment of the company.

Dividend payments – does not hoard cash: Unlike several Indian companies,
Pidilite did not hoard cash for fanciful aspirations; most of the spare cash has
been paid as dividends.

Capex – small ticket sizes: Pidilite maintained low capital intensity in its
businesses and has not incurred any mega capex that could hit financial health.
July 21, 2016
Page 46
Pidilite Industries
Exhibit 90: CFO accounted for majority of the company’s
sources of funds
Exhibit 91: 86% of cash went into capex and dividend
payments
Interest +
Dividend ,
1%
Dividend,
21%
Interest,
12%
CFO, 99%
Capex ,
65%
Inc in cash,
2%
FY96-05
FY96-05
Exhibit 92: Even in this decade, CFO was the main source of
cash inflows…
Exhibit 93: …and 80% of cash inflows
re-invested or paid out as dividends
Int+div,
2%
Debt
repaid, 2%
were
either
Others, 2%
Investments
, 9%
Dividend,
24%
Capex,
56%
CFO, 98%
Interest, 6%
FY06-15
July 21, 2016
Inc in cash,
2%
FY06-15
Page 47
Pidilite Industries
Appendix
I] Understanding the adhesive usage in India
Penetration in a misnomer: Adhesive industry still has a lot of room for
innovation: Adhesives market in India is US$900mn, ~2% of overall adhesive
consumption globally. The global adhesive market has gone through continuous
innovation, as new applications expanded the market size. In India as well, new
chemistries, specifically in flexible packaging, disposable hygiene, medical products
and construction, is leading to expansion of the market size and addressable
opportunity.
As per Jeremy Hunter, President Henkel adhesives:
China and India remains the fastest growing region for adhesives and sealants on a
global basis through to 2015. Asia-Pacific remains the dominant market followed by
Europe due to increase in applications for labels. In terms of individual countries, India
is a fast growing market due to heavy automotive sector and wide range of industries
present in the market.
Global manufacturers such as Henkel have established innovation centres in India for
R&D into new adhesive varieties. Other large players such as Bostik (subsidiary of
Arkema) have recently expanded capacities to cater to rising applications.
Exhibit 94: Competitive landscape of Indian adhesive market
Unorganised,
26%
Pidilite, 30%
Atul , 2%
Sika, 2%
Metlok, 2%
Henkel, 20%
Anabond, 2%
Bostik, 2%
Resinova, 3%
Huntsman, 4%
3M, 7%
In India, Polyvinyl acetate (Fevicol) accounts for 38% of the overall adhesive market
(white glue), followed by rubber based adhesives. Packaging, furniture and
construction account for ~2/3rd of adhesive usage in India.
July 21, 2016
Page 48
Pidilite Industries
Exhibit 95: PVA accounts for 38% of adhesive production in
India
Others, 7%
Exhibit 96: Packaging and wood-working are the largest
end-user industries
Footwear,
Transport,
5%
8%
Industry split by product type
Rubber, 18%
Packaging,
27%
Others, 8%
Polyvinyl
acetate, 38%
Industry split by end-use
Assembly,
10%
Epoxy, 12%
Polyurethane
, 10%
Construction
, 18%
Acrylic, 15%
Woodwork,
18%
DIY, 6%
A] Polyvinyl Acetate (PVA) – white (water-based) glue
Characteristics: An emulsion made of vinyl acetate monomer (VAM) in water. These
are thermoplastic homopolymers that are odorless and non-toxic, which makes it
suitable for domestic use as well. Our estimation is that the size of the industry
is ~`23bn in India.
End use: Furniture, packaging and home/office use accounts for majority use of PVA
in India. Carpenters use PVA because of ease of application (fast setting), availability
and low cost. In the packaging industry PVA is used to bind perforated outer bodies of
packaging material, filter paper and pleats sealing.
Positioning of players: Pidilite with its flagship brand – Fevicol is the undisputed
leader in this segment (~70% market share). The other relatively large manufacturers
are Huntsman (Karpenter) and Jubilant (Jivanjor).
Exhibit 97: Fevicol is the undisputed leader in PVA
Jivanjor,
10%
Exhibit 98: Furniture and packaging accounts for 70% of
PVA usage in India
Others,
10%
Others,
30%
Furniture ,
40%
Karpenter,
10%
Fevicol,
70%
Packaging ,
30%
Market share of top brands
Source: Techsci research, Ambit Capital research
Usage by end-use
Competitive threat for Pidilite: Pidilite has been in this segment for the last five
decades and over this period, has developed strong brand equity with the carpenters,
who are resistant to changing to other brands of adhesives. Given that adhesive is
not a major cost of overall furniture construction, carpenters are usually brand
conscious and use Fevicol. Very few dealers offer shelf space to other brands in this
category. Hence, we do not see a major threat for Pidilite due to entry of competitors
in this segment.
July 21, 2016
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Pidilite Industries
Pidilite’s growth visibility in PVA: As per our estimation, PVA accounts for 33% of
overall sales of Pidilite The volume growth of PVA will largely mirror the growth of
furniture and packaging in India. Furniture construction has been tepid in recent
years, due to slow-down in real-estate absorption, which should normalize in the next
few years. Given low penetration of furniture in India alongside continued growth in
packaging (due to rising organized manufacturing), there is fair visibility of the
longevity of growth of this category.
We believe that volume growth of PVA is likely to be 6-7% over the next 4-5 years.
Furthermore, Pidilite has premiumized its portfolio, through launching new variants
such as Marine, Heat-X and Speed-X, which have found good acceptance with the
carpenters.
Disruption threat from organized furniture: The major disruption possibility in
this category is proliferation of organized furniture as against bespoke furniture
manufactured by carpenters. Institutional consumers will be brand agnostic which will
lead to not only margin contraction (as pricing premium wanes), but will also market
share loss for Pidilite.
B] Rubber adhesive (RA)
Characteristics: Tackifiers are added to natural rubber to produce RA; tackifiers are
chemical compounds used in formulating adhesives to increase the tack, the
stickiness of the surface of the adhesive. RA is relatively higher priced as compared to
their mediocre resistance and low temperature resistance. Majority of rubber
adhesives in India is imported from South Korea.
Our estimation is that the size of the industry is ~`11bn in India.
End use: Mainly used in footwear applications and packaging and tyre applications.
This is largely an industrial product with limited retail sales
Positioning of players: Pidilite is the leading manufacturer (45% market share) with
its brand Fevibond and Fevicol SP. Other large manufacturers are French firm (Bostik)
and Chandra chemicals (Dendrite).
Exhibit 99: Pidilite is the leader in RA
Exhibit 100: Footwear industry is the major usage of RA
Others, 6%
Carpentry,
15%
Atul, 6%
Others, 5%
Footwear,
38%
Pidilite, 45%
Bostik, 23%
Packaging,
20%
Chandra,
20%
Rubber
cluster, 22%
Market share of top brands
End industry usage
Competitive threat for Pidilite: None of the recent entrants have targeted RA as
their core segment. However, since it is an institutional product, there is a likelihood
of market share loss to lower priced brands. However, competition in this segment is
nothing new, Pidilite has managed to gain market share, despite severe competition.
Pidilite’s growth visibility in RA: RA accounts for 10% of Pidilite’s overall sales.
Footwear industry has grown at a 15% CAGR over the last five years and our retail
analyst’s estimation is that there is still ample scope for growth in footwear as income
levels rise. Hence the segment can sustain high single digit volume growth.
Disruption: Industry experts suggest that replacement with other thermoplastic
elastomeric rubber adhesives such as ethylene-propylene diene monomer rubber
(EPDM). The automotive sector, in particular, is replacing rubber-based adhesives
with EPDM.
July 21, 2016
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Pidilite Industries
C] Epoxy adhesives
Characteristics: It is an engineered adhesive with high strength and better chemical
and heat resistance. Epoxy resin is mixed with hardeners to manufacture epoxy
adhesive. Epichlorohydrin (ECH) is the key raw material for manufacturing epoxy
adhesive, which is largely imported from Thailand, Germany and South Korea.
Our estimation is that the size of the industry is ~`7.5bn in India.
End use: Unlike western countries, epoxy adhesive is not used in industrial
applications but largely in after-market applications. Windmill blades is one of the
leading application areas of epoxies. Epoxy adhesives are also used for laminates,
tiles, glass etc.
Positioning of players: Huntsman (Araldite) is the leader in epoxy adhesives in
India with 30% market share, followed by Resinova with ~15% market share. Other
manufacturers are Atul Industries, Pidlite and Momentif.
Exhibit 101: Araldite (Huntsman) is the strongest brand in
epoxy adhesives
Others,
40%
Exhibit 102: Windblades is the largest consumer of epoxy
adhesives in India
Wind
blades,
30%
Others,
40%
Huntsman
, 30%
Product
assembly,
20%
Resinova,
15%
Atul, 15%
Auto, 10%
Market share
of top brands
Usage by end-use
Competitive threat for Pidilite: Pidilite does not have a strong franchise in epoxy
adhesives and in our visits to hardware shops, very few stocked its brand – Fevitite.
Hence, we do not think that it is at a major risk of a market share loss due to
aggressive expansion by Astral, post-acquisition of Resinova.
Pidilite’s growth visibility: As per our calculations, Pidilite’s sales from epoxy
adhesive would not be more than ~`500-750mn. Even if Pidilite lags industry growth
rates of 7-8% in this segment due to aggressive entry of Astral (through Resinova)
and Asian Paints (through Loctite), it is not very concerning.
July 21, 2016
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Pidilite Industries
D] Acrylics (Cyanoacrylates)
Characteristics: Cyanoacrylates (super glue) are instant bonding, easy application
and have high viscosity. It is generally imported in India from China, US, Taiwan and
Korea. It goes through instant curing at room temperature. China accounts for 70%
of cyanoacrylates imports in India.
End use: Majority of the use is for consumer segment for DIY applications. Apart
from that, other uses are in automotive applications.
Positioning of players: Pidilite is the leader with its Fevikwik brand. The company
has the widest distribution reach of the product in India.
Competitive threat for Pidilite: Currently, Pidilite commands ~60% market share
in this segment. Resinova has a small presence in this segment (~`200mn sales). We
do not see a major threat to Pidilite because of Astral’s entry, given that Pidilite’s
reach in this product is unparalleled and given the low-ticket size of this product,
consumers are not price conscious.
Pidilite’s growth visibility: We believe that Fevikwik’s contribution to Pidilite’s sales
would be ~6-7%. We believe that the company can manage to sustain 6-8% growth
in this segment in-line with the growth rates of other adhesive products.
E] Epoxy sealant
Characteristics: It is a room temperature hardening substance used as a spacefilling adhesive. It is stored until use as two components of clay-like consistency which
are kneaded into each other and creates an exothermic chemical. Unlike many other
types of glues, an epoxy adhesive can fill gaps and even be molded into a structural
part.
End use: Epoxy putty is used as a sealant to plug water leakages and fixing/repairs.
It is also used for leveling uneven surfaces.
Positioning of players: Pidililte is the market leader with ~60% market share, the
other competing brands are Araseal by Araldite and Bond-set by Resinova.
Competitive threat for Pidilite: We believe that the only risk that Pidilite faces here
is through the aggressive entry of Astral in this product. Given that this is largely a
plumbing product, Astral with its strong plumber connect can garner some of the
market share. However, Pidilite has administered a rebranding exercise
July 21, 2016
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Pidilite Industries
II] Construction Chemicals – still nascent
Construction chemicals are a niche segment of speciality chemicals which is used as a
catalyst while building concrete structures or to impart durability and strength. The
size of the industry has more than tripled in the last decade, with better building
construction practices, rising awareness by Indian corporates after these companies
made significant investments in setting up capacities and capabilities for production
of construction chemicals. Admixtures (binding material mixed with concrete) is the
largest component of construction chemicals in India, accounting for ~45% of the
overall construction chemical market. Waterproofing is the second largest – 15% of
overall market.
Exhibit 103: Admixtures account for
construction chemical sales in India
Tiling, 12%
majority
of
the
Exhibit 104: Construction chemicals: 16% CAGR over the
last two decades
Construction chemicals size (` bn)
Others, 2%
50
40
Sealants, 5%
Admixture,
45%
Waterproofin
g, 14%
40
30
27
20
12
10
Flooring, 10%
Grouts, 12%
0
Split of construction chemicals
in India
5
2
1995
2000
2005
2011
2015
Exhibit 105: Key categories of construction chemicals in India
CONSTRUCTION
CHEMICALS
CONCRETE
ADMIXTURES
WATER
PROOFING
FLOORING
COMPOUNDS
REPAIR AND
REHABILITATI
MISCELLANEOUS
Ligno based
Polyurethane
based
Epoxy & floor
hardners
Cementitious
repair mortars
Sealants
*SNF & SMF
based
Bitumin based
Polyurethane
coatings
Polymer repair
mortars
Grout
*PCE based
Polymer - SBR,
Acrylic
Polyurea
based
Epoxy based
resin mortars
Adhesives
Source: Ficci, Ambit Capital research
July 21, 2016
Page 53
Pidilite Industries
Exhibit 106: Segments of construction chemicals
Segment
Admixtures
Flooring Agents
Waterproofing agents
Repair and rehab
Miscellaneous
Size (` mn) Features
Pidi's products
Mixed with concrete to reduce water content and increase durability of
18,000 concrete
Epoxy and Polyurethane based used at finishing stage of construction to
5,000
avoid moisture penetration, strengthening of damaged floors
6,000 Products based on bitumen, PU and polymers to stop water infiltration
Dr Fixit LW+ Dr Fixit Pidicrete
Dr Fixit repair mortar
Dr Fixit Roofseal
Retrofitting is addition of new features to older systems and improving the
structures with energy efficiency. These products include cementations repair
5,000
Dr Fixit Microconcrete
mortars, epoxy based mortars and other products like rust removers, anticorrosion products etc.
Sealants used to seal expansion joints. Grouts and tile adhesives provide
Roff Grout. Dr Fixit Modern tile
6,000
strength to load-bearing structures
adhesive
July 21, 2016
Page 54
Pidilite Industries
Balance Sheet
Rs mn unless mentioned
FY14
FY15
FY16
FY17E
FY18E
513
513
513
513
513
Reserves and surplus
19,014
22,193
27,316
33,047
40,349
Total Networth
19,526
22,706
27,829
33,559
40,862
459
584
843
843
843
Share capital
Loans
Minority Interest
Deferred tax liability (net)
Sources of funds
42
51
427
427
427
537
566
670
670
670
20,565
23,907
29,769
35,499
42,802
Net block
7,062
9,569
10,696
11,203
11,812
Capital work-in-progress
4,580
4,618
4,618
4,618
4,618
Investments
2,603
3,599
6,490
6,490
6,490
1,772
860
1,319
8,123
14,650
Sundry debtors
5,244
5,861
7,294
8,609
9,824
Inventories
5,997
6,410
6,290
7,404
8,596
Loans and advances
1,612
1,885
1,777
1,722
2,047
Total Current Assets
14,809
15,146
17,246
25,857
35,116
8,719
9,240
9,281
12,669
15,234
Current liabilities and provisions
Net current assets
Application of funds
6,090
5,905
7,965
13,188
19,882
20,565
23,907
29,769
35,499
42,802
Income statement
Revenue
yoy growth
Total expenses
FY14
FY15
FY16
FY17E
FY18E
42,832
48,441
53,695
62,845
74,703
10%
13%
11%
17%
19%
36,117
40,734
41,902
52,603
62,097
EBITDA
6,715
7,708
11,792
13,385
16,341
yoy growth
-18%
15%
53%
14%
22%
812
1,178
1,331
1,493
1,641
6,352
6,985
10,971
12,742
16,087
Interest and financial charges
163
156
133
117
101
Other income
449
455
510
850
1,388
Adj PBT
6,189
6,828
10,839
12,625
15,986
Provision for taxation
1,653
1,694
3,221
4,040
5,116
Adjusted PAT
4,519
5,122
7,618
8,585
10,871
Depreciation
EBIT
yoy growth
-29%
13%
49%
13%
27%
Reported PAT
4,499
5,126
7,615
8,625
10,911
EPS basic (`)
9
10
15
17
21
EPS diluted (`)
9
10
15
17
21
DPS (`)
3
3
4
5
6
July 21, 2016
Page 55
Pidilite Industries
Cash Flow statement
FY14
FY15
FY16
FY17E
FY18E
6,124
6,779
10,839
12,625
15,986
Depreciation
812
1,178
1,331
1,493
1,641
Interest paid
163
156
133
117
101
CFO before change in WC
7,122
7,862
11,792
13,385
16,341
Change in working capital
(1,514)
(593)
(150)
(417)
(880)
Direct taxes paid
(1,669)
(1,749)
(3,221)
(4,040)
(5,116)
PBT
CFO
Net capex
Net investments
Interest received
3,939
5,520
8,421
8,928
10,345
(1,894)
(4,091)
(2,457)
(2,000)
(2,250)
488
(807)
-
-
-
145
111
510
850
1,388
(987)
(4,359)
(1,947)
(1,150)
(862)
Proceeds from borrowings
-
5
259
-
-
Change in share capital
-
-
-
-
-
(203)
(157)
(133)
(117)
(101)
CFI
Interest & finance charges paid
Dividends paid
(1,559)
(1,619)
(2,468)
(858)
(2,855)
CFF
(2,415)
(1,651)
(2,342)
(974)
(2,956)
Net increase in cash
FCF
Opening cash balance
Closing cash balance
538
(490)
4,131
6,803
6,527
5,833
9,611
10,878
10,928
12,595
645
1,182
692
1,319
8,123
1,182
692
4,823
8,123
14,650
Ratio Analysis
Particulars
FY14
FY15
FY16
FY17E
FY18E
Revenue growth
9.9
13.1
10.8
17.0
18.9
EBITDA growth
(18)
15
53
14
22
PAT growth
(30)
14
49
13
26
EPS norm (dil) growth
(30)
14
49
13
26
EBITDA margin
16
16
22
21
22
EBIT margin
15
14
20
20
22
Net margin
11
11
14
14
15
RoCE
24
24
29
27
28
RoIC
21
38
45
48
61
RoE
25
24
30
28
29
FY14
FY15
FY16
FY17E
FY18E
P/E (x)
82
73
49
43
34
P/B(x)
19
16
13
11
9
Debt/Equity(x)
18
18
20
19
18
Net debt/Equity(x)
(8)
(5)
(6)
(25)
(37)
Valuation Parameter
Particulars
EV/Sales(x)
EV/EBITDA(x)
9
8
7
6
5
54
48
31
27
22
July 21, 2016
Page 56
Pidilite Industries
Institutional Equities Team
Saurabh Mukherjea, CFA
CEO, Institutional Equities
(022) 30433174
[email protected]
Research Analysts
Name
Industry Sectors
Nitin Bhasin - Head of Research
E&C / Infra / Cement / Industrials
(022) 30433241
Desk-Phone E-mail
[email protected]
Aadesh Mehta, CFA
Banking / Financial Services
(022) 30433239
[email protected]
Aakash Adukia
Oil & Gas / Chemicals / Agri Inputs
(022) 30433273
[email protected]
Abhishek Ranganathan, CFA
Retail
(022) 30433085
[email protected]
Achint Bhagat, CFA
Cement / Home Building
(022) 30433178
[email protected]
Anuj Bansal
Mid-caps
(022) 30433122
[email protected]
Ashvin Shetty, CFA
Automobile
(022) 30433285
[email protected]
Bhargav Buddhadev
Power Utilities / Capital Goods
(022) 30433252
[email protected]
Deepesh Agarwal, CFA
Power Utilities / Capital Goods
(022) 30433275
[email protected]
Dhiraj Mistry, CFA
Consumer
(022) 30433264
[email protected]
Gaurav Khandelwal, CFA
Automobile
(022) 30433132
[email protected]
Girisha Saraf
Mid-caps / Small-caps
(022) 30433211
[email protected]
Karan Khanna, CFA
Strategy
(022) 30433251
[email protected]
Kushank Poddar
Technology
(022) 30433203
[email protected]
Pankaj Agarwal, CFA
(022) 30433206
[email protected]
Paresh Dave, CFA
Healthcare
(022) 30433212
[email protected]
Parita Ashar, CFA
Metals & Mining / Aviation
(022) 30433223
[email protected]
Prashant Mittal, CFA
Strategy / Derivatives
(022) 30433218
[email protected]
Rahil Shah
(022) 30433217
[email protected]
Rakshit Ranjan, CFA
Consumer
(022) 30433201
[email protected]
Ravi Singh
(022) 30433181
[email protected]
Ritesh Gupta, CFA
Oil & Gas / Chemicals / Agri Inputs
(022) 30433242
[email protected]
Ritesh Vaidya, CFA
Consumer
(022) 30433246
[email protected]
Ritika Mankar Mukherjee, CFA
Economy / Strategy
(022) 30433175
[email protected]
Ritu Modi
Automobile
(022) 30433292
[email protected]
Sagar Rastogi
Technology
(022) 30433291
[email protected]
Sumit Shekhar
Economy / Strategy
(022) 30433229
[email protected]
Utsav Mehta, CFA
E&C / Industrials
(022) 30433209
[email protected]
Vivekanand Subbaraman, CFA
Media
(022) 30433261
[email protected]
Sales
Name
Regions
Sarojini Ramachandran - Head of Sales
UK
Desk-Phone E-mail
Dharmen Shah
India / Asia
(022) 30433289
[email protected]
Dipti Mehta
India / USA
(022) 30433053
[email protected]
Hitakshi Mehra
India
(022) 30433204
[email protected]
Krishnan V
India / Asia
(022) 30433295
[email protected]
Nityam Shah, CFA
USA / Europe
(022) 30433259
[email protected]
Parees Purohit, CFA
UK / USA
(022) 30433169
[email protected]
Praveena Pattabiraman
India / Asia
(022) 30433268
[email protected]
Shaleen Silori
India
(022) 30433256
[email protected]
Pramod Gubbi, CFA – Director
Singapore
+65 8606 6476
[email protected]
Shashank Abhisheik
Singapore
+65 6536 1935
[email protected]
+44 (0) 20 7614 8374 [email protected]
Singapore
USA / Canada
Ravilochan Pola - CEO
Americas
+1(646) 361 3107
[email protected]
Production
Sajid Merchant
Production
(022) 30433247
[email protected]
Sharoz G Hussain
Production
(022) 30433183
[email protected]
Jestin George
Editor
(022) 30433272
[email protected]
Nikhil Pillai
Database
(022) 30433265
[email protected]
July 21, 2016
Page 57
Pidilite Industries
Pidilite Industries Ltd (PIDI IN, BUY)
May-16
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
800
700
600
500
400
300
200
100
0
Pidilite Industries Ltd
July 21, 2016
Page 58
Pidilite Industries
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>10%
SELL
NO STANCE
UNDER REVIEW
NOT RATED
<10%
We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
We will revisit our recommendation, valuation and estimates on the stock following recent events
We do not have any forward looking estimates, valuation or recommendation for the stock
POSITIVE
We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE
We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically,
and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Disclaimer
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Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI
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July 21, 2016
Page 59

Pidilite Industries

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