Pidilite Industry : Fevicol ka Jod

Stock Opportunities
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Decline in Sales expected as a result of lockdown. Q4 should be taken as exceptional quarter. Q1 numbers will likely be worse as the lockdown in Q4 was for one month only (March), while it is for almost 2 months in Q1.

The stock will most likely dip. Pidilite is part of Marcellus “Consistent Compounders” portfolio but it has run up quite a bit since they added to their portfolio. When CC was launched, Pidilite was at around 1050. Now 1.5 years later, it is at 1400. Could be a buy at around 1150-1200 levels. I know Saurabh says no worries even if you buy 25% higher, but when you buy at a reasonable price, you can sleep in peace

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With all due respect to your views on Marcellus and CC investing, Pidilite upward journey so far or in last 1.5 years is not linked to either. Marcelus including it in their portfolio is no way linked to its upward or downward journey and it shall remain that ways.

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There is no hope for good / better sales / earning in Q1 (most of India remain under lock down) and Q2 being monsoon season (people don’t do painting and furniture in rainy days)!
As stock price already has run-up, stock will remain in consolidation mode…or there could be correction if overall market see panic selling.

Fortunately, these companies able to protect bottom line due to favorable conditions (1) Corporate Tax cut and (2) Lower raw material price (due to lower crude oil price). But going forward these might not have additional benefits to protect bottom line.

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I was not linking Pidilite upside with Marcellus investing. I was saying that a stock that Marcellus invested in gives a lot of comfort because of the coffee can filters and good & clean accounting. Marcellus is too small a player to influence Pidilite price.

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Learning from my mistakes - instead of relying blindly on some famous name, we must do our own home work. I doubt their good & clean account: Why they are not able to detect real cash flow red flag in Caplin lab and GMM Faudler

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Was waiting for Pidilite to fall for sometime now. When these Coffee Can stocks fall, they don’t fall a lot because lot of people that missed an opportunity are waiting to buy.

Disclosure: Picked up 75 shares @ 1398

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IMO, just like other stocks, they too can crash. Take Bajaj Finance for example, it fell from almost 5000 to less than 1800.

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Since I invested in Pidilite, did some fundamental analysis before I add more at lower levels. Sharing here:

We see that this is Mr Consistent with Sales, PBT, PAT, Operating Profit CAGR in any period more than 13%. There is variation with Sales, EBITDA, PAT, Operating Profit sometimes in single digits or negative but it always bounces back over longer periods

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ROCE > 20% in every year over 10 years. With above and ROCE, this is clearly a Coffee Can stock.
The source of high ROCE is both high NPM and a high capital turnover ratio closer to 2. So even if NPM falls in the future, the capital turnover ratio will make up for it.

Company is investing for the future as we see that the fixed assets have become 2.5 times over 10 years. Company does not need to take on any debt to grow because of its strong NFAT, high NPM, low dividend payout ratio and low consistent depreciation. Company generates strong cash with cash flow RoC more than 40%. Clearly this is a jewel.

Company generates strong Free cash flow.

EXPENSIVE stock
P/E is at 64 which is above 3 year and 5 year averages of 52 and 60 respectively.
All valuation methods like Dhandho and Ben Graham show that this is over-valued stock. Dhandho method shows Pidilite as 14X overvalued (meaning it can fall 94%) and Ben Graham method shows that this is 3X over-valued (meaning it can fall 65%). Clearly, traditional valuation methods are not working for Pidilite

Did some sensitivity analysis to see what would be the returns for different earning growth rates and different P/E values.

We are likely to get double digit CAGR from Pidilite as long as the P/E after 10 years is more than 35 and the earnings growth > 15% CAGR

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Given that Pidilite has consistently delivered 15% CAGR in the past and this is likely to continue on the back of strong ROCEs, and the market will attach a high P/E for companies like Pidilite, we can say this is a reasonably ‘buy and forget’ stock.

In case earnings growth falls below 15% consistently for a couple of years, Pidilite could become unviable as there is no safety in buying such a high P/E stock

Disclosure: Invested, Will add more on falls

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Yes, but that was an opportunity !!! Nothing fundamentally happened, it was just a panic, in theory they will have a bad year or so but nothing really bad from a 10 year holding perspective. Now its back at 3000 and in an year it will back at 4000. But then remember the coffee can method portfolio holding is a minimum 10 years.

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Thanks for this analysis.

In addition to what you said, the increasing EBITDA and Net profit margin gives further comfort. Even if PE halves in next 10 years, the company should not disappoint.

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History says that Pidilite has been a prudent capital allocator, however it will be interesting to see how they perform going forward.

Disc: Invested at multiple levels with a 10-15 years view. Want to add more at dips.

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Do you think the entry of other players lik Asian Paints and reliance will hurt it’s future prospects.
Many stocks trading at pre-covid level but Pidilite still lagging behind

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Is RIL entering adhesives? Can you give more details on this?
One thing I observed in most home delivery places which ppls use for grocery, fresh items and medicines, Fevicol is not available so it’s bazaar segment seems literally facing availability issue as it’s not a priority for the grocery chains who used to keep it otherwise before covid …so if one needs Fevicol or mseal, that would demand a seperate unique trip to related store or online place available…so while industrial part is affected like all other businesses, sad to see the consumer part also affected by this roadblock. Demand should be huge as literally every school kids need Fevicol but where to order from. I see this as opportunity to develop retail part of business if only in e-commerce like the Michael store in US which is into hobbies etc. But not yet seen any steps from pidilite in this direction
Disc: pidilite part of core portfolio, not a recommendation to buy/sell

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Q1FY21 results has the EBITDA drop by 77% and a YOY decline of 82% in PBT. Seems like the impact was quite severe.

Management commentary:

“This quarter’s performance was significantly impacted by the lockdowns as a result of the pandemic. While April sales was completely impacted, we saw a partial recovery in May and a significant recovery in June. The recovery has continued in July. The profitability of the business was helped by softer input costs as well as stringent cost control measures undertaken across the organisation. While near term demand appears uncertain as a result of the continuing pandemic and the resultant restrictions across several parts of the country, we remain focused on restoring volumes and ensuring profitable growth”.

Source:
(https://www.bseindia.com/xml-data/corpfiling/AttachLive/060eccfa-3ffe-49af-881e-d7c418ddac02.pdf)

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Motilal Oswal _ Update ~ Transformative changes underway _ 15.09.20.pdf (1.1 MB)

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Hi

Pidilite acquires the famous brand of Araldite.

1cd804fa-dbce-4749-a3f1-fd1248177b8f.pdf (497.8 KB)

Rgds

Disc: continue to be invested

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Excerpts:

The Deal:

  • Pidilite is paying Rs 2100 crore to acquire a business that had Rs400 Cr of revenue in 2019 and an EBITDA of Rs 140 Cr, which means it’s paying a multiple of 5.3 times sales and 35 times EBITDA.

Was it costly?

  • Pidilite itself trades at a price to sales of 11 times and market cap to EBITDA of 48 times.

  • The Huntsman business had an EBITDA margin of 35%, much higher than Pidilite’s companywide margin of 22% during the four quarters ended December 2019. However, the consumer and bazaar segment’s margins—in which Araldite will fit are much higher and are probably more comparable.

Why buy?

  • PE funds would have been interested in such a business… A renowned brand such as Araldite with the capital support required to take it into adjacent business categories could have become a potent threat for an incumbent such as Pidilite.

  • Araldite acquisition adds 5% to Pidilite’s consolidated revenue. However, it will be a bigger addition to the adhesives and sealants category, which contributes a little over a half of sales and forms part of Pidilite’s reported consumer and bazaar segment.

  • The real value that Pidilite can extract from this acquisition is … grow the business aggressively through its vast distribution network… improve the already healthy EBITDA of the acquired business by eliminating overlapping functions.

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Pidilite Final.pdf (2.7 MB) Report by MJK Investment

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FY2021Q2.pdf (1.8 MB)

Decent results from Pidilite Industries in Q2 considering the nationwide lockdown only started to relax from May onwards.

I calculated the TTM EPS to be 17.43 on the basis of which the CMP (06-Nov) is at 91.61 times premium.

But instead of the EPS reported in Q1 this year, if we consider the number reported in Q1 last year then that measure comes down to 72.67.

Considering the last 5 year median PE of the company is 54.8 - I am staying vigilant for now.

Discolure : I have a nibbling allocation hence biased. Looking to add more at better price levels.

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PIDILITE INDUSTRIES:

Concall Summary dated 6th Nov 2020
Revenue: ₹1,880.3 cr (▲4.1%) Net Profit: ₹356.4 cr (▲9.7%)

FINANCIAL PERFORMANCE

  • The revenue from operations was ₹1,880.3 crore in Q2 FY21 as against ₹1,806.6 crore in Q2 FY20, an increase of 4.1% YoY.
  • The net profit grew by 9.7% YoY to ₹356.4 crore in Q2 FY21 from ₹325.0 crore.
  • Export revenue was ₹695 crore during the year.
  • EBITDA (before non-operating income) was ₹514 crore, which grew by 39.3% YoY.

OPERATING PERFORMANCE

  • The company’s plants are running at a capacity utilisation of 90%.
  • The material cost as a percentage to net sales was lower by 226 bps YoY. Its major raw material vinyl acetate monomer (VAM) had reached ~$900/tonne. During Q2, the prices were $765/tonne and the spot prices has now increased to $900. The company expects the prices to increase further due to availability constraint.
  • The net sales grew by 3.4% YoY. The international subsidiaries had a double digit growth while the domestic business witnessed challenges due to pandemic and signs of revival is observed for the latter part of the quarter.
  • The company’s sales had been largely impacted in the real estate segment whereas the small semi-urban markets (artisan, construction and non-wood business) are picking-up well. Its products were utilised towards construction business for Jammu and Kashmir tunnels.
  • It is planning to emphasize on advertisement and commercial spends to drive sales and volumes for the coming months.
  • It more than doubled its online penetration in a year, revenue being generated from customer and bazaar segment.
  • The company witnesses no competition from paint brands in water-proofing segment, as the company has a strong brand market share in this segment.
  • The overall market is growing at 1-1.5 times of GDP (excluding Covid phase).

BUSINESS PERFORMANCE

  • The overseas subsidiaries sales during the quarter was as follows: ₹87 crore from Asia, ₹119.1 crore from America, ₹65 crore from Middle East & Africa. The revenue from overall subsidiaries was ₹575 crore.
  • The domestic subsidiaries sales comprises of: Nina Percept Private Limited which de-grew by 35.5%, ICA Pidilite Private Limited grew by 1.1%, Cipy Polyurthane Private Limited declined by 24.2% and other subsidiaries grew by 59.9%.
  • Its product portfolio comprising of adhesives and sealants, construction and paint chemicals and art and craft materials has 79.9% sales from C&B products. The industrial adhesives, industrial resins and constructions, and pigments & preparations has 18.7% sale from B2B products and rest 1.4% from other segments.

HAMSPL ACQUISITION

  • The company has completed the acquisition of 100% stake in Huntsman Advanced Materials Solutions Private Limited (HAMSPL) for ₹2,100 crore on November 3, 2020. Huntsman sells adhesives and sealants under brands such as Araldite, Araldite Karpenter and Araseal.
  • The acquired business (HAMSPL) is a profitable business with strong leadership and distribution channels. It has miniscule amount of fixed assets, as the assets are through tolling arrangements and are done on the basis of cost conversion route.
  • The acquisition was funded through the liquidation of the company’s treasury business.
  • The transaction value was 90% upfront payment and the balance 10% in 18 months, on deferred consideration through mutual consent between both the companies based on the condition of certain revenue achievement in the coming 6 months due to uncertainty in markets.
  • Pidilite Industries has a current plan of reflecting the acquired business as investment proceeds in its financial statement and run it as an independent entity.
  • The strategy of Pidilite would be to enhance its portfolio brand through this acquisition and increase its footprints through distribution channels and accelerate its revenue through it. There would be a cost and revenue synergy from the acquired business as the product category is already known by the parent company.
  • The acquisition includes the trademark license for Middle East, Africa and ASEAN countries.

CAPITAL EXPENDITURE

  • The company plans to operate at a capex of 4%-5% of revenue.
  • There would be no differential spend on capex. It has 9 plants which are in work-in-progress phase and there would be no extra spending on capex towards these plants beyond that range.

Disc: Invested in Core PF.

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My two cents on my Pidilite investment…
This pandemic has created a strong gulf between Haves & Have-nots. Have - nots are the people , whose businesses got affected, who lost their jobs, who had pay cuts. These are the people whose economic & financial situation was affected by the pandemic. Whereas, Haves are the people who got benefitted from the pandemic . They have steady jobs, steady income & steady businesses. Their income wasn’t affected, but their expenses were largely constrained , restricted to basic necessities & all the discretionary expenses, luxury expenses, extravaganza expenses were reduced drastically. So, their household savings increased.

Now, at the macro level, we have three things going on…

  1. People have access to cheaper credit because RBI lowered the interest rates
  2. Indian household savings & pent up demand
  3. Consumer confidence, which was low at the peak of pandemic , is slowly, but gradually restoring back.

Now, this trifecta will propel the real estate & housing sector growth. This will in turn benefit several sectors like cement , paints ( we are alrdy witnessing the rally in these stocks), tiles, waterproofing, furnishing etc. Pidilite is the market leader in waterproofing & adhesives( used for furniture & tiles). So, it is expected to benefit and grow tremendously on the back of real estate growth.

Let me know your views, suggestions & thoughts on the above theory.

Disclaimer : This is just a theory tht I have in my mind & I am invested in the stock. Please do your own research before investing in this stock.

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