T Date: 17th Aug, 2018

Company Report: Pidilite Industries Ltd. Closing Price: - 1124.00 Target Price: - 1343.00 Stock data Rs.

Closing Price 1,124Target price 1,343MCAP (Rs in crore) 57,07752 week high 1,195.452 week low 751.3FY 18 Adj. EPS 18.86Book value/share FY18 73.83

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Highlights: Pidilite Industries Limited (PIL) is a leading

manufacturer of adhesives, sealants, construction chemicals, craftsmen products, DIY (Do-It-Yourself) products, polymer emulsions and others for use by carpenters, plumbers, mechanics, students, offices, households and industries in India.

Since its inception in 1959, PIL has been a pioneer in consumer and specialities chemicals in India.

PIL owns the most trusted brands in the country.

They include Fevicol, Dr. Fixit, M-seal and Fevikwik. PIL has 19 Manufacturing units in India. PIL has 5046 Distributors, 27 warehouses & 3 R&D

centers in India. It has 17 overseas subsidiaries (5 direct and 12 step-down) and one joint venture.

Indian subsidiaries include 9 domestic subsidiaries

and 2 partnership firms. PIL is India’s leading exporter of Pigments and

Pigment emulsions to emerging markets as well as Europe and North America. The company currently exports to more than 80 countries.

PIL has diversified into Waterproofing solutions for

construction industry and high performance solutions for the Auto industry. It also offers heat insulation services.

Source: Capitaline, LHS Scale= %

Financial Summary: Key Financials Total Income YoY Gr EBIDTA Op Margins Adj. Net Profit YoY Gr Book Equity

Yr Ended March (Rs. Cr) (%) (Rs. Cr) (%) (Rs. Cr) (%) Value/share Capital2016 5,361 10.7% 1,173 21.9% 803 58.9% 52.8 51.272017 5,617 4.8% 1,260 22.4% 861 7.3% 70.9 51.272018 6,078 8.2% 1,341 22.1% 958 11.2% 73.8 50.782019E 7,152 17.7% 1,591 22.3% 1,129 17.8% 82.2 50.782020E 8,296 16.0% 1,887 22.7% 1,364 20.8% 96.0 50.78

Key Ratios Adj. EPS Adj. ROCE Adj. ROE P/E P/B EV/Sales EV/EbidtaYr Ended (March) (Rs) (%) (%) (x) (x) (x) (x)

2016 15.8 42.1% 32.4% 35.8 10.7 5.3 24.42017 17.0 35.5% 27.4% 39.6 9.5 6.1 27.12018 18.9 32.3% 26.1% 43.8 15.2 9.4 42.52019E 22.2 35.8% 28.5% 50.6 13.7 8.0 35.82020E 26.9 37.6% 30.2% 50.0 11.7 6.9 30.2

Source: EPS, ROCE, ROE, P/E, P/B, EV/Sales, EV/Ebitda based on Consolidate basis. Valuations: PIL is a dominant player in India’s adhesive market with a market share of 70% in its leading brand category (Fevicol). PIL’s constant innovation through advanced Technology, In-house research team, strong brand recall, well-entrenched distribution, great connect with intermediary and end-users, near zero Debt borrowing will continue to boost its financial performance. PIL’s strong pedigree of 50 years existence with Professional management on board allows it to be uniquely placed at the highest spectrum of value addition. We value PIL’s business at 50x FY20E earnings of 26.86 to arrive at a target price of Rs. 1343/share to be achieved within 18 months.

Analyst: Vanitha Poojari

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Maximus Securities Research Pidilite Industries Ltd’s –Company Overview

Way back in 1954, a 29-year-old trader in chemicals, with a law degree under his belt and the zeal of enterprise in his heart, started his own modest business, manufacturing a single product at Jacob Circle in Mumbai.

The product was synthetic glue and the young, ambitious entrepreneur was the founder, late Shri. Balvant Kalyanji Parekh.

The late Balvant Parekh established PIL Industries in 1959 at a time when there was hardly any awareness or knowledge about synthetic adhesives in Indian markets.

Five decades later, PIL Industries Ltd. (PIL) is the largest manufacturer of adhesives in India reputed for its top-quality consumer and speciality chemical products, many of which, including the Fevicol brand, are market leaders.

PIL started off with direct marketing campaigns for Fevicol, targeting carpenters –who were unaware of the brand with initiatives like Fevicraft, a bimonthly magazine for carpenters.

1970s- The ad agency, O&M was roped in to help with the branding process. They were responsible for creating the now-iconic logo (two elephants) and introducing the famous tagline “Dum laga ke haisha”( Fevicol ka Jhod hai tutega nahi).

In 1985- When import liberalisation negatively impacted the speciality business, PIL’s decision to revert back to Fevicol was proven right and worked well for the company.

Exhibit 1: Source- www.Pidilite.com

Maximus Securities Research

1990- By mid-1990s the business grew impressively and revenues were 200 crore approx. PIL’s two businesses – consumer and bazaar (C&B) and industrial chemicals were separated.

2000- With the acquisition of M-Seal and Mr Fixit (later rechristened Dr Fixit) in 2000. PIL were looking at ways to constantly improve and innovate.

2001- The Company launched Dr. Fixit range of Construction Chemicals. 2004- PIL acquired the `Roff' brand of Construction Chemicals.

Products-Adhesives became Innovative

Consumer Products-Fevicol

Consumer Products-Waterproofing

Consumer Products-DIY

Maximus Securities Research

PIL’s product ranges are Adhesives, industrial adhesives, synthetic and industrial resins, organic pigments, pigment preparations, surfactants, etc. for use in various industries, including packaging, textiles, paints, printing inks, paper, leather, etc. In addition, it offers waterproofing and heat insulation services. The company sells its products primarily under the Fevicol, Fevicol MR, Dr. Fixit, Fevikwik, M-Seal, Fevistick, Fevicryl, Hobby Ideas etc.

PIL has been spearheading the market of adhesives with its water-based, solvent-based and hot melt technologies.

Its brand name Fevicol has become a household name that is today synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in India. PIL’s biggest bond is through the Fevicol family of products. The brand has introduced many innovative products which have transformed the way carpentry trade operates in India.

Exhibit 2: Source- PIL, Corporate Presentation

Industry Segment Composition as on March 2018 Exhibit 3: Source- PIL, Corporate Presentation

Maximus Securities Research Solutions-One stop solutions shop Wood Finishes-Breathe Life into Your Furniture PIL has a wide range of solutions for wood finishes needs of multiple categories of users and consumers. Products targeted at mass market of wood coatings consists of anti-termite treatment, wood fillers, sanding sealer, stains, and Melamine and PU top coats in single as well as two component system.

Waterproofing Solutions-Solutions with the latest construction technology Waterproofing Solutions Business caters to customers seeking expert execution and proven integrated solutions for large scale projects.

High Performance Solutions-Auto

AutoPro is an essential brand of PIL and offers a range of adhesive solutions for the automotive as well as general industries.

High demand for automotive components which are pre-coated with anaerobic adhesives has led the company to cater to this demand.

Technical Textiles-Uncomplicated coating and lamination products PIL’s extensive range of products is designed to impart special attributes and functionalities necessary for technical textiles. MEP-Mechanical, Electrical & Plumbing From ultra-strong insulation adhesives to innovative low VOC and non-flammable lag coatings, the Large Users Business (PLUB) offers a wide range of insulation adhesives, coatings, sealants and solvent cements specially designed for commercial and industrial market.

Tiles Adhesives & Grouting-The Innovators Of Tile Adhesives PIL products have evolved to suit various tile applications. These include adhesives for high strength bonding of tile surfaces like marble, glass, granite and stone. A pioneer in the area of tile adhesive manufacturing, Roff has a complete range of products for various tile applications and care.

Maximus Securities Research Turning Point

To continue expanding, PIL has focused not just on the brand, but also on the people running the company. For a family-run business, it was early in recognising the need for senior professionals.

For the first two decades, the family members and

early colleagues of founder ran the company. Until a little over a decade ago, Mr.Madhukar Parekh

took the decision to cede power to outsiders and it first brought up the issue of “the family stepping back”.

The professionals will build management bandwidth in line with their promoters of the company. The popular phrase around the PIL campus is OTOS -On top of a situation.

The other framework includes OAAP – observation, analysis, action plan.

These Management practices gives them the cutting edge to win in the market place.

PIL’s strength has always been in pioneering categories and it will be no different in the future.

PIL’s strategy has always been to avoid markets with a large number of players or with high level of commoditization. The trick is to enter a market at an early stage that is what PIL have done well with Fevicol or construction chemicals. Both its products back then, be it pigment dispersion or white glue, had competition only from a handful of German and Japanese multinationals.

Maximus Securities Research Investment Rationale Our investment rationale is based on following premises:

1 – Brand building through Marketing/ Advertising. 2 – Technology & Innovation. 3 – New Acquisition with Foreign Companies 4 – Global Presence. 5 – Drivers for growth going forward. 1. Brand building through Marketing/ Advertising

In 1963, the First manufacturing plant in Kondivita, Mumbai was

set up with the single product offering called “Fevicol”. It became a generic household name in the white glue category.

In 1970, 30 gram collapsible tube was launched. This was introduced as a consumer pack and was smart strategy to establish Fevicol as a consumer brand. Fevicol embarked on a bold marketing game plan. Instead of selling through stores, PIL approached carpenters directly.

Fevikwik organized branded van activations in 31 districts of Uttar Pradesh and Bihar. Through a magic show the brand engaged with the audience and educated them about the different substrates on which Fevikwik can be used.

Fevicol Champions’ Club celebrated Shram Daan Diwas across India on December 20, 2017. Around 51,200 contractors and carpenters visited 800 needy institutions and donated a day of their labour to repair broken furniture.

The Company has carried a series of consistent and effective brand building activities across various categories (a) Consumer Adhesives & Sealants (b) Craftsmen Adhesives (c) Waterproofing Chemicals (d) Hobby & Craft Colours.

Several of the brands Fevicol, Fevikwik, M-Seal, Dr Fixit, Fevicryl, etc. are well-known in their respective categories and have become household names.

The flagship product of PIL is a case in point. Consider this for starters During the marriage the pandit recites the mantra ~ YEH FEVICOL KA MAZBOOTH JOD HAI TOOTEGA NAHI or for that matter Cricket hi to hai desh ka Fevicol.

Both these humor logs are pointers to the image that Fevicol has been able to build over the years due to sustained brand building campaign.

Award winning advertisements resulting in mass appeal of brands across all segments and geographies.

The Company has increased its

focus on using new digital platform as a medium for marketing its brands

Fevikwik uses creative witty posts on social media creating

awareness among consumers about the uncommon use of Fevikwik to repair broken articles.

Dr. Fixit launched its new theme based campaign ‘5-point

waterproofing’ featuring Mr.Amitabh Bachchan. The TV advertisement is aimed at creating awareness about five sources of leakage in a house.

Maximus Securities Research

Fevicol advertisements have emphasised the core theme of the benefits of its products and have showcased the wonderful human bonding in different forms, be it the rickety bus ad, or the shadow ad or the pakde rehna chodna nahi series ads. The advertising campaign has been handled by O&M for many years.

2. Technology & Innovation PIL’s focus on product innovation based on its sharp market research and understanding of customer needs is the reason for the Company’s dominant success. It has sustained collaborative efforts with various research institutes in India and abroad. In addition, technology experts were retained to support and accelerate technology development programs. The Technology Platform and Synthesis group developed novel polymers, chemistries and product applications. The Benefits derived like product improvement, cost reduction, product development or import substitution-R&D innovations have resulted in improved sales, product performance, process efficiencies, capacity de-bottlenecking, addressing market needs for new applications, product cost reduction and improved environment compliance. There is no technology imported during the last 3 years. Adhesives Become Innovative:- PIL’s biggest bond is through the Fevicol family of products. The brand has introduced many innovative products which have transformed the way carpentry trade operates in India. PIL search for new ideas in everything they do, and more than two thirds of their sales happen through in-house innovation. It has three fully-equipped in-house R&D centres in India and five state-of-the-art technical research and innovation centres in Singapore, Thailand, Brazil, Dubai and USA. Over 150 R&D professionals use a customer-focused innovation process to bring to fruition the learnings from these interactions. Innovation at Fevicol: - It Takes An Idea To Change The World * The company laid its foundations with innovation in the form of Fevicol – path-breaking synthetic white resin adhesive. It meant freedom from cumbersome animal fat glue for binding woodworks. To this day, Fevicol remains the first choice of carpenters. * Fevicol was an industrial product. PIL re-launched it in an innovative ‘tube-pack’ to reach retail end consumers. * Fevicryl Fabric Colours-launched, with new brand graphics and bottle shape, for multiple fabric surfaces like apparel, home décor and accessories * M-Seal Super Phataphat a softer, easy to mix and easy to apply putty, offering smoother finish. * Fevicryl 3D Neon Liners an easy to use, convenient pen format liner, available in four neon shades for creative outlining and DIY art.

Maximus Securities Research * At PIL, talented and experienced R&D team is fully equipped to develop industrial products as per market needs, and also to customise products to meet unique quality, cost and performance needs. * PIL develops most of products in-house with the help of a strong, research-driven innovation overlaid with consumer insights. A well-equipped and well-staffed R&D centre continuously develops and enhances products for consumers, craftsmen and industries. * PIL also established a state-of-the-art research centre in Singapore that is now a member of Singapore Chemical Industry Council (SCIC). * PIL is working towards the next breakthrough in speciality chemicals to develop and adopt greener technologies. It is also committed to supporting our scientists and technologists in their advanced research initiatives.

Exhibit 4: Source-PIL, Corporate Presentation

3. New Collaborations

PIL has entered into collaboration with Jowat SE, a German family-owned enterprise and one of the leading suppliers of industrial adhesives worldwide.

Jowat SE is well known for its high end adhesives used by modular and other wooden furniture manufacturers and industrial customers in packaging.

As part of the collaboration, PIL will now exclusively handle sales and distribution of the entire range of Jowat adhesives in India and other neighbouring countries including Sri Lanka, Bangladesh, and Nepal.

Jowat has pioneered the development of several high end adhesive products, and has constantly undertaken development work at the cutting edge of adhesive technology. The company’s core competence lies in innovation in both technology and R&D, and in delivering outstanding technical service to customers.

The two companies have also entered into a technical collaboration encompassing the high growth, specialised category of Hot Melt adhesives. This will provide a comprehensive range of Thermoplastic Hot Melt adhesives for use in several industrial, and modular and other wooden furniture segments.

Maximus Securities Research

The synergies between Jowat and PIL in terms of product range, customer segments served and technologies deployed are clear and visible. Both companies together are uniquely placed to capitalise on the healthy prospects for growth in the segments targeted.

The collaboration is for the long term, and leverages the well-known strengths and capabilities of

the two companies. It aims to provide best-in-class technology and products to customers, comprising of manufacturers of furniture and varied industrial products with requirement of adhesives.

Collaborations with CIPY Poly Urethanes Pvt Ltd

The Company alongwith Fevicol Company Ltd. (wholly owned subsidiary of the Company) jointly acquired 70% stake in equity shares of CIPY Poly Urethanes Pvt. Ltd.(‘CIPY’).

CIPY was incorporated on 29th November, 1994 and it is engaged in the business of manufacturing and selling of floor coatings using polyurethanes, epoxies, polyurea and polyaspartic polymers.

This acquisition will help to participate in the growth of the resin flooring and floor coatings market.

4. Global Presence PIL continues to uphold excellence and innovation and has a wide portfolio of products. The

company engages with a global audience in over 100 countries, and has manufacturing setups in more than 9 countries.

PIL ensures its products reach as many people as possible.

PIL Lanka Pvt. Ltd, a JV between PIL and Macbertan Pvt. Ltd. unveiled a new state-of-the-art

adhesive manufacturing plant in Polgahawela in North Western Province of Sri Lanka. PIL Lanka Pvt. Ltd. has earmarked over INR. 200 million as an investment towards the plant. Spread over four acres, the plant will strengthen PIL’s position in the adhesive market in Sri Lanka and enhance its market share. This will be an environment-friendly plant with zero-discharge.

Manufacturing facility is planned in Ethiopia. An additional manufacturing facility is planned in

Bangladesh.

Exhibit 5: Source- www.pidilite.com

Maximus Securities Research 5. Drivers for growth going forward Growing Demand in the Composites Segment

The usage of adhesives for composites joints has been consistently increasing in numerous applications, such as consumer packaging, aerospace, and automotive.

The demand for and usage of composites, owing to their properties (like, reduced weight, improved aesthetics, enhanced environmental resistance, design flexibility, and increased stiffness) has been growing.

The construction industry in Europe is recovering and growing demand for electric vehicles across the world are expected to offer a number of opportunities to the adhesives & sealants market.

The Packaging Industry Leads the Adhesives & Sealants Market

The Packaging Industry Leads the Adhesives & Sealants Market. The packaging industry generates the highest revenue in the market whereas the transportation industry records the highest CAGR. The demand for adhesives in the packaging industry is growing, with higher end-user applications.

Online retail shopping has increased at a higher rate with rising internet technologies and web applications, which has largely supported the growth of the packaging industry.

The demand for cosmetics and food & beverage products is expected to grow, due to the growing population and demand for quality products, urbanization, and consumers inclining toward technology, hence increasing the demand for packaging industry. Therefore driving the demand for adhesive & sealant market.

Asia-Pacific to Lead the Adhesives & Sealants Market

In Asia-Pacific, the adhesives generated a revenue of over USD 26.5 billion and sealants generated revenue of USD 5.5 billion in 2017.

Increase in the number of female workers, rise in dual income nuclear families, growth in disposable income, and higher per capita expenditure on social and cultural factors are a few factors fueling up the demand in the Asia-Pacific market.

Rise in the government funding for public welfare in the region. The construction sector in countries, such as China and India, is growing at a higher rate with urbanization projects and new construction activities, such as bridges, dams, roads, railways (metro rails), urban infrastructures, buildings, and others, which, in turn, is propelling the demand for adhesives & sealants construction chemicals market in the region.

The company’s Industrial specialty chemical products in Professional & Do It Yourself (DIY) segment in foreign markets is also catching up fast as they provide flexibility, innovation and unlimited design variation.

Strong Fundamentals Brands provide instant recognition, not just that, they become a symbol of trust. Companies put lot of time effort, and resources in building a brand. Brands not only enjoy recognition, it also helps in maintaining long term relationship between customers and companies.

PIL’s strength lies in making innovative adhesive products for various needs of its consumers. PIL Industries is the market leader in adhesives segment with 63% market share.

Growth in Revenue segment wise in FY17-18

Exhibit 6: Source- Corporate Presentation

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Ebitda Margin

18%

22%22%

22%

16%15%

16%16%

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10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18Year

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34.10% 34.40% 33.10% 33.80%

38.40%

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2013-14 2014-15 2015-16 2016-17 2017-18

The PIL’s net worth (Equity capital + Reserves ) has grown from Rs.2039 crores as on 31st March 2014 to Rs.3564 crores as on 31st March 2018, giving a Compounded Annual Growth Rate (CAGR) of 15%.

The market capitalization of the Company on 31st March 2018 is Rs.46,642 crores and has grown at a CAGR of 31.13 % since the company’s IPO in 1993.

PIL’s revenue from operations grew from Rs.3678 Crs in 2013 to Rs.6078Crs in 2018, a CAGR growth of 11% per annum.

PIL’s profitability has seen a faster growth than its revenue, which means company has successfully improved its profit margins over the years.

Backed by consistent dividend payouts. PIL is sharing bigger part of its net profits with its shareholders. In 2013, company was distributing 28.92% of its net profit as dividends, while in 2018, PIL distributed 38.4% of its net profit as dividend.

The EBITDA margin of PIL was around ~16% during FY11-15. However, it improved significantly to around 22% during FY16-18. This was backed by new high margin product launches leading to improved product mix and regular price hikes to sustain volatile prices of raw material i.e. vinyl acetate monomer (VAM). PIL has stated that they would be comfortable to achieve EBITDA margin going ahead. It plans to mitigate rising raw material prices through price hikes.

Exhibit 7: Source- Capitaline, MSL Exhibit 8: Source- Capitaline, MSL ________________________________________________________________________________________________ Risks & Concern

Slower growth of the Indian economy could impact the performance of the Company. Overseas subsidiaries by virtue of their relatively smaller size remain vulnerable to the political and economic uncertainties of their respective countries.

Rising Input cost of Raw Materials. Currency fluctuations could impact the profits of the company.

Highlights of the Consolidated First quarter result

The Net Sales including other operating income for the quarter increased by 20% yoy and by 23% qoq to Rs. 1834.07 Crs.

Ebitda for the quarter grew by 19% yoy and increased by 39% qoq to Rs. 381.66 Crs.

Profit Before Tax (PBT) for the quarter

came in at Rs. 376.83 Crs registering a growth of 14% yoy and 29% qoq.

Profit After Tax grew by 6% yoy and by -

14% qoq to Rs. 240.78 Crs. The lower rate of growth in consolidated PAT is mainly on account of elimination of profit on inter-company transfer of certain

intangible assets and effect of tax thereon during the current quarter.

The effective Tax Rate was 36% at

136.05 Crs for the quarter.

Sales are driven by 20.2% growth in sales volume & mix of Consumer & Bazaar products and 7.3% growth in sales volume & mix of Industrial Products.

PIL undertook various measures for

conservation of energy and use of alternate sources of energy which resulted in total savings of 15.4 crores during the year. Savings accrued during the last 2 years (2016 - 18) is 29.1 crores.

Financial analysis (In Rs. Crs)

Exhibit 9: Source: Capitaline Database, MSL Research

The Indian economy provides a large opportunity to the Company to market its differentiated products. Higher growth in select global economies could provide a boost to exports. PIL’s core brands such as Fevicol, Fevistik, M-Seal and Fevikwik remain growth drivers. The company believes there is scope for widening the portfolio by concentrating on innovation and focusing on new segments such as wood finishes. Two-thirds of the business will come from the core brands, while the other one-third will come from innovation and newer segments. The overall market for Waterproofing & Flooring in India is expected to grow to more than ₹5,000 Crores by 2025 which is currently less than ₹2,000 Crores. Its pointing out that the market is largely unorganised, with only 25% coming from the organised players.

PIL’s leadership position in Adhesive & sealants market, recent acquisitions and strategic investments are expected to aid volume growth. Consistent improvement in Return on capital employed (RoCE), Return on equity (RoE) and EPS have aided growth. High market share, sustained operating performance over a longer time horizon, low levels of debt-equity ratio opens an entry point for investing in the stock. Its robust Volume growth makes it an attractive proposition in the coming future.

Source: Capitaline Database, MSL Research

Maximus Securities Research Financial estimates (In Rs. Crs)

Source: Capitaline Database, MSL Research

Source: Capitaline Database, MSL Research

Maximus Securities Research

Notes

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Dealer - Equities Dealer - Equities

022 - 61418712 022 - 61418712

Equity Research______________________________________________________ Vanitha Poojari Research Analyst 022 - 61418713 report@maximussecurities.com

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