J. P Morgan - Pidilite Industries

www.jpmorganmarkets.com

Asia Pacific Equity Research03 May 2014

Pidilite Industries

Initiation

OverweightPIDI.NS, PIDI IN

A stock to bond with; initiate with OverweightPrice: Rs315.00

Price Target: Rs375.00

India

Building Materials

Gunjan Prithyani AC

(91-22) 6157-3593

[email protected]

Bloomberg JPMA PRITHYANI <GO>

J.P. Morgan India Private Limited

Saurabh Kumar

(91-22) 6157-3590

[email protected]

J.P. Morgan India Private Limited

Leon Chik, CFA

(852) 2800-8590

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

YTD 1m 3m 12mAbs 10.1% 2.1% 14.0% 25.9%Rel 3.9% 3.0% 2.5% 14.3%

Pidilite Industries (Reuters: PIDI.NS, Bloomberg: PIDI IN)

Rs in mn, year-end Mar FY12A FY13A FY14E FY15E FY16ERevenue (Rs mn) 31,097 36,579 42,395 48,993 57,101Revenue growth (%) 17.6% 17.6% 15.9% 15.6% 16.5%EBITDA (Rs mn) 4,926 5,990 7,327 8,606 10,128EBITDA Margin 15.8% 16.4% 17.3% 17.6% 17.7%Net Profit (Rs mn) 3,244 4,221 4,863 5,837 6,876EPS (Rs) 6.39 8.23 9.49 11.39 13.41DPS (Rs) 1.90 2.60 3.32 3.99 4.69P/E(x) 49.3 38.3 33.2 27.7 23.5EV/EBITDA (x) 32.7 26.8 21.9 18.4 15.5Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataShares O/S (mn) 508Market Cap (Rs mn) 159,909Market Cap ($ mn) 2,650Price (Rs) 315.00Date Of Price 02 May 143M - Avg daily vol (mn) 0.223M - Avg daily val (Rs mn) 65.773M - Avg daily val ($ mn) 1.1NIFTY 6694.80Exchange Rate 60.33Price Target End Date 31-Mar-15

See page 33 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Price Performance

PIDI.NS share price (Rs)

NIFTY (rebased)

Initiate with Overweight and Mar-15 PT of Rs375. Pidilite Industries (PIDI) is a leading adhesive & construction chemical manufacturer in India and holds a near-monopolistic share (50-70%) across its key brands (Fevicol/M Seal/Dr Fixit). PIDI has delivered revenue and EPS growth of 17% over the last three years despite challenging fundamentals for discretionary and construction spends. We expect growth to be sustained, especially given expectations of a macro improvement and a pick-up in industrial activity in 2H. Recent improvement in its underperforming international portfolio should also aid growth. Valuation of27.7x FY15E P/E is at a premium to its trading history, but this should continuegiven its increasing FCF generation, strong ROE profile, and overall valuation re-rating seen across the building products space.

Glued to steady growth: PIDI has a long-standing track record of delivering steady revenue and earnings growth with minimal volatility, especially in its consumer-facing business. New product launches and increasing growth in tier-2 towns have been aided by a strong brand equity and widespread distribution network (1MM+ points of presence). Also notwithstanding cost pressures in key RM (VAM, Oil derivatives) and expected ad rate inflation, we think PIDIcan hold on to margins given its improving contribution mix and ability to pass on costs via price rises (consistent history of over 10 years). We model revenue growth of 15-16% in FY15/16, similar to FY14’s. Improvement in discretionary spending or industrial activity in 2H could provide upside to growth trends.

International business now nearing a turnaround after being a drag on financials since FY08. We are encouraged by growth and margin improvement seen over 9M FY14 driven by price increases and cost control along with initiatives taken to strengthen local management and marketing teams. In Brazil (one of the biggest markets in the international portfolio) PIDI’s losses shrank significantly in 9M and it is targeting cash breakeven over the next year.

Earnings and valuations: Our expected EPS growth for the business over the next two years is 19%. Our DCF valuation imputes a COE of 12.5% and long-term growth of 6%. PIDI’s closest competitors in the Paints space – APNT (UW, covered by Latika Chopra) and Berger (Not Covered) – trade at comparable or higher multiples and have similar industry structure, business model, demand fundamentals (home improvement), and cost and margin profile.

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Gunjan Prithyani(91-22) [email protected]

Key catalysts for the stock price: Upside risks to our view: Downside risks to our view:

- Pick-up in growth trends as macro improves and industrial activity revives

- Trends in international business especially Brazil

- Increase in dividend payout given strong FCF generation and net cash balance sheet

- Stake sale in Elastomer project

- Higher-than-expected growth trends

- Faster-than-expected cash breakeven in international operations

- Sharp decline in VAM prices and consequent margin improvement

- Cash deployment in non-core acquisition or Elastomer project

- Delay in international cash breakeven

- Sustained weak macro impacting the growth trends

Key financial metrics FY13A FY14E FY15E FY16E Valuation and price target basis

Revenues (Rs M) 36,579 42,395 48,993 57,101 Our Mar-15 price target of Rs375 is based on DCF, factoring in a COE of 12.5% and long-term growth of 6%. This implies a 28x forward P/E, whichis 1SD above PIDI's mean valuation for the last two years and at a ~20% discount to ANPT’s average trading multiple for the last two years.

Revenue growth (%) 17.6% 15.9% 15.6% 16.5%

EBITDA (Rs M) 5,990 7,327 8,606 10,128

EBITDA margin (%) 16.4% 17.3% 17.6% 17.7%

Tax rate (%) 27.5% 27.5% 28.0% 29.0%

Net profit (Rs M) 4,239 4,863 5,837 6,876

EPS (Rs / share) 8.2 9.5 11.4 13.4

EPS growth (%) 28.9% 15.2% 20.0% 17.8%

BVPS (Rs / share) 32 38 45 52

Operating cash flow (Rs mn) 5,175 3,654 5,510 6,277

Net margin (%) 11.6% 11.5% 11.9% 12.0%

Sales/assets (X) 2.0 2.1 2.1 2.1

Net debt/equity (%) (0.2) (0.2) (0.2) (0.3)

ROE (%) 28% 27% 28% 28%

Key model assumptions FY13A FY14E FY15E FY16E

Consumer & Bazaar growth 20.7% 15.1% 15.2% 16.2%

Industrial segment growth 8.5% 14.5% 12.6% 14.8%

International growth 11.6% 22.0% 18.0% 18.0%

Source: Bloomberg, Company and J.P. Morgan estimates.

Sensitivity analysis EBITDA EPS JPMe vs. consensus, change in estimates

Sensitivity to FY14E FY15E FY14E FY15E EPS FY15E FY16E5% change in Domestic growth rates -1.0% -1.9% -1.0% -1.9% JPMe old NA NA

JPMe new 11.4 13.4

+1% change in EBITDA margin -5.4% -5.5% -5.4% -5.5% % chg NA NA

Consensus 11.5 13.6

Source: J.P. Morgan estimates. Source: Bloomberg, J.P. Morgan.

Pidilite: Comparative analysis with other building product companiesPidilite Asian Paints Kajaria Ceramics Hindustan

Sanitary-wareGreenply

5 year Revenue CAGR (FY09-14) 17% 18% 23% 25% 22%EBIT margin (avg 5 year) 16.4% 16.3% 12.5% 11.3% 7.7%ROE (avg 5 year) 30% 36.0% 28.3% 10.0% 18.6%Net D/E (0.2) (0.2) 0.5 0.9 1.2Dividend payout 30%+ ~40% ~20% 15-20% 15%Earnings growth 34% 25% 68.4% 3.8% 15.6%P/E 27.7 34.6 22.6 15.6 6.8EV/EBIT 20.3 22.5 12.2 10.6 5.3

Source: Company

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Table of ContentsInvestment Summary ...............................................................4

Initiate with Overweight and Mar-15 PT of Rs375 ...................................................5

DCF valuation: what is the stock pricing in?............................................................6

Stock price performance and key catalysts ...............................................................6

Investment Positives................................................................7

Industry leader in adhesives space; Diversification into non adhesive segments has also yielded positive results .....................................................................................7

Strong connect with demand influencers has helped build brand equity ....................8

Multiple growth drivers...........................................................................................9

Growth has moderated but still strong at 15%+......................................................10

Key segments .........................................................................11

Consumer & Bazaar: Retail products driving the growth ........................................11

Industrial Chemicals: Weak domestic trends offset by pick-up in exports on rupee depreciation ..........................................................................................................13

Others: Specialty acetates ......................................................................................14

International business witnessing improving trends; Brazil cash break-even likely in the next year..........................................................................................................15

Strong FCF generation and net cash balance sheet provides scope for higher dividend payout...................................................................................................................17

Expect margins to stay firm...................................................................................18

Investment risks .....................................................................19

Spike in VAM prices or FX depreciation could lead to margin volatility in the near term… ..................................................................................................................19

Cash deployment in non-core business remains a risk ............................................20

Elastomer project remains a drag on returns; strategic tie-up could remove an overhang...............................................................................................................20

Lower-than-expected domestic growth trends ........................................................20

Pidilite Industries: Comparative analysis.............................22

PIDI vs. Paints companies (Asian Paints)...............................................................22

PIDI vs. Building product companies.....................................................................25

PIDI vs. Global chemical companies .....................................................................26

Financials................................................................................28

Company profile .....................................................................30

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Investment Summary

We initiate coverage on PIDI with an Overweight rating and price target of Rs375, implying upside of ~20% from the current share price.

PIDI holds a near-monopolistic position in the adhesive and sealants industry in India. The company has a strong portfolio of brands, with its flagship products such as Fevicol and M Seal commanding a 70%+ market share in their respective categories. The company’s diversification in non-adhesive segments over the pastdecade, i.e. construction chemicals and art materials, has also met with good success. Its key construction chemical brand Dr Fixit commands a 50% market share in the retail waterproofing segment.

PIDI has a long-standing track record of delivering steady revenue and earnings growth with minimal volatility especially in its consumer facing business. This as new product launches, increasing growth in tier-2 towns have been aided by its strong brand equity and widespread distribution network (1MM+ points of presence).9M revenue growth was 16% driven by steady growth of consumer / retail adhesives which has helped offset weak trends in discretionary and industrial segments. We expect the growth trends for the company to sustain, given expectation of an improved macro & pick up in industrial activity in 2H. Recent improvement in its international portfolio is also encouraging and should aid revenue/ earnings growth.

PIDI’s stock price has seen a significant re-rating over the last five years, and valuations at 27.7x FY15E P/E are at a premium to its trading history. This is not at odds with the valuation up-move seen across the entire building product space (paints, ceramics etc) and is supported by its steady growth trends, strong ROE profile, and increasing FCF generation, in our view. Increase in dividend payout, international business turnaround, and clarity around tie-up for Elastomer project are some key stock catalysts ahead.

We view paints companies as the closest comparables for PIDI given their similar industry structure, demand fundamentals (home repair / renovation/ new home furnishing), cost structure (high reliance on crude derivatives/ imports), good pricing power, and similar margin profile. Looking at the last 10 years, the performance of PIDI and Asian Paints has been fairly comparable across most key financial metrics. Compared to other building products companies (tiles, plywood, sanitary ware) and chemical companies, PIDI is trading at a premium. This in our view is justified given PIDI’s dominant position (high pricing power), better ROE and earnings growth profile and strong BS.

Table 1: Pidilite: Comparative analyses with building product companies

Pidilite Asian Paints Kajaria Ceramics Hindustan Sanitary-ware

Greenply

5 year Revenue CAGR (F09-14) 17% 18% 23% 25% 22%EBIT margin (avg 5 year) 16.4% 16.3% 12.5% 11.3% 7.7%ROE (avg 5 year) 30% 36.0% 28.3% 10.0% 18.6%Net D/E (0.2) (0.2) 0.5 0.9 1.2Dividend payout 30%+ ~40% ~20% 15-20% 15%Earnings growth 34% 25% 68.4% 3.8% 15.6%P/E 27.7 34.6 22.6 15.6 6.8EV/EBIT 20.3 22.5 12.2 10.6 5.3

Source: Company reports and J.P. Morgan estimates. For non covered companies we use Bloomberg consensus estimates

Established in 1959, Pidilite is a

pioneer in consumer and

industrial specialty chemicals. The company is a market leader

in most categories and has a

strong brand portfolio. Itsflagship brands, i.e. Fevicol,

Feviquick, and M- Seal,

command 70%+ market share in their respective categories

From being a pure adhesive

player, co has diversified into construction chemicals and art

material segment over the last

decade

Further, the company has made

a foray in international market

since 2005 via acquisition of brands and companies in the

US, Brazil, Southeast Asia and

the Middle East

Pidilite: Key brand portfolio

Category Major Brands

Adhesives & Sealants

Fevicol, M- Seal (leakage in pipes), Feviquick (instant adhesive),

Fevimarine (stickingmarine products)

Construction Chemicals

Dr. FIXIT (leakage in walls), Roff (Tiling

solution)

Art Materials

Ranipal, Fevicol Hobby Ideas, Motomax, Cyclo

Source: Company, J.P. Morgan

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Initiate with Overweight and Mar-15 PT of Rs375

Our Mar-15 price target of Rs375 is based on DCF factoring in a COE of 12.5% and long-term growth of 6%. This implies a 28x forward P/E which1SD above PIDI’s mean valuations for the last two years and at a ~20% discount to ANPT’s averagetrading multiple for the last two years.

Key risks to our price target include: a) usage of surplus cash to diversify into non-core segments/ brands; b) delay in cash break-even for international operations; c) sustained macro weakness and consequently moderation in growth trends.

Figure 1: Pidilite: P/E trading range over the last two years

Source: Company reports and J.P. Morgan estimates.

Figure 2: PIDI valuation discount to Asian Paints (on P/E basis)


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DCF valuation: what is the stock pricing in?

In this section, we also look at DCF valuations and growth rates that the market is implying currently. In our DCF analysis, we use a WACC of 12.5% and medium-term revenue/ EBITDA CAGR of 16%. The current stock price seems to be implying 3-4% long-term (terminal) growth, which in our view in not demanding.

Our PT assumes a 6% terminal growth which we think is achievable factoring the price inflation in the business (4-5% pa price increase achieved over past decade) and also given linkages to real estate demand and increasing retail/ consumer usage of the products.

Table 2: DCF sensitivity to long-term growth rates and WACC

11.5% 12.0% 12.5% 13.0% 14.0% 15.0%3.0% 359 332 308 287 252 2234.0% 383 352 325 302 262 2315.0% 416 379 347 320 275 2406.0% 460 414 376 343 291 2517.0% 523 463 414 374 312 2658.0% 623 537 470 418 339 284


Stock price performance and key catalysts

Key catalysts for stock, in our view, are -

1. Stake sale in Elastomer project – This will remove an overhang of further investment for completion of the project.

2. Cash break-even for Brazil operations which have been a drag on financials over the last few years. Recent revenue/margin trends on this biz. have been encouraging.

3. Increase in dividend payout – given limited capex needs and increasing FCF generation.

4. Improvement in domestic growth trends – driven by expectation of macro environment and pick up industrial activity in 2H.

Figure 3: PIDI: Share price performance

Source: Bloomberg

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Investment Positives

Industry leader in adhesives space; Diversification into non adhesive segments has also yielded positive results

PIDI is market leader is adhesive and sealants and construction chemicals space in India. PIDI has a strong portfolio of brands with key products like Fevicol, M-Seal and M-Seal commanding 70%+ market share in their respective categories. Even the relatively newer brand Dr Fixit (under its construction chemical segment) has a 50% market share in retail water proofing segment. Company’s flagship brand “Fevicol” is synonymous with adhesives in India and is largest selling adhesive in Asia.

Brand extensions to introduce new variants (of Fevicol i.e. marine/ speedx), product innovation, creative marketing, and product offerings across price points (especially its Rs5 packages) to capture retail consumer demand have enabled company to maintain its market share in the adhesives space. Further, the company’s strategy to replicate Fevicol success in non-adhesive segments, i.e. construction chemicals / art materials is also yielding positive results and these segments have been key driver of growth over the last few years.

Table 3: Pidilite: Key brand portfolio

Category Major Brands

Adhesives & Sealants Fevicol, M- Seal (leakage in pipes), Feviquick (instant adhesive), Fevimarine (bonding products with water exposure)

Construction Chemicals Dr. FIXIT (leakage in walls), Roff (Tiling solution)

Art Materials Ranipal, Fevicol Hobby Ideas, Motomax, Cyclo

Source: Company, J.P. Morgan

Figure 4: Pidilite – Segmental breakdown (F13)

Source: Company

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Strong connect with demand influencers has helped build brand equity

PIDI has very strong brand equity across its users; built on the back of significant investments in advertising and publicity and relationship building with key demand influencers (carpenters, architects, plumbers etc). PIDI’s innovative advertisements have resulted in mass appeal and high brand recall. The company has created a fairly strong connect with the demand influencers and customers for its products. Its brand “Fevicol” is synonymous with adhesive in India.

PIDI undertakes relationship building activities with its key users or demand influencers i.e. carpenters, plumbers and architects. Some of the key initiatives taken by the company include: a) Fevicol champions club which is a community of 50-60K carpenters for networking; b) number of publications for carpenters (furniture book highlighting new trends and designs) and artists (fabric designs, Paint designs etc); and c) Dr Fixit Knowledge Center –for correct understanding and application of water proofing solutions for architects and civil engineers.

Figure 5: Pidilite Industries: Advertisement and Publicity spend - Rs B and as % of sales


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Multiple growth drivers

Below we highlight the key growth drivers for PIDI’s products range.

Diversified user base

PIDI has a diversified user base ranging from carpenters/ architects (furniture industry), plumbers, art professionals, retail consumers, electricians and various industries (paints/ footwear/ leather). This helps company offset growth pressures in case of demand weakness in a particular user industry. For instance, demand for discretionary products (new furniture) was slow in FY14, although this was offset by steady retail demand (Feviquick, Fabricare etc).

Large distribution base with widespread geographic presence

PIDI has one of the largest distribution networks within the building products space. The company has a separate distribution network for each of its segments. Overall ithas 1000 distributors across segments and 60K dealers. For its retail products (such as Feviquick), the company has 1MM points of presence (200K direct and 800K indirect). This is the highest in the building products industry and comparable to FMCG companies. PIDI’s target is to reach 3MM touch points over the medium term, which will continue to drive demand for the retail-led products.

Home repair / renovation a key home driver, which is more stable than new home construction

A large part of the demand for the company’s products comes from home repair & renovation work and retail usage of adhesives (Feviquick). Renovation demand has a shorter cycle of 4-5 years vs. new home construction and hence demand is relatively more stable vs. new home construction. Further, the number of old buildings in large (like Mumbai/ Delhi) as well as tier 2/3 cities, which can potentially go under renovation, is fairly high and these provide a large opportunity for its construction chemical segment (water proofing).

Dominant presence and low cost of usage (as % of overall spend on home renovation/ furnishing) provides company pricing power

PIDI has fairly strong pricing power given its brand equity and dominant market share. Further, spending on PIDI’s products as percentage of total spending on renovation / new home furnishing is fairly low. This makes demand relatively price-insensitive and perceived quality usually takes precedence over cost.

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Growth has moderated but still strong at 15%+

PIDI has been able to register healthy growth trend (16% in 9M), despite overall weak macro and slowing discretionary spending, given the company’s strong brand portfolio, extensive distribution network, diversified user base, and higher replacement demand (vs. new homes). While there has been some moderation in FY14, we think the overall growth trend is fairly healthy at 15%+.

For FY15/16, we are modeling in largely stable growth of 15%/16%, primarily driven by steady growth trends in the consumer segment, while we do not factor a revival in industrial demand into our assumptions. Any improvement in overallmacro and industrial activity will likely provide upside to growth forecasts.

Long-term prospects for the adhesives industry remain strong, given rising income levels across rural/ urban areas, low per-capita consumption of adhesives offers potential headroom for growth, increasing the desire to renovate/ refurbish homes (shorter cycle) and higher awareness of branded products.

Figure 6: Pidilite: Standalone (domestic business) revenue growth trend


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Key segments

Consumer & Bazaar: Retail products driving the growth

Consumer and Bazaar segment accounts for 80% of the overall revenues and 90% of the segmental profits. This segment has continued to register steady growth given its diverse product portfolio catering to different end users. Hence, demand moderation in the furniture industry over the last year has been offset by steady consumer demand (retail usage for Feviquick, M-Seal etc) and strong growth in the art / stationary segment. Consequently, a large part of incremental growth in this segment is coming from non-Fevicol products.

Figure 7: PIDI: Consumer and Bazaar segment growth trends


Figure 8: PIDI: FY13 Breakdown of Consumer & Bazaar segment

Source: Company

The share of Consumer & Bazaar segment has been increasing over the last few years due to weak performance of industrial segment.

Within Consumer and Bazaar, the company operates under three segments

a) Adhesive & Sealants (51% of revenues): Key brands in this segment include its flagship Fevicol, M-Seal which are used for wood work, plumbing, electrical purposes etc. Most brands in this segment command a 70%+ market share and face limited competition. Huntman’s products such as Carpenter/ Araldite are the key competition, while others are primarily from smaller regional players. This segment has registered a 21% CAGR growth over FY10-13. Growth over the recent past, though, has been led by non-fevicol brands.

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Figure 9: Adhesive and Sealants: Revenue growth trends


b) Construction and Paint Chemicals (20% of revenues): PIDI has a wide product range in this segment. Key brands include ROFF and Dr Fixitwhich are essentially used for waterproofing, tile fixing, floor hardening etc. PIDI’s brands are market leaders in their categories and the company benefits from a first-mover advantage in this segment. However, it has seen competition increasing from paint companies in this space. The segment is as yet fairly nascent and penetration levels are very low, so it offers a strong growth potential. This segment registered a 25% CAGR growth over FY10-13 given the relatively low base, PIDI’s strong brands, and high industry growth.

Figure 10: PIDI: Construction Chemicals and Paints


c) Art Materials and Stationary (10% of revenues) – The company has anextensive range of art materials for education, hobby, and fine art segments. Key brands in the segment include fabric glue, Ranipal, Fevicare, Fevicraft etc. This segment has seen sharp growth over the last two years, aided by product refresh, new launches, and a marketing push by the company. This segment is growing off a low base and, given retail oriented products, itshould continue to drive growth over the next few years.

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Figure 11: Art & Material: Revenue growth trends


Industrial Chemicals: Weak domestic trends offset by pick-up in exports on rupee depreciation

PIDI’s industrial segment has seen an impressive revival over the last few quarters, after a fairly slow FY12/13. This has primarily been aided by a pick-up in exports on the back of a weak rupee, while domestic market performance remains fairly subdued due to weak industrial activity (IIP trends) in India. Key export markets for the company are the Middle East, Africa and emerging markets in the U.S. 9M industrial segment growth stood at 14% as against FY12/13 sales growth of 7-8%.

We are modeling growth of 13-14% over FY15/16. A favorable election outcome will be the key to a revival in industrial activity and hence could meaningfully aid the growth trends in this segment.

Within industrial, company has three sub segments:

a) Industrial Adhesives – PIDI is a market leader in this segment with extensive range of products catering to packaging, cigarettes, stickers, labeling, footwear, book binding etc.

b) Industrial Resins – Specialty chemicals for industries such as paints, non-woven and flocked fabrics and leather catering to domestic and export market. This is used as an intermediate product by paper, leather and paint companies.

c) Organic pigments – PIDI is a market leader in pigment dispersions for textile segment. Also caters to paint and plastic companies

Of the above segments, industrial resins and pigments have a high contribution from exports, while the industrial adhesives segment is primarily domestic-market-driven.

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Figure 12: PIDI – Industrial business growth trend


Figure 13: PIDI: Industrial segment – FY13 revenue breakdown

Source: Company

Figure 14: Industrial production trends in India (YoY)

Source: Bloomberg

Others: Specialty acetates

The Others segment is primarily Vinyl Acetate Monomer (VAM) plant operations. VAM is the largest raw material for PIDI. However, the company is importing VAM currently as the price of bought out VAM is lower than in-house production cost.

PIDI is now evaluating the possibility of utilizing the VAM plant for other specialty acetates. As of now trials are underway and the company is marketing the products to clients. The company expects the revenue contribution from this segment to increase to Rs1-2B+ over the next 2-3 years, once the product gets acceptance, as against FY13 revenues of Rs200MM (9MF14 – Rs240MM). This could result in a positive EBIT contribution from this segment as capacity utilization picks up, compared to the loss in FY13.

22.3%

7.2%8.5%

14.5%12.6%

14.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

3

4

5

6

7

8

9

10


Revenues Growth (%)

Industrial Resins

31%

Industrial Adhesives

37%

Organic Pigments and Preparations

32%

(20)

(10)

0

10

20

30

40

Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14

IIP Capital goods Consumer durable Consumer non-durable

%

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International business witnessing improving trends; Brazilcash break-even likely in the next year

PIDI’s international operations have shown a meaningful improvement over the last few quarters, after being a drag on the company’s consolidated financials since FY07. This has been primarily driven by improving trends in Brazil operations and margin improvement seen across geographies aided by both price increases taken and cost controls. A near-term focus for the company is reaching cash breakeven for Brazil operations, and trends over the last few Qs have been encouraging.

Specifically for South Americas business (key to international turnaround), PIDI has taken a number of measures to improve the performance, i.e. strengthening the management (appointed CEO) and marketing / sales team on the ground. These measures have yielded positive results, and consequently losses in Brazil have reduced significantly.

Overseas subsidiaries registered a 14% growth (constant currency basis) in 9M and margins improved across all businesses.

Table 4: Pidilite: International revenues and profitability for key marketsRs MM FY12 FY13 9MFY13 9MFY14 % ch Y/YInternational revenues North America 1,276 1,574 1,238 1,401 13% South America 1,260 1,225 941 1,168 24% Middle East 291 289 227 239 5% South & South East Asia 422 595 433 613 42% International EBITDA North America 62 55 56 104 84% South America (94) (150) (119) (29) -76% Middle East (50) (21) (10) (36) 244% South & South East Asia 45 93 76 116 52% International EBITDA margin North America 5% 4% 5% 7% 3% South America -7% -12% -13% -2% 10% Middle East -17% -7% -5% -15% -10% South & South East Asia 11% 16% 18% 19% 1%

Source: Company reports

PIDI’s international presence has primarily been building through acquisitions done over 2005-07. The company has operations in the US, Brazil, Bangladesh, Egypt and Thailand, Dubai and Singapore. Below we highlight the trends in key markets-

a) USA – Key businesses here are Sargent Arts and Cycle. Sargent (art material) registered 5.5% Y/Y revenue growth and Cycle (car care) grew by 3% Y/Y in 9M. Margins although expanded meaningfully (by 200-500bpY/Y) for the both the segments aided by price increases implemented by the company.

b) South America – With management changes (CEO) done and the strengthening of the on-the-ground sales & marketing team, business seems to seeing good traction and losses have come down significantly. Revenue growth for 9M stood at 24% and losses have come down to a marginal Rs30MM (vs. a 9M loss of Rs119MM last year).

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c) South and Southeast Asian – Revenue growth stood at 29% in 9M (constant currency) and EBITDA was almost 1.5x last year. Near-term growth in Bangladesh has been impacted due to political issues; although company remains positive on long term demand outlook in Bangladesh.

d) Middle East and Africa – Revenue growth has been healthy, despite difficult market conditions in Egypt.

Table 5: Pidilite – International Acquisition History

International foray in Singapore, Dubai

Pidilite acquired Chemson Asia Pvt. Ltd, a Singapore-based brand that manufactured waterproof coating and emulsion paints.

Pidilite took over Jupiter Chemicals in Dubai. Furthering its international operations, the company incorporates two more subsidiaries in Brazil and Middle East.

Sargent Art (USA) Pidilite USA Inc. acquired Sargent Art brand & business in June 2006. Based in Pennsylvania, Sargent Art sells art materials in USA for over 50 years. The product range includes crayons, tempera colours, acrylic colours, markers and modelling clay.

Cyclo (USA) Based in Florida, USA, Cyclo was acquired in June 2006 by Pidilite. The product range includes maintenance, performance and appearance products for DIY (Do it Yourself) and professional car care segment. Co sells products in the United States and 50 other countries.

PULVITEC (Brazil) Pidilite Brazil Ltd. acquired Pulvitec in June 2007. Pulvitec has been in the business of developing adhesives, sealants and construction chemicals since a very long time. The acquisition helped Pidilite tap the large Latin American market.

Source: Company reports

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Strong FCF generation and net cash balance sheet provides scope for higher dividend payout

PIDI’s domestic business is generating strong cash flows given healthy growth trends, stable working capital, and limited capex commitments. Further, co's international operations are also improving and should contribute positively to the cash flows over F15/16. We expect the company to generate free cash flows of Rs3.8B/Rs4.6B over the FY15/16 respectively.

PIDI has a consistent dividend payout history and has maintained its dividend payout at 30%+. Given the strong cash generation and net cash balance sheet (Rs3B+), there is a possibility of a higher dividend payout ahead.

Table 6: Pidilite Industries: Cash flows

Rs MM FY14E FY15E FY16E

EBITDA 7,327 8,606 10,128Less: Tax Paid (1,835) (2,259) (2,795)Change in working capital (1,838) (837) (1,056)Operating cash flows 3,654 5,510 6,277

Capex (1,500) (2,100) (2,100)Change in investments 0 0 0Net finance charges 170 343 453Free cash flow 2,324 3,753 4,630

Dividend paid (2,000) (2,400) (2,828)Net cash flows 340 1,380 1,835

Source: J.P. Morgan estimates.

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Expect margins to stay firm

PIDI’s margins have been improving over the last few years despite RM increases and sharp rupee depreciation seen over the last year. We expect the margins to stay firm on the back of company’s strong pricing power, improving sales mix and improvement in profitability of international operations.

a) Favorable value mix – Shift in sales mix with higher contribution coming from better-margin Consumer & Bazaar segment, while growth for relatively low-margin industrial segment has been subdued.

b) Strong pricing power – Given PIDI’s strong brand equity and dominant market share, the company has been able to effect price increases to offset any cost pressures due to RM cost increase / rupee depreciation.

c) International businesses – After being a drag for the last few years, international business should start to contribute positively to the consolidated financials ahead. This is being driven by cash breakeven at Brazil and improving margin trends across other markets (cost controls)

Table 7: Pidilite: Sales and EBIT mix

% of sales F10 F11 F12 F13 F14E

Consumer & Bazaar 77% 77% 79% 81% 81%Industrial 23% 23% 21% 19% 19%% of EBIT F10 F11 F12 F13 F14E

Consumer & Bazaar 81% 82% 86% 89% 91%Industrial 19% 18% 14% 11% 9%


Figure 15: Pidilite – Margins improving on improved mix and pricing power

Source: Company data, J.P. Morgan estimates

13.8%

14.5%

15.3%

15.8%16.1%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

FY12 FY13 FY14E FY15E FY16E

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Investment risks

Spike in VAM prices or FX depreciation could lead to margin volatility in the near term…

PIDI’s key raw material VAM (Vinyl Acetate Monomer) as well as other monomers, are largely imported or linked to crude oil prices (~50%+ of RM cost). For VAM, India is dependent on imports from countries such as Singapore, Taiwan, and Saudi Arabia. VAM prices have increased significantly over the last 3-4 months due to supply constraints on account of large plant closures in Europe late last year and planned turnarounds in US plants. VAM prices have increased to US$1,300+ per ton, after being rangebound at US$950-1000/ton for the last three years.

The recent surge in VAM prices is likely to impact the gross margins in the near term, although this should normalize as the company implements price increases to offset the cost increase. However, we note that price increases come through with a lag of 1-2 quarters, with the consumer segment seeing faster pass-through (given market dominance) than the industrial segment.

PIDI has fairly high pricing power for its key products across segments given its dominant market share and strong brand equity. Further, given that the spending on PIDI’s product is fairly low as a proportion of total home repair/ renovation, demand is not very price sensitive. Therefore, the company has been able to implement price increases to offset any cost pressures coming from rupee depreciation as well as any RM appreciation in the past.

Figure 16: VAM prices – Recent surge in prices likely to impact margins in the near term

Source: Company data, J.P. Morgan calculations

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Cash deployment in non-core business remains a risk

In its recent analyst calls, management indicated that once the Brazil operation reaches cash break-even, it will evaluate acquisition opportunities in international markets, primarily focused on strong local brands in emerging markets. The company has not done any international acquisitions since 2007, as the focus had been on integrating the earlier acquisitions and improving the profitability of international subsidiaries.

The price paid for any international acquisition and correspondingly integration issues for big acquisitions remain the key risks, given that the past experience of international acquisitions has not been very encouraging. Further, cash deployment in the non-core business is also a risk (as seen in Elastomer acquisition earlier).

Elastomer project remains a drag on returns; strategic tie-up could remove an overhang

PIDI has stalled work for the last two years on its Elastomer project in Gujarat (Dahej). The company is now looking for a strategic partner for the project. Overall ithas invested around Rs3.6B to date, and completion of the project would entail an additional Rs3.5B in capex.

Given significant pending capex, non-core operations and changes in the demand environment, PIDI is evaluating a tie-up with a strategic partner or a stake sale in the project. Any progress on this could remove an overhang on the stock. PIDI’s reported ROEs have been adversely affected by this investment.

Just to recap, PIDI had acquired the plant, machinery, technology, patent and trademark of the synthetic elastomer project in June 2007 from Polymeri Europa Elastomers. The production (25000 tonnes pa) from the plant was to be exported to Europe and Amercia. This acquisition is completely unrelated to its core business of primarily consumer-driven adhesives business. Consequently, the acquisition was not taken well by the market.

Lower-than-expected domestic growth trends

Sustained macro weakness and deferment of discretionary spending could further adversely affect the growth trends for the company. This, in our view, is the key risk to earnings and stock performance.

Consensus estimates for PIDI have come down marginally over the past quarter due to moderation in growth trends. This is primarily due to a slowdown in discretionary segments (home furnishing/ renovation) over the past year. Growth in consumer/ retail products (Feviquick/ M Seal) and art materials, though, has helped offset the weakness in the repair/ renovation segment, thereby keeping overall growth healthy at 15%+.

21



Figure 17: Pidilite: Consolidated consensus estimates

Source: Company reports and J.P. Morgan estimates

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Pidilite Industries: Comparative analysis

Given no direct comparable, we benchmark Pidilite’s financial metrics and valuations to building product companies as well as global chemical companies in the sections below. Figure 18: PIDI – Porters model

Source: JP Morgan

PIDI vs. Paints companies (Asian Paints)

The closest comparables to PIDI in the listed space are paint companies. Both have a similar industry structure (concentrated market share), demand fundamentals (home repair / renovation/ home furnishing), cost structure (high reliance on crude derivatives/ imports) and good pricing power. In terms of demand mix, both sectorshave a high share of replacement demand vs. new home completions.

PIDI, however, also has a retail product portfolio in the adhesive and sealant space which has helped offset growth weakness in the discretionary segment (renovation) over the last year. Further, PIDI has been an early entrant in the construction chemical space (25% of revenues), while paint companies are now aggressively building up a presence in this segment.

Below we compare industry leader Asian Paints (APNT, covered by Latika Chopra) and PIDI across various metrics. We note APNT is much bigger in scale than PIDIgiven the large industry size. Both companies have a dominant position in their respective industries, Paints and Adhesives/ sealants. APNT has a 50% share in the decorative paints business, while PIDI has a 70%+ share in its core segment of adhesives. Given the leadership position and strong brand, both companies have

23



good pricing power and have been able to offset cost pressures through price increases.

Table 8: Asian Paints and Pidilite: Key metrics (FY14)

Rs B Asian Paints PidiliteRevenue 124.0 42.6EBIT 18.4 6.5EBIT margin 14.9% 15.3%Net profit 12.0 4.9ROE 32% 27%

Mcap 491 162Net cash (10.5) (3.6)EV 480 158


Table 9: Asian Paints and Pidilite: Du Pont analysis

FY10 FY11 FY12 FY13 FY14E FY15E FY16EAsian PaintsProfit margin 13% 11% 10% 10% 10% 10% 10%Asset Turnover 5.2 5.8 5.1 4.4 5.0 5.5 6.0 Leverage 0.7 0.6 0.7 0.7 0.6 0.5 0.5 ROE 49.1% 38.5% 36.0% 32.9% 29.9% 29.6% 29.0%PidiliteProfit margin 12.3% 11.7% 10.4% 11.5% 11.4% 11.9% 12.0%Asset Turnover 2.6 2.9 3.1 3.4 3.7 3.9 4.1Leverage 1.0 0.8 0.8 0.7 0.6 0.6 0.5ROE 31.0% 28.4% 24.3% 25.4% 25.0% 25.5% 25.5%

Source: Company reports and J.P. Morgan estimates

1. Growth trends have been similar and highly correlated to GDP growth:Growth trends for both companies have been fairly similar and strongly correlated to GDP growth. Typically paint industry volume growth has been 1.5-2x GDP growth, while PIDI’s volume growth has been 2x (avg) GDP growth. Weak macro and slowing discretionary consumption havemoderated the growth trends for both APNT and PIDI over the last year. However, PIDI’s growth trends have been relatively more steady due to healthy demand for retail products like Feviquick / M Seal.

Figure 19: PIDI and Asian Paints: Sales growth trends and correlation with GDP


2. Margins – Key raw material for both the companies are crude derivatives(Ti02 for paint companies and VAM for Pidilite) and hence the margin trends have also been similar. We note that even though PIDI’s gross

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0%

5%

10%

15%

20%

25%

30%

35%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E

Asian Paints (LHS) Pidilite (LHS) GDP (RHS)

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margins are higher than APNT; EBIT margins are largely similar probably explained by APNT’s scale. Also PIDI’s international business is a drag on consolidated financials, which should improve.

Figure 20: Asian Paints and PIDI: Gross margin trends


Figure 21: Asian Paints and PIDI: EBIT margin trends


3. ROE comparison- ROEs for APNT has been very strong at 30%+, while for PIDI it has been improving consistently and is currently at 25%. APNT’s higher ROEs are primarily explained by high asset turnover. However, we note that the gap between the two has narrowed.

Figure 22: Asian Paints and PIDI: ROE trends


4. Dividend payout- Given healthy FCF generation in the business and net strong balance sheet (net cash), the dividend track record for both companies has been consistent.

36%

38%

40%

42%

44%

46%

48%

50%

52%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Asian Paints Pidilite

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Asian Paints Pidilite

40%36%

32% 32% 31%27% 28% 27% 28% 28%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

FY12 FY13 FY14E FY15E FY16E

Asian Paints PIDI

25



Figure 23: Dividend payout

Source: Company

5. Valuations – PIDI vs. paint companies

Valuations for PIDI are at a 20% discount to APNT’s (industry leader) and in asimilar range to other paint companies’. The paint industry is oligopolistic with four large players (APNT has the highest share at 50%) and the industry size is fairly large; adhesives is a smaller, niche segment with only one large organized player (PIDI) and competition is primarily smaller regional players.

Table 10: Valuations: Pidilite vs. paint companies

Market Cap P/E (x) EV/EBITDA (x) ROE (%) EBITDA margin EPS growth

(US$MM) FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E

Pidilite 2,689 27.7 23.5 18.6 15.4 27.7% 27.7% 17.5% 17.6% 20.0% 17.8%

Asian Paints 8,170 34.6 30.0 20.6 17.7 29.6% 29.0% 16.2% 16.2% 17.6% 15.6%

Berger Paints 1,399 28.0 23.5 15.9 13.1 23.9% 25.0% 11.9% 11.6% 19.9% 19.3%

Akzo Nobel 689 18.2 19.9 14.2 12.8 16.1% 14.7% 8.1% 8.1% 37.9% -8.8%

Kansai Nerolac 1,104 24.8 21.7 13.5 11.8 16.9% 18.2% 12.3% 12.2% 19.0% 14.1%

Source: Company reports and J.P. Morgan estimates. Bloomberg consensus estimates used for non-covered companies

PIDI vs. Building product companies

Below we compare PIDI with other building product companies in tiles (Kajaria), sanitary ware (HSIL), and plywood segments (Greenply).

1. Demand driver: Repair/ renovation vs. new home construction: In terms of mix, replacement demand is higher for PIDI’s products, while new construction drives 70-80% of demand for tiles/ sanitary/ plywood companies. Further, PIDI’s products also have retail usage (Feviquick/ M Seal) which is independent of discretionary demand for home furnishing.

2. Growth trends have moderated across all companies given slowdown in discretionary spending. However, overall growth trends remain healthy (in the 15-20% range) given increasing penetration into tier 2/3 cities and shift to organized segment (vs. unorganized).

3. Market dominance: PIDI as a near-monopoly in the adhesive space and faces very limited competition, while market share is fairly fragmented in other building product segments with the industry leader commanding 10-30% market share. The unorganized market is fairly big in other segments.

40%42%

31%

36%39% 40%

26%

40%

28% 29%30% 31%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

FY08 FY09 FY10 FY11 FY12 FY13

APNT PIDI

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4. Pricing power – Smaller spending on adhesives, strong brand equity and dominant market share give good market share to PIDI. Among others, sanitary ware companies and Greenply have decent pricing power given brands, while tiles players’ pricing power is lower due to competition from the unorganized segment.

On valuations, PIDI is trading at a premium to these building product companies. PIDI has a better ROE profile, stronger FCF generation, higher dividend payout, and a net cash balance sheet (vs. 0.5-1x Net D/E for other companies) which should support the premium valuation. Other building product companies have also witnessed a sharp re-rating over the past 2-3 years given steady growth trends and improving ROEs. However, FCF generation and dividend payout is low in these companies given capex needs.

Table 11: PIDI – Comparative analysis with building product companies

PIDI KJC HSIL Greenply5 year Revenue CAGR (F09-14) 17% 23% 25% 22%EBIT margin (avg 5 year) 16.4% 12.5% 11.3% 7.7%ROE (avg 5 year) 30% 28.3% 10.0% 18.6%Net D/E (0.2) 0.5 0.9 1.2 Dividend payout 30%+ ~20% 15-20% 15%Earnings growth 34% 68.4% 3.8% 15.6%


Table 12: Pidilite vs. other building product companies

Mkt Cap P/E (x) EV/EBITDA (x) Earnings growth ROE (%)$ MM FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16

Pidilite 2,689 27.7 23.5 18.6 15.4 20% 18% 27.7 27.7Havells 1912 19.7 17.1 12.0 10.5 21% 15% 28.9 27.1Kajaria 574 23.3 17.9 13.8 11.2 31% 26% 25.5 25.4HSIL 185 15.6 9.4 6.9 5.1 70% 65% 7.5 11.5Greenply Industries 163 7.4 5.8 5.3 4.3 28% 28% 21.5 22.9

Source: Company reports and J.P. Morgan estimates. Bloomberg estimates have been used for non covered companies

PIDI vs. Global chemical companies

As compared to global peers in the construction chemical space, PIDI is trading at a premium. We note that PIDI has a much large retail / consumer portfolio primarily in India, while global peers have high/ concentrated exposure to industrial segments across countries. On financials, PIDI has a better growth profile and ROE and has been less affected by the weak macro environment over the last few years.

PIDI is also scaling up its international presence both via exports and its subsidiaries in Brazil and North America. International subsidiaries have seen a pick-up in growth and margin improvement over the recent past. This should help improve consolidated profitability, after being a drag over the last few years.

Importantly, we note that PIDI’s international business and strategy is to scale up its presence in emerging markets which offer strong growth potential and niche segments (care care/art material in the US).

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Table 13: Pidilite vs. Global chemical companies

Currency Mkt Cap P/E (x) EV/EBITDA (x) ROE (%) Earnings growth$ MM FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Pidilite Industries Ltd IN 2,689 27.7 23.5 18.6 15.4 27.7 27.7 20.0% 17.8%Clariant Ag-Reg CHF 6,732 14.8 12.5 8.0 6.9 12.6 14.6 18.2% 10.8%Sumitomo Chemical Co Ltd JPY 6,230 18.8 11.2 7.2 6.9 6.3 9.8 68.2% 30.8%H.B. Fuller Co. US 2,307 15.0 12.6 8.9 7.6 15.7 16.9 18.9% 5.3%Du Pont (E.I.) De Nemours US 61,309 15.5 13.7 9.2 8.5 24.4 24.9 13.2% 11.6%Huntsman Corp US 6,094 11.9 9.3 6.3 5.7 24.1 24.6 27.0% 16.0%Eastman Chemical Co US 12,918 12.3 11.1 8.1 7.3 25.4 25.4 11.7% 9.6%Shin-Etsu Chemical Co Ltd JPY 25,433 19.5 17.8 7.1 6.5 7.4 7.7 9.1% 12.9%BASF SE EUR 106,394 14.1 13.0 8.3 7.6 19.2 19.4 8.9% 9.9%Celanese Corp-Series A US 9,545 12.0 11.5 7.7 7.4 25.9 23.5 4.6% 9.6%

Source: Company reports, Bloomberg consensus estimates

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Financials

1. Revenue growth – We model consolidated revenue growth of 15-16% Y/Y, primarily driven by steady growth in Consumer and Bazaar segment and improvement in international growth trends. Industrial segment growth could see a pick-up as macro improves and the capex cycle revives in 2H,though we are not building in any material improvement in our assumptions

2. Margins – We expect margins to improve marginally given increasing contribution from the better-margin Consumer & Bazaar segment and improved profitability at the international operations.

3. Net cash balance sheet – PIDI has a net cash BS (Rs3B as of Dec-Q). Further, we expect the company to generate Rs3.8B/Rs4.6B of FCF over FY15/16.

4. Return ratios – Return ratios for the company have been improving and fairly strong. ROCE is 25%, and adjusted ROCE (adjusted for Elastomer plant investment) is even higher at 30%+. ROEs are in the range of 27-28% aided by better asset turn and steady margins.

Table 14: Pidilite – Consolidated income statement

Rs MM, YE Mar. FY12 FY13 FY14E FY15E FY16E

Revenues 31,266 36,781 42,616 49,237 57,370

Cost of Goods sold (COGS) 17,403 20,081 22,996 26,501 31,101Gross Profit 13,862 16,700 19,620 22,736 26,268Gross Margin 44.6% 45.7% 46.3% 46.4% 46.0%

Staff Cost 3,262 3,746 4,195 4,699 5,263Advertising & Publicity 1,074 1,473 1,738 2,082 2,427Other Expenditure 4,599 5,492 6,359 7,349 8,451Total Expenses 26,339 30,791 35,289 40,631 47,242

EBITDA 4,926 5,990 7,327 8,606 10,128% Growth 5.0% 21.6% 22.3% 17.5% 17.7%EBITDA Margin 15.8% 16.3% 17.2% 17.5% 17.7%

Depreciation 637 686 823 881 942EBIT 4,289 5,304 6,504 7,726 9,186EBIT Margin 13.7% 14.4% 15.3% 15.7% 16.0%

Interest 397 214 180 60 50Other income 435 704 350 403 503Profit Before Tax 4,327 5,794 6,674 8,068 9,639Total Tax 1,100 1,595 1,835 2,259 2,795Tax rate 25.4% 27.5% 27.5% 28.0% 29.0%Profit after tax 3,244 4,239 4,863 5,837 6,876Growth (%) 4.6% 30.7% 14.7% 20.0% 17.8%Net Margin 10.4% 11.6% 11.5% 11.9% 12.0%


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Table 15: Pidilite: Balance sheet

Rs MM, YE Mar FY12 FY13 FY14E FY15E FY16ENet Fixed Assets 6,177 6,467 6,544 7,164 7,721Capital WIP 3,938 4,280 4,880 5,480 6,080Total Fixed Assets 10,115 10,747 11,424 12,644 13,802

Investments 983 2,931 2,931 2,931 2,931Current AssetsInventories 4,541 5,236 6,156 7,131 8,331Sundry Debtors 3,952 4,305 5,048 5,848 6,832Cash & Bank balances 2,732 1,506 1,246 2,426 4,061Loans & Advances 1,261 914 2,093 2,425 2,833Other Current Assets 115 113 250 250 250Total Current Assets 12,601 12,074 14,794 18,080 22,306

Current Liabilities 5,285 5,808 6,772 7,845 9,164Provisions 1,466 1,786 1,965 2,161 2,377Current Liabilities and Provisions 6,751 7,595 8,737 10,006 11,542

Net Current Assets 5,850 4,479 6,057 8,074 10,765Total Assets 16,947 18,158 20,413 23,649 27,497Debt 3,213 1,134 534 334 134

Net Deferred Tax Liabilities / (Assets) 468 499 500 500 500Share Capital 508 513 513 513 513Reserves and Surplus 12,754 16,003 18,866 22,302 26,350Shareholders' Funds 13,261 16,515 19,378 22,815 26,863


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Company profile

PIDI was established as a partnership firm by the Parekh family, which commissioned a plant for the Acron brand of pigment emulsion in 1959. PIDI was acquired by Parekh Dyechem Industries Pvt Ltd in 1969 and was renamed PDI Chemicals Pvt Ltd in 1986. The company went public in 1988, acquired its present name in 1990, and made an IPO in 1993.

PIDI is a pioneer in consumer and industrial specialty chemicals. The company is a market leader in most categories and has a strong brand portfolio. Its flagship brands Fevicol, Feviquick, and M- Seal command a 70%+ market share in their respective categories. The company has a strong and diversified portfolio of brands.

From being a pure adhesive player, PIDI has diversified into construction chemicals and art material segment over the last decade. PIDI’s foray in these newer niche segments has met with good success and its construction chemical flagship brand Dr Fixit commands a 50%+ market share in its categroy. The company has also diversified into the international market since 2005 via th eacquisition of brands and companies in the US, Brazil, Southeast Asia and the Middle East.

The consumer segment accounts for 81% of total revenues (90% of EBIT), while the remainder comes from the industrial segment. PIDI has a wide geographical spread with 1MM+ points of presence for its retail brands (in town with 50K+ population). It also has a well established R&D team and has been consistently innovating new products.

Figure 24: Pidilite Industries: Key milestones

Source: Company presentation

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Figure 25: Shareholding structure

Source: BSE

Table 16: Pidilite: Product range – Key brands and their usage

Product range Description and use Fevicol SH, Fevicol Speedx, Fevicol Marine, Fevicol WRA etc

Synthetic Resin Adhesive. Usage primarily wood work. Variants for different requirement like fast bonding, water exposure etc

Woodgrip Synthetic Resin Adhesive. High viscosity adhesive

M Seal Liquid pipe sealnt - Used for joining & leakage plugging

Fevitite range For bonding of metals, ceramix, marble, granite, plastics, glass etc

Dr. FIXIT sealants range For sealing gap between glass, Ceramic, Aluminium, etc

Terminator wood preservative For protection from termites / borers and increases life of the wood

Showcase range For wood finishing/ polishing

ROFF New construction Tile Adhesive

Raincoat For Decorative exterior waterproofing coating

Pidilite Distempers/ Emulsion/ Colors For white wash of houses, office etc. Binds lime/ distemper on wall. Prevents Cracks

Steel Grip PVC electrical insulator

Fevicol Foamfix For Sofa, Chaits Mattresses

Source: Company

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Pidilite Industries: Summary of FinancialsProfit and Loss Statement Cash flow statementRs in millions, year end Mar FY12 FY13 FY14E FY15E FY16E Rs in millions, year end Mar FY12 FY13 FY14E FY15E FY16E

Revenues 31,097 36,579 42,395 48,993 57,101 EBIT 4,289 5,304 6,504 7,726 9,186% change Y/Y 17.6% 17.6% 15.9% 15.6% 16.5% Depr. & amortization 637 686 823 881 942

EBIT 4,289 5,304 6,504 7,726 9,186 Change in working capital (306) 145 (1,838) (837) (1,056)% change Y/Y 4.6% 23.7% 22.6% 18.8% 18.9% Others - - - - -EBIT margin (%) 13.8% 14.5% 15.3% 15.8% 16.1% Cash flow from operations 3,670 5,175 3,654 5,510 6,277

Net Interest (397) (214) (180) (60) (50)Earnings before tax 4,327 5,794 6,674 8,068 9,639 Capex (1,554) (1,460) (1,500) (2,100) (2,100)

% change Y/Y 7.4% 33.9% 15.2% 20.9% 19.5% Disposal/(purchase) - - - - -Tax (1,100) (1,595) (1,835) (2,259) (2,795) Net Interest - - - - -

as % of EBT 25.4% 27.5% 27.5% 28.0% 29.0% Free cash flow 2,413 3,870 2,285 3,453 4,213Core net profit 3,244 4,221 4,863 5,837 6,876

% change Y/Y 4.6% 30.1% 15.2% 20.0% 17.8% Equity raised/(repaid) 0 0 0 0 0Shares outstanding 508 513 513 513 513 Debt raised/(repaid) (147) (2,078) (600) (200) (200)EPS (reported) 6.39 8.23 9.49 11.39 13.41 Other (4) (284) 6 27 29

% change Y/Y 4.3% 28.9% 15.2% 20.0% 17.8% Dividends paid (1,030) (1,121) (2,000) (2,400) (2,828)Beginning cash 1,038 2,732 1,506 1,246 2,426Ending cash 2,732 1,506 1,246 2,426 4,061

Balance sheet Ratio AnalysisRs in millions, year end Mar FY12 FY13 FY14E FY15E FY16E Rs in millions, year end Mar FY12 FY13 FY14E FY15E FY16E

Cash and cash equivalents 2,732 1,506 1,246 2,426 4,061 EBIT margin 13.8% 14.5% 15.3% 15.8% 16.1%Accounts receivable 3,952 4,305 5,048 5,848 6,832 Net margin 10.4% 11.5% 11.5% 11.9% 12.0%Inventories 4,541 5,236 6,156 7,131 8,331 aOthers 1,376 1,027 2,343 2,675 3,083 aCurrent assets 12,601 12,074 14,794 18,080 22,306 Sales growth 17.6% 17.6% 15.9% 15.6% 16.5%a Core Net profit growth 4.6% 30.1% 15.2% 20.0% 17.8%Investments 983 2,931 2,931 2,931 2,931 EPS growth 4.3% 28.9% 15.2% 20.0% 17.8%Net fixed assets 10,115 10,747 11,424 12,644 13,802 aTotal Assets 23,699 25,752 29,150 33,655 39,039 Interest coverage (x) 12.4 28.0 40.7 143.4 202.6a Net debt to total capital 3.5% (2.3%) (3.8%) (10.1%) (17.1%)Liabilities Net debt to equity 3.6% (2.3%) (3.7%) (9.2%) (14.6%)Accounts payables 2,058 2,501 2,955 3,423 3,999 Sales/assets 1.4 1.5 1.5 1.6 1.6Others 3,227 3,307 3,817 4,421 5,165 Assets/equity 1.8 1.7 1.5 1.5 1.5Total current liabilities 5,285 5,808 6,772 7,845 9,164 ROE 26.9% 28.3% 27.1% 27.7% 27.7%Total debt 3,213 1,134 534 334 134 ROCE 20.8% 22.5% 25.1% 25.8% 26.0%Other liabilities 473 509 500 500 500 aTotal Liabilities 10,437 9,237 9,771 10,840 12,176 aShareholder's equity 13,261 16,515 19,378 22,815 26,863 aBVPS 26.12 32.22 37.80 44.50 52.40 a


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Other Companies Discussed in This Report (all prices in this report as of market close on 02 May 2014)Asian Paints Limited (ASPN.NS/Rs511.45/Underweight)

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Pidilite Industries, Asian Paints Limited.

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

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Pidilite Industries (PIDI.NS, PIDI IN) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

mailto:[email protected]


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Date Rating Share Price (Rs)

Price Target (Rs)

06-Oct-13 UW 463.50 445.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Prithyani, Gunjan: Godrej Properties (GODR.NS), Havells India Ltd (HVEL.NS), Phoenix Mills (PHOE.BO), Sobha Developers (SOBH.BO)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 11%IB clients* 58% 49% 40%

JPMS Equity Research Coverage 45% 48% 7%IB clients* 78% 67% 60%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

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Asian Paints Limited (ASPN.NS, APNT IN) Price Chart

UW Rs445

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

Initiated coverage Oct 06, 2013.


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