Pidilite is the largest adhesive manufacturing company in India. The company started its operations in the year 1959, with its most popular adhesive brand named Fevicol and since then it has established its presence in 80+ countries across the world. The company now manufactures adhesives, sealants, pigments, Industrial resins, construction and Paint chemicals etc. It currently has a portfolio of 500+ products.
Now, let’s take a deep dive into the fundamentals of the company.
The analysis is based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.
Economic Moat
Business Model and Management
Growth Ratios
Profitability Ratios
Cash Flow Ratios
Liquidity and Solvency Ratios
Efficiency Ratios
Valuation Ratios
ROE (Du Pont Analysis)
Future Prospects
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Economic Moat
Pidilite Industries have a total of 23+ manufacturing plants in India and a solid market presence of over 6 decades. The company has expanded into 18 international and 9 domestic subsidiaries and has established 8 R&D centres. The company owns some well know brands like Fevicol, M-seal, Dr Fixit, WD 40 etc which has a strong awareness in both consumer and industrial segments. The focus of the company is on-brand premiumization and Innovation.
Some of their brands like M-seal has 70% market share in the plumbing segment and Dr Fixit has achieved 98% top of the mind awareness among consumers. Fevicol has also been the most trusted adhesive brand for many decades. Overall the company has a solid economic moat with its innovative adhesive solutions and brand awareness. Its market dominance is also near-monopolistic in Fevicol and M seal brands which contributes a major portion of the revenue.
Business Model and Management
The company has distributed its brands across three major categories. The core brands include Fevicol, Fevicol Marine, Fevi Kwik, M-seal and Fevicryl. These brands have a very wide distribution and have market dominance even in remote areas. They are high volume medium margin products. The second category is growth, these brands have high awareness in their niche categories like WD 40, Dr Fixit, Nina Percept etc. They drive revenue growth, especially in urban areas. The third category is Pioneers which has Cipy, Jowat and Roff brands. These are innovative solutions and are in a nascent stage.
The business model is such that 56% of the revenue comes from adhesives and sealants, 20% from construction and paint chemicals, 8% from arts and crafts materials, 6% from pigments and the rest from Industrial adhesives and resins. This has helped the company to diversify its product portfolio and achieve sustainable growth in revenue.
Mr Bharat Puri is the Managing Director of the company and has 4 decades of experienceacross industries. Previously he held leadership roles at Asian Paints and Mondelez. Mr Vivek Sharma is the Chief Marketing Officer and has over 25+ years of experience. He has held senior leadership positions at Philips, MIRC Electronics, Ogilvy Advertising and Cadbury Kraft (now Mondelez India). Overall the company has a qualified management team which has been successful in delivering robust growth over the years.
Growth Ratios
The revenue has seen a growth of 12.4% CAGR over the last 10 years.The operating income and net income has also seen a growth of 13.6% and 13% CAGR respectively. This shows improving efficiency for the company.The working capital has also increased over the years which indicates a surplus of current assets like cash, receivables and inventory. The capital expenditure has also remained stationary over the years. Overall this indicates a steady and sustainable growth.
Cash Flow Ratios
The capital expenditure as a percentage of sales has declined, which indicated over capacity or moderate growth in the future.The free cash flow as a percentage of net income has been stable and operating cash flows have also seen improvement. This overall indicates a good cash position for the company.
Liquidity and Solvency Ratios
The current ratio has seen a decent improvement over the years along with the quick ratio. This indicates a surplus of cash and receivables available with the company to meet the short term obligations. The financial leverage has been going down and debt to equity ratio is also very low. This overall indicates robust liquidity and solvency positions for the company.
Efficiency Ratios
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has not shown any significant improvement over the years.The inventory days have gone down slightly and the payable period has improved. The receivable days have also increased from 53 days to 63 days but this is necessary for increasing distribution reach for their products.Overall the cash conversion cycle has been positive which means an additional working capital requirement.
Valuation Ratios
The company is a near-monopoly in the adhesive segment in India and its market is witnessing a 7-8% annual growth rate since the last few years.The company also has a track record of profitability and innovation Therefore, the market has started pricing its shares at higher multiples. The growth is driven by fundamentals and is sustainable.
ROE 5 way Du Pont Analysis
The asset turnover has flattened over the years and the interest burden ratio has remained almost 100%. This is due to the zero long term debt in the capital structure.The Tax efficiency has remained stable and the operating margin has shown some recovery after FY 2015. Overall the ROE has flattened and has not seen any significant improvement.
Future Prospects
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
The COVID-19 outbreak will have a negative impact on sales across the countries. Exports will also see a significant decline. The demand for industrial adhesives will recover only after manufacturing companies start operating at their full capacity.
As of now, the company does not appear to be concerned about the impact of Coronavirus on China-based manufacturing of VAM (Vinyl Acetate Monomer) but are monitoring the situation closely. The disrupted supply chain can be an issue in the coming years for the company.
Pidilite will also benefit from the fall in the crude oil price as it constitutes a major portion of raw material cost. The actual impact will only be seen after the factories start operating.
The company is taking initiatives to achieve 15-16% value growth in the coming years. Expected demand scenario to improve from FY 2021 onwards in India. This may get delayed due to the COVID-19 lockdown.
Pidilite acquired a stake of $30 million in HomeLane due to evolving market dynamics and innovation. The company has an interest in interior design space and wants to be part of the changing landscape due to technology.
Tile adhesives are doing good with the category sales growing at a fast rate. The product is witnessing higher market acceptance with consumers increasingly switching from cement to tile adhesives.
The company shows promising growth opportunities once the temporary disruption due to COVID-19 clears.
Disclaimer: This post originally appeared on Billion Dollar Valuation written by Dhairya D Patel and has been reproduced here (with certain minor edits) with his kind permission. Also note that this post should not be construed as investment advice from Galactic Advisors.
