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Asia Pacific Equity Research
03 May 2014
Pidilite Industries
Initiation
Overweight
PIDI.NS, PIDI IN
A stock to bond with; initiate with Overweight
Price: Rs315.00
Price Target: Rs375.00
India
Building Materials
Gunjan Prithyani
AC
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Bloomberg JPMA PRITHYANI <GO>
J.P. Morgan India Private Limited
Saurabh Kumar
(91-22) 6157-3590
saurabh.s.kumar@jpmorgan.com
J.P. Morgan India Private Limited
Leon Chik, CFA
(852) 2800-8590
leon.hk.chik@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
YTD 1m 3m 12m
Abs 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 FY16E
Revenue (Rs mn) 31,097 36,579 42,395 48,993 57,101
Revenue growth (%) 17.6% 17.6% 15.9% 15.6% 16.5%
EBITDA (Rs mn) 4,926 5,990 7,327 8,606 10,128
EBITDA Margin 15.8% 16.4% 17.3% 17.6% 17.7%
Net Profit (Rs mn) 3,244 4,221 4,863 5,837 6,876
EPS (Rs) 6.39 8.23 9.49 11.39 13.41
DPS (Rs) 1.90 2.60 3.32 3.99 4.69
P/E(x) 49.3 38.3 33.2 27.7 23.5
EV/EBITDA (x) 32.7 26.8 21.9 18.4 15.5
Source: Company data, Bloomberg, J.P. Morgan estimates.
Company Data
Shares O/S (mn) 508
Market Cap (Rs mn) 159,909
Market Cap ($ mn) 2,650
Price (Rs) 315.00
Date Of Price 02 May 14
3M - Avg daily vol (mn) 0.22
3M - Avg daily val (Rs mn) 65.77
3M - Avg daily val ($ mn) 1.1
NIFTY 6694.80
Exchange Rate 60.33
Price 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.
220
260
300
340
Rs
May-13 Aug-13 Nov-13 Feb-14 May-14

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 of
27.7x FY15E P/E is at a premium to its trading history, but this should continue
given 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 PIDI
can 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 FY14s. 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) PIDIs 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%. PIDIs 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.
2
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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, which
is 1SD above PIDI's mean valuation for the last two years and at a ~20%
discount to ANPTs 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 FY16E
5% 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 companies
Pidilite Asian Paints Kajaria Ceramics Hindustan
Sanitary-ware
Greenply
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 1.2
Dividend 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 6.8
EV/EBIT 20.3 22.5 12.2 10.6 5.3
Source: Company
3
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Table of Contents
Investment 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
4
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 companys diversification in non-adhesive segments over the past
decade, 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.
PIDIs 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
PIDIs 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 1.2
Dividend 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 6.8
EV/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. Its
flagship 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 (sticking
marine products)
Constructi
on
Chemicals
Dr. FIXIT (leakage in
walls), Roff (Tiling
solution)
Art
Materials
Ranipal, Fevicol Hobby
Ideas, Motomax, Cyclo
Source: Company, J.P. Morgan
5
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 PIDIs
mean valuations for the last two years and at a ~20% discount to ANPTs average
trading 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)
Source: Company reports and J.P. Morgan estimates.
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6
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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% 359 332 308 287 252 223
4.0% 383 352 325 302 262 231
5.0% 416 379 347 320 275 240
6.0% 460 414 376 343 291 251
7.0% 523 463 414 374 312 265
8.0% 623 537 470 418 339 284
Source: Company reports and J.P. Morgan estimates.
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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7
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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. Companys 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 companys 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
8
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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). PIDIs 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
Source: Company reports and J.P. Morgan estimates.
3.3%
3.7%
3.5%
4.0%
4.1%
4.3%
4.3%
2.5%
3.0%
3.5%
4.0%
4.5%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
A&P spend (Rs B) A&P as % of sales
9
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Multiple growth drivers
Below we highlight the key growth drivers for PIDIs 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 it
has 1000 distributors across segments and 60K dealers. For its retail products (such
as Feviquick), the company has 1MMpoints of presence (200K direct and 800K
indirect). This is the highest in the building products industry and comparable to
FMCG companies. PIDIs target is to reach 3MMtouch 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 companys 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 PIDIs 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.
10
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 companys 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 overall
macro 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
Source: Company reports and J.P. Morgan estimates.
24
28
33
38
44
52
23%
19%
18%
15%
15%
16%
0%
5%
10%
15%
20%
25%
10
15
20
25
30
35
40
45
50
55
FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (Rs B) Growth % YoY
11
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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
Source: Company reports and J.P. Morgan estimates.
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. Huntmans 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.
22.3%
22.3%
20.7%
15.1% 15.2%
16.2%
10%
15%
20%
25%
0
5
10
15
20
25
30
35
40
45
FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (Rs B) Growth (%)
Adhesives &
Sealants
63%
Construction /
Paint
Chemicals
25%
Art Material &
Others
12%
12
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Figure 9: Adhesive and Sealants: Revenue growth trends
Source: Company reports and J.P. Morgan estimates.
b) Construction and Paint Chemicals (20% of revenues): PIDI has a wide
product range in this segment. Key brands include ROFF and Dr Fixit
which are essentially used for waterproofing, tile fixing, floor hardening etc.
PIDIs 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, PIDIs strong brands, and high industry
growth.
Figure 10: PIDI: Construction Chemicals and Paints
Source: Company reports and J.P. Morgan estimates.
c) Art Materials and Stationary (10% of revenues) The company has an
extensive 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, it
should continue to drive growth over the next few years.
22.3%
23.7%
18.2%
13.0%
13.0%
15.0%
5%
10%
15%
20%
25%
0
5
10
15
20
25
30
FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (Rs B) Growth (%)
29.1%
25.1%
20.6%
18.0%
18.0%
17.0%
10%
15%
20%
25%
30%
35%
0
2
4
6
8
10
12
FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (Rs B) Growth (%)
13
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Figure 11: Art & Material: Revenue growth trends
Source: Company reports and J.P. Morgan estimates.
Industrial Chemicals: Weak domestic trends offset by pick-
up in exports on rupee depreciation
PIDIs 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.
10.2%
8.9%
36.1%
20.0%
20.0% 20.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
1
2
3
4
5
6
FY11 FY12 FY13 FY14E FY15E FY16E
Revenues (Rs B) Growth (%)
14
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Figure 12: PIDI Industrial business growth trend
Source: Company reports and J.P. Morgan estimates.
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
FY11 FY12 FY13 FY14E FY15E FY16E
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
%
15
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
International business witnessing improving trends; Brazil
cash break-even likely in the next year
PIDIs international operations have shown a meaningful improvement over the last
few quarters, after being a drag on the companys 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 markets
Rs MM FY12 FY13 9MFY13 9MFY14 % ch Y/Y
International 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
PIDIs 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 200-500bp
Y/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 Rs119MMlast year).
16
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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
17
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Strong FCF generation and net cash balance sheet
provides scope for higher dividend payout
PIDIs 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 10,128
Less: 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 0
Net finance charges 170 343 453
Free 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.
18
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Expect margins to stay firm
PIDIs 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 companys 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 PIDIs 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%
Source: Company reports and J.P. Morgan estimates.
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
19
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Investment risks
Spike in VAM prices or FX depreciation could lead to
margin volatility in the near term
PIDIs key raw material VAM (Vinyl Acetate Monomer) as well as other monomers,
are largely imported or linked to crude oil prices (~50%+ of RMcost). 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
PIDIs 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
20
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 it
has 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. PIDIs
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
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Figure 17: Pidilite: Consolidated consensus estimates
Source: Company reports and J.P. Morgan estimates
22
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Pidilite Industries: Comparative analysis
Given no direct comparable, we benchmark Pidilites 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 sectors
have 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 PIDI
given 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
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 Pidilite
Revenue 124.0 42.6
EBIT 18.4 6.5
EBIT margin 14.9% 15.3%
Net profit 12.0 4.9
ROE 32% 27%
Mcap 491 162
Net cash (10.5) (3.6)
EV 480 158
Source: Company reports and J.P. Morgan estimates.
Table 9: Asian Paints and Pidilite: Du Pont analysis
FY10 FY11 FY12 FY13 FY14E FY15E FY16E
Asian Paints
Profit 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%
Pidilite
Profit 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 4.1
Leverage 1.0 0.8 0.8 0.7 0.6 0.6 0.5
ROE 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 PIDIs volume growth has been 2x (avg) GDP
growth. Weak macro and slowing discretionary consumption have
moderated the growth trends for both APNT and PIDI over the last year.
However, PIDIs 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
Source: Company reports and J.P. Morgan estimates.
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 PIDIs 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)
24
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
margins are higher than APNT; EBIT margins are largely similar probably
explained by APNTs scale. Also PIDIs international business is a drag on
consolidated financials, which should improve.
Figure 20: Asian Paints and PIDI: Gross margin trends
Source: Company reports and J.P. Morgan estimates.
Figure 21: Asian Paints and PIDI: EBIT margin trends
Source: Company reports and J.P. Morgan estimates.
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%.
APNTs 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
Source: Company reports and J.P. Morgan estimates.
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
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Figure 23: Dividend payout
Source: Company
5. Valuations PIDI vs. paint companies
Valuations for PIDI are at a 20% discount to APNTs (industry leader) and in a
similar 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 PIDIs products, while new
construction drives 70-80% of demand for tiles/ sanitary/ plywood
companies. Further, PIDIs 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
26
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 Greenply
5 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%
Source: Company reports and J.P. Morgan estimates.
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 27.7
Havells 1912 19.7 17.1 12.0 10.5 21% 15% 28.9 27.1
Kajaria 574 23.3 17.9 13.8 11.2 31% 26% 25.5 25.4
HSIL 185 15.6 9.4 6.9 5.1 70% 65% 7.5 11.5
Greenply 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 PIDIs 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).
27
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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
28
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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 31,101
Gross Profit 13,862 16,700 19,620 22,736 26,268
Gross Margin 44.6% 45.7% 46.3% 46.4% 46.0%
Staff Cost 3,262 3,746 4,195 4,699 5,263
Advertising & Publicity 1,074 1,473 1,738 2,082 2,427
Other Expenditure 4,599 5,492 6,359 7,349 8,451
Total 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 637 686 823 881 942
EBIT 4,289 5,304 6,504 7,726 9,186
EBIT Margin 13.7% 14.4% 15.3% 15.7% 16.0%
Interest 397 214 180 60 50
Other income 435 704 350 403 503
Profit Before Tax 4,327 5,794 6,674 8,068 9,639
Total Tax 1,100 1,595 1,835 2,259 2,795
Tax rate 25.4% 27.5% 27.5% 28.0% 29.0%
Profit after tax 3,244 4,239 4,863 5,837 6,876
Growth (%) 4.6% 30.7% 14.7% 20.0% 17.8%
Net Margin 10.4% 11.6% 11.5% 11.9% 12.0%
Source: Company reports and J.P. Morgan estimates.
29
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Table 15: Pidilite: Balance sheet
Rs MM, YE Mar FY12 FY13 FY14E FY15E FY16E
Net Fixed Assets 6,177 6,467 6,544 7,164 7,721
Capital WIP 3,938 4,280 4,880 5,480 6,080
Total Fixed Assets 10,115 10,747 11,424 12,644 13,802
Investments 983 2,931 2,931 2,931 2,931
Current Assets
Inventories 4,541 5,236 6,156 7,131 8,331
Sundry Debtors 3,952 4,305 5,048 5,848 6,832
Cash & Bank balances 2,732 1,506 1,246 2,426 4,061
Loans & Advances 1,261 914 2,093 2,425 2,833
Other Current Assets 115 113 250 250 250
Total Current Assets 12,601 12,074 14,794 18,080 22,306
Current Liabilities 5,285 5,808 6,772 7,845 9,164
Provisions 1,466 1,786 1,965 2,161 2,377
Current Liabilities and Provisions 6,751 7,595 8,737 10,006 11,542
Net Current Assets 5,850 4,479 6,057 8,074 10,765
Total Assets 16,947 18,158 20,413 23,649 27,497
Debt 3,213 1,134 534 334 134
Net Deferred Tax Liabilities / (Assets) 468 499 500 500 500
Share Capital 508 513 513 513 513
Reserves and Surplus 12,754 16,003 18,866 22,302 26,350
Shareholders' Funds 13,261 16,515 19,378 22,815 26,863
Source: Company reports and J.P. Morgan estimates.
30
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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. PIDIs 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
31
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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
32
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
Pidilite Industries: Summary of Financials
Profit and Loss Statement Cash flow statement
Rs 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 4,213
Core 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 0
Shares 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 2,426
Ending cash 2,732 1,506 1,246 2,426 4,061
Balance sheet Ratio Analysis
Rs 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 a
Others 1,376 1,027 2,343 2,675 3,083 a
Current 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 a
Total Assets 23,699 25,752 29,150 33,655 39,039 Interest coverage (x) 12.4 28.0 40.7 143.4 202.6
a 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 1.6
Others 3,227 3,307 3,817 4,421 5,165 Assets/equity 1.8 1.7 1.5 1.5 1.5
Total 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 a
Total Liabilities 10,437 9,237 9,771 10,840 12,176 a
Shareholder's equity 13,261 16,515 19,378 22,815 26,863 a
BVPS 26.12 32.22 37.80 44.50 52.40 a
Source: Company reports and J.P. Morgan estimates.
33
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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)
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0
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234
312
390
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Mar
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Jun
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Sep
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Mar
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Jun
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Sep
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14

Pidilite Industries (PIDI.NS, PIDI IN) Price Chart
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
34
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
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gunjan.x.prithyani@jpmorgan.com
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.
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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
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Neutral
(hold)
Underweight
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0
122
244
366
488
610
732
854
Price(Rs)
Oct
10
Jul
11
Apr
12
Jan
13
Oct
13

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.
35
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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36
Asia Pacific Equity Research
03 May 2014
Gunjan Prithyani
(91-22) 6157-3593
gunjan.x.prithyani@jpmorgan.com
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