initiating coverage pidi in equity july 21,...

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

It’s all sticking together manufacturer?XXXIt’s not (just) an Six decades of innovation in category/brand creation with prudent capital allocation (FCF in 18 of past 20 years) make Pidilite an unassailable franchise (FY96-16: 17% sales CAGR/25% RoE). Misplaced investor concern on rising competition does not credit formidable competitive moats – brand, relationships with influencers, and reach better than FMCG majors. Induction of senior professionals from iconic consumer franchises provides bandwidth to grow legacy adhesive segment/ extensions and incubate new ones like construction chemicals (an opportunity bigger than Fevicol). Demand recovery and product launches should keep sales/earnings CAGR at 18%/21% over FY16-20, similar to last two decades. Rich valuation (40x FY17E EPS) is justified given earnings/FCF longevity rivaling branded consumer names helped by under-penetration and innovation-led applications.

Competitive position: STRONG Changes to this position: POSITIVE Franchise built on bonds with customers and through ambassadors Pidilite’s leading adhesive brands (Fevicol, Fevikwik, M-Seal and Fevistik) are built via (a) innovation in branding (witty messaging, double run times and consumer feedback); (b) innovation in packaging which helped in brand flanking and expanding end-user base (B2B-B2I-B2C); (c) converting intermediaries into ambassadors; and (d) chasing shelf space at every shop in India. In three high-growth, high-potential segments Pidilite brands enjoy near-monopoly recall.

Pre-empted and prepared for today’s competition Until 2007 the franchise was largely family-run and Fevicol (and extensions) dominant. Entry into construction chemicals and to further scale up consumers/ intermediaries connect, promoters brought Bharat Puri on Board and doubled employee base by first hiring experienced talent (from Castrol, Asian Paints) and then young talent from top B-Schools. Simultaneously, Pidilite strengthened distribution/HR processes, adopted Kaizen, and now supply-chain management.

Well-crafted platform for creating more Fevicols Pidilite’s history, truly sustainable competitive advantages, product portfolio and present talent pool (at par with Asian Paints) drive its right-to-win as awareness and acceptance of adhesives/chemicals rise across end-uses, especially construction/packaging/industrial/personal-care. Pidilite’s focus on new products (some “Moonshots”) poses upside risks to near-term estimates as these could become Fevicol-esque (~`16bn brand); Dr Fixit, is the highly probable one. 40x for 60 years of reputation for excellence Over the next decade, Pidilite could close the gap with Asian Paints and emulate 3M given (a) presence in multiple low capital intensity segments and geographies (finally turning around); (b) a strong supply of resources (cash, people, brands) and (c) culture of innovation. We value the company at 40x FY18 eps (using fading growth in DCF) well knowing the fact that near-term multiples can be misleading; Asian Paints and 3M are prime examples.

INITIATING COVERAGE PIDI IN EQUITY July 21, 2016

Pidilite IndustriesBUY

Building Materials

Recommendation Mcap (bn): `373/US$5.6 6M ADV (mn): `497.6/US$7.4 CMP: `728 TP (12 mths): `835 Upside (%): 15

Flags Accounting: AMBER Predictability: GREEN Earnings Momentum: GREEN

Catalysts

Pick-up in revenue growth with revival in end-user industries in FY17

Non-linear growth in segments such as construction chemicals in FY18/FY19

Improvement in supply chain driving working capital efficiencies from FY18

Performance (%)

Source: Bloomberg, Ambit Capital Research

75 85 95

105 115 125 135

Jul-

15

Sep-

15

Oct

-15

Dec

-15

Jan-

16

Feb-

16

Apr

-16

Ma

y-1

6

Jul-

16

SENSEX PIDI

Key financials Particulars FY14 FY15 FY16 FY17E FY18E

Revenues 42,832 48,441 53,695 62,845 74,703

Operating Profits (` mn) 6,715 7,708 11,792 13,385 16,341

Net Profit (Adj) 4,499 5,126 7,615 8,625 10,911

Diluted EPS (`) 8.8 10.0 14.9 16.8 21.3

ROE (%) 25.1% 24.3% 30.1% 28.0% 29.2%

P/E (x) 82.7 72.6 48.9 43.2 34.1

P/B(x) 18.9 16.4 13.4 11.1 9.1

Source: Company, Ambit Capital research

Research Analysts

Achint Bhagat, CFA

+91 22 3043 3178 [email protected]

Nitin Bhasin +91 22 3043 3241

[email protected]

Pidilite Industries

July 21, 2016 Ambit Capital Pvt. Ltd.

CONTENTS

Snapshot of Company Financials …………………………………………………3

Story in charts ………………………………………………………………………..4

Champion for five decades and counting………………………………………..6

Great process; great outcome……………………………………………………..7

The legend of Pidilite………………………………………………………………..8

Secret sauce: The strength of diversity …..……………………………………..16

Gauging longevity of PIDI’s growth ……………………………………………..26

Financial assumptions……………………………………………………………..36

Valuation: Near-term valuations the right parameter ……………………….39 for this franchise?

Appendix ...…………………………………..……………………………………..48

Pidilite Industries


Snapshot of Company Financials Profit and Loss ` mn unless mentioned FY16 FY17E FY18E

Revenue 53,695 62,845 74,703

yoy growth 11% 17% 19%

Total expenses 41,902 52,603 62,097

EBITDA 11,792 13,385 16,341


Depreciation 1,331 1,493 1,641

EBIT 10,971 12,742 16,087

Interest and financial charges 133 117 101

Other income 510 850 1,388

Adj PBT 10,839 12,625 15,986

Provision for taxation 3,221 4,040 5,116

Adjusted PAT 7,618 8,585 10,871


Reported PAT 7,615 8,625 10,911

EPS basic (`) 15 17 21

EPS diluted (`) 15 17 21

DPS (`) 4 5 6

Pidilite’s key milestones Year Event

1959 Incorporated as Parekh Dychem Industries

1970 -80s Sets up synthetic resins project in Maharashtra.

Innovation: carpenter journals, collapsible tubes

1980-00s

Tie up with the O&M group - marketing and branding

Won several awards for TV advertisements Launch of new products such as Fevistik, Fevikwik. Acquired Ranipal fabric whitener in 1999

2000 Acquired M-Seal and Dr. Fixit from Mahindras

2002 Acquired insulation tape brand Steel Grip for `80m from Bhor Industries. Expands presence in Fabric care, car care and stationery segments

2003 Launches new liquid pipe sealant and unveils Fevicol Marine.

2004 Set-up manufacturing units in Himachal Pradesh

2005-08

Enters into snack market with 'Chikkers'.

Acquires subsidiaries in Thailand, Middle East, Brazil and USA Decided to set-up elastomer business

2009-13 Sharp increase in employee base and professionalizing management; brings Bharat Puri on Board in May-08

2014-15 Acquired Percept, Nina waterproofing and Blue coat adhesives.

Hired Mr. Bharat Puri - the first professional CEO in Pidi's history

Balance Sheet ` mn unless mentioned FY16 FY17E FY18E

Share capital 513 513 513

Reserves and surplus 27,316 33,047 40,349

Total Networth 27,829 33,559 40,862

Loans 843 843 843

Deferred tax liability (net) 670 670 670

Sources of funds 29,769 35,499 42,802

Net block 10,696 11,203 11,812

Capital work-in-progress 4,618 4,618 4,618

Investments 6,490 6,490 6,490

Cash and bank balances 1,319 8,123 14,650 Cash and bank balances 1,319 8,123 14,650

Total Current Assets 17,246 25,857 35,116

Current liabilities and provisions 9,281 12,669 15,234

Net current assets 7,965 13,188 19,882

Application of funds 29,769 35,499 42,802

Cash flow ` mn unless mentioned FY16 FY17E FY18E

PBT 10,839 12,625 15,986

Depreciation 1,331 1,493 1,641

Interest paid 133 117 101

CFO before change in WC 11,792 13,385 16,341

Change in working capital (150) (417) (880)

Direct taxes paid (3,221) (4,040) (5,116)

CFO 8,421 8,928 10,345

Net capex (2,457) (2,000) (2,250)

Interest received 510 850 1,388

CFI (1,947) (1,150) (862)

Interest & finance charges paid (133) (117) (101)

Dividends paid (2,468) (858) (2,855)

CFF (2,342) (974) (2,956)

Net increase in cash 4,131 6,803 6,527

FCF 10,878 10,928 12,595

The brand mapping of Pidilite


History of strong FCF generation and ROEs

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Pidilite Industries


Story in charts Exhibit 1: Strong FCF generation consistently except for FY08


Exhibit 2: CE turnover remained steady and leverage has reduce over the last five years, sharp spike in FY08-09 was due to the elastomer project.


Exhibit 3: Advertisement expenses has remained high as the company continued spending to build the brand


Exhibit 4: Working capital cycle shrank as the brand strengthened


Exhibit 5: Significant investment in employee ecosystem


Exhibit 6: ..as the company increased employee count and improved employee productivity


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Pidilite Industries


Exhibit 7: Rising competition – we do not see any major risks to Pidilite’s core portfolio

Segment Market

Size (̀ bn)

Pidilite's market

share

Risk of competition Competitor Pidi's competitive advantage

Polyvinyl acetate (Fevicol) 23 70% Low Karpenter – Huntsman

Jivanjor – Jubilant

Connect with carpenters Legendary brand Low cost in overall construction, high cost of failure Influence and relationship with the channel

Cyanoacrylates (Fevikwik) 5 60% Low Polyfix

Vetra – Resinova

Scale - sourcing advantage, bulk purchase from China Well-established brand Unparalleled retail reach

Glue stick (Fevistik) 3 70% Low Kores Faber Castell

Scale - sourcing advantage bulk purchase from Korea, China Well-established brand Superior distribution with depots spread across the country

Rubber Adhesives (Fevibond) 11 45% Moderate Bostik

Chandra Chemicals Strong relationships with end-user industries An industrial product, hence competition could impact Pidilite

Epoxy Adhesives (Fevitite) 7.5 7% High Araldite- Huntsman

Bondtite – Resinova No major presence, Huntsman is the leader Expansions by Astral could impact Pidilite’s market share

Epoxy Sealant (M-seal) 3 60% Low Araseal – Huntsman

Bondset – Resinova

Strong connect with plumbers Low unitary cost and hence little incentive for plumbers to shift Astral’s aggressive entry could impact market share

Source: Ambit Capital research

Exhibit 8: BAS framework for top building material franchises in India – Asian Paints and Pidilite – almost flawless

Innovat

-ion Brand Architecture Strategic

asset Final rank

Rural Urban Mfg.

reach Dtrbn. reach

Asian

Pidilite

Havells

Supreme

Kajaria

Source: Ambit Capital research; Note : - Strong; - Relatively Strong; - Average; - Relatively weak.

Exhibit 9: International businesses turning around


Exhibit 10: FCF generation likely to remain strong


Exhibit 11: PAT growth likely to accelerate in FY18


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Pidilite Industries


Champion for six decades and counting… Pidilite is one of the most popular case studies in Indian business schools as a commoditized product that turned into an exemplary consumer business. The company’s evolution from a manufacturer of synthetic adhesive for wood-work to a consumer brand influencing multiple end-users and applications (home, office, hardware, repairs, waterproofing, plumbing and specialty chemicals) has been an outcome of continuous innovation around products, packaging and, most importantly, branding. The strength of this champion franchise is clearly visible in its stellar financial performance over the last two decades – 24% CFO CAGR and 20%+ RoE each year alongside maintaining a strong balance sheet.

Exhibit 12: Strong financials throughout the last two decades

Source: Company, Ambit Capital research; RoE is the median RoE for the respective period

Business segments

Consumer and Bazaar (84%/90% of FY16 sales/EBITDA) – segment consists of adhesives, construction chemicals and art materials. Most products in this segment are branded products sold at retail shops.

Industrial products (16%/10% of FY16 sales/EBITDA) – largely a B2B segment, with sales to several industries such as footwear, automotive etc.

International business – Pidilite has subsidiaries in five international locations, with the USA and Brazil accounting for ~60% of sales; international business accounts for 10% of consolidated sales.

Exhibit 13: Adhesives and sealants account for >50% of revenues (FY16)


Exhibit 14: North and South America account for 60% of Pidilite’s international revenues (FY16)


11%15%

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24%

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FY95-00 FY00-05 FY05-10 FY10-16

Sales CAGR EBITDA CAGR RoE (RHS)

Adhesives , 53%

Construction chemicals ,

19%

Craft, 12%

Industrial adhesives ,

10%

Pigments, 6%

North America,

42%

South America,

17%

SAARC, 14%

SEA, 9%

MEA, 18%

The strength of this champion franchise is clearly visible in its stellar financial performance over the last two decades – 24% CFO CAGR.

Pidilite Industries


Great process; great outcome Pidilite has not only created strong brands but has also created new product categories in India. We segment the company’s brands into four broad categories. The Hits – extremely successful brands (such as Fevicol, Fevikwik, M-seal etc) with majority market share and well-established competitive advantages; the Misses – not very successful and is a marginal player in the segment (such as Fevitite, Renaissance etc). The Still to be Proved – incubating brands, wherein the market is still to evolve (Motomax, Cyclo etc). The Moonshots – segments like Dr. Fixit which are yet to reach full potential and, if successful, could create a segment as big as Pidilite’s adhesives/sealants business.

Exhibit 15: Mapping Pidilite’s brands


Pidilite transitioned its target markets from industrial users to intermediaries and to consumers through effective communication to carpenters (end-users) and packaging innovation. Not only did the company create strong brand equity but also a robust feedback loop from the influencers to continuously refine its products and processes.

Exhibit 16: A snapshot of Pidilite’s process of building brands and extending end-users

Source: Ambit Capital research; B2I is Business-to-Intermediaries

Pidilite has not only created strong brands but has also created new product categories in India.

Process

Entry into a seemingly commoditized business

Establish strong connect with the influencers

Innovative branding to increase retail recall

Innovation in packaging to reach mass users

Pidilite Industries


The legend of Pidilite 1950-1980 – Changing the rules of the game In 1954, Mr. Balvant Parekh, a distributor of chemicals for Hoechst (German chemical manufacturer), started manufacturing synthetic glue and pigments for the textile industry. After having built expertise in adhesive manufacturing and sales, in 1959 he began manufacturing synthetic glue for the wood-working industry, where natural glue was the preferred adhesive product. In its early years, Pidilite faced competition from fragmented local players and a few large manufacturers which used to sell adhesives in hardware shops. Intermediaries (carpenters in woodworking) were neither aware of brands and, in those days, were largely indifferent to which brand of adhesives they were using. Pidilite was the first Indian company to figure this out and, as a first step towards brand building, started direct marketing to the intermediaries – a practice it follows across its product range till date.

The key innovations by Pidilite in this period were:

Educating carpenters about the benefits of better quality and easy to apply adhesive was the first level of innovation for the company. Earlier, companies focused only on the channel and no adhesive manufacturer had cared to build a connect with the intermediaries.

‘Fevicol design ideas’ – a free book with furniture designs helped carpenters in building designs and also served as a catalogue for the carpenters to add value to clients. The idea was to add value to carpenters by helping them to become advisors to clients; this significantly enhanced the company’s relationship with carpenters. Pidilite understood that adhesive is a minor cost to the overall furniture construction but a poor quality adhesive could dent the carpenter’s reputation. Hence, they positioned Fevicol as a high quality product which could ensure longevity of furniture.

Introduction of 30 gram collapsible tubes of Fevicol was the first instance of product extension and innovation in packaging. Through this, the company began channel expansions – selling adhesives is small packages in retail shops as against bulk packages sold in wood-marts.

Exhibit 17: One of the first print ads of Fevicol

Source: Google images, Ambit Capital research

In its early years, Pidilite faced competition from fragmented local players and a few large manufacturers which used to sell adhesives in hardware shops.

Fevicol was the first adhesive company to start training carpenters.

Pidilite Industries


1980-2000 – setting up the consumer franchise Through continuous training and other initiatives with the carpenter, Pidilite established itself as the leading synthetic adhesive brand for the wood working industry by the 1980s. Thereon, the company’s focus was to establish a consumer franchise to sell adhesives in retail outlets in smaller packages. The key initiatives by the company in this phase were:

Pidilite hired an advertising agency (O&M) to set up its retail brand recall. Piyush Pandey, an intern with O&M in 1983 and now the executive chairman and creative director, created the iconic logo and introduced taglines such as (dum laga ke haisha, Crude english translation – put in all your efforts). Whilst the logo was earlier designed for Fevitite (epoxy adhesive), Pidilite’s management decided to use it for their flagship product – Fevicol.

Exhibit 18: Fevicol’s iconic logo in its first television advertisement in 1980s

Source: Google images, Ambit Capital research

Expanding products and end-users: Over 1980-2000, Pidilite grew the product portfolio to expand the addressable opportunity and end-users (from carpenters to home/office applications, plumbers, electricians, etc.). It launched Fevikwik, which failed to find success initially; but in early 2005 the company repackaged Fevikwik in `5 shell packages and it is now one of the core brands.

Focus on innovative advertisements: Throughout this period, Pidilite continued to aggressively invest in advertising; Pidilite and O&M combined to produce some of the best television advertisements in Indian ad history. Pidilite won several awards, both domestically and internationally for its advertisements. In 1998, Pidilite was amongst the top-15 Indian brands.

By end of this phase (2000), Pidilite had evolved into a multi-product consumer brand

Indeed, in its 1997 annual report, the company talks about the business as:

“A child has made a cardboard toy for his younger sibling. Another has stood first in a painting competition. Someone's sticking a laminate. And, someone is fixing a tile. Someone is showing off a leather jacket. And, someone's gloating over tennis shoes. Someone's buying a saree. And, someone is reading a magazine. Someone's driving a car. Someone's getting his house painted. And, someone is... Phew! The list is endless,. The number of ways in which PIDILITE touches millions of lives across the world is a thing that cannot be confined in a limited amount of space 40 established brands. 400 varied products. Fevicol. Fevicryl. Fevikwik. Fevitite. Acron. Pidivyl. And more”

In 1997, the company had sales offices in 8 metropolitan areas, representatives in 33 towns and cities, 30,000 dealers and distributors serving 3,00,000 retail outlets countrywide and hundreds of personnel directly serving over 2000 industrial users.

The company’s focus was to establish a consumer franchise to sell adhesives in retail outlets in smaller packages.

In this phase, Pidilite focused on branding, expanding product range and backed it up with innovative advertisements

Pidilite Industries


The company discontinued its NBFC business in FY98, given weak performance of the business to funnel management bandwidth in the core business. We do not find much details of the start and the functions of this venture.

Financials: Over FY93-00, the company’s sales/EBITDA expanded at a 15%/33% CAGR. Cumulative/median EBITDA margin was 16.8%/13.9%. Median RoE in this phase was 23% and not in a single year was RoE lower than 20%.

Exhibit 19: Consistent improvement in RoE


Exhibit 20: Sharp growth in EBITDA and declining leverage


2000-05 – acquiring and incubating brands After having established Fevicol as the market leader in white glue, Pidilite started acquiring and building other adhesive and sealant brands to expand its product offering. The idea behind doing this was not only creating other lines of business but also extending the company’s channel presence and intermediary influence. In its 2002 annual report, the company highlighted:

“The Company has strong brands, extensive distribution, strong R&D and an excellent reputation amongst trade and consumers. This provides the Company with opportunities to increase the market share, to introduce new products and to acquire new brands and businesses.”

Acquisitions: The key acquisitions by the company in this phase were M-Seal, Dr. Fixit, Ranipal, Steelgrip and Roff. The details of these acquisitions are summarised in the table below:

Exhibit 21: Acquisitions by Pidilite during FY01-05

Acquisition Year of acquisition Acquired from Value

(̀ mn) Product description Channel Influencer

Ranipal 1999 IDI limited 40 Fabric whitener - a small product in Pidilite's portfolio Retail stores Retail

Consumers

M-seal

2000 Mahindra Engg and chemicals 320

Epoxy putty (sealant) for plumbing and leaking applications. M-seal is the market leader of this category in India

Hardware shops Plumber

Dr. Fixit Waterproofing solutions for roofing, bathroom etc. Leader in the category

Cement and Hardware shops

Mason, construction contractors

Steelgrip 2002 Bhor Industries 100 Wiring and insulation tape. Electricals shops Electrician

Roff 2005 Roffe NA Construction chemicals for tiling, flooring and grouting Hardware shops

Mason, construction contractors


New product launches: Apart from the acquisitions, the company continued to launch new products in its existing categories to enhance shelf space at the dealer level. Some of these launches were:

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The idea behind doing this was not only creating other lines of business but also extending the company’s channel presence and intermediary influence.

Pidilite Industries


Exhibit 22: New launches by Pidilite during FY02-05 Products launched Adhesive Plumbing Waterproofing Stationary Construction/

Industrial Paint

FY02 Upholstery adhesive Dr. Fixit Acron and Fevicryl, Fabric glue, Fabric whitener

Steelgrip acquired Synthetic Distemper (Paint application)

FY03 Laminator glue,

M-seal Plumber, M-seal Instant

Waterproofing products Fevicryl, Hobby ideas

FY04 Export market products, Fevicol variants Dr. Fixit variants


Other important developments during this period

International and domestic accolades in advertisements: Fevicol continued to launch new advertisements focused on key products such as Fevicol, Feviquik, Fevistik and M-seal and won several awards for innovative advertising in Cannes Lions awards and Abby awards at Indian advertisement festivals.

Packaging innovation: The company changed the packaging of its products to improve end-user connect. Management highlighted in its FY03 annual report: “Designs of several products were changed to give a more contemporary look. These products include "M-Seal", "Fevicryl" and "Acron". Plus One Design of U.K. have designed new international look containers as well as an attractive graphic design for "Fevicol" and these are in the process of being launched.”

Manufacturing locations in Himachal Pradesh: The company set up manufacturing units in Himachal Pradesh for production of different types of adhesives.

Dr. Fixit institute (http://www.drfixitinstitute.com): Pidilite set up the Dr. Fixit Institute in FY05 to train intermediaries in the construction industry. The company continues to conduct various training programmes in this institute to educate Indian engineers about global best standards in waterproofing, repair and rehabilitation.

Financials: Pidilite’s sales and EBITDA expanded at a 14% CAGR and EBITDA at a 11% CAGR over FY01-04. The company invested 70% of the CFO in capex and generated FCF in each of the 5 years. RoEs averaged at 21% over these 5 years. Whilst EBITDA margin contracted slightly, the company increased its CE turnover to 2x in FY05 from 1.8x in FY01. The median EBITDA margin and ROE in this phase were 20% and 22%.

Exhibit 23: RoE and margin remained consistently high


Exhibit 24: Sharp pick-up in CFO/FCF and CE turnover


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Fevicol continued to launch new advertisements focused on key products such as Fevicol, Feviquik, Fevistik and M-seal.

http://www.drfixitinstitute.com):

Pidilite Industries


2005-10 – a bit of hubris? With most of its expansions in India doing well, Pidilite shifted focus to international geographies; it also entered snacks business! Mr. Apurva Parekh joined the board at the start of this phase (2005) and was instrumental in the international expansion. International acquisitions: Whilst Pidilite began expanding internationally with

small ticket acquisitions in emerging markets initially, later it acquired companies in large markets such as the USA and Brazil, where the dynamics of the business are materially different from those in India. The company’s international geographies, especially Brazil and the Middle East, continue to struggle.

Exhibit 25: International expansions by Pidilite

Geography Year of Entry Segment Comments

Thailand 2006 Waterproofing Acquired Bamco Ltd in Thailand

Middle East 2006 Adhesives Acquired a 49% stake in Jupiter LLC, which manufactures reflective coatings, tile adhesives and plasters

USA 2007 Art Materials, Automotive chemicals

Acquired Sargent Art - manufacturer of art materials in USA and acquired Cyclo - manufacturer of automotive chemicals

Brazil 2008 Adhesives, sealants, construction chemicals

Acquisition of Pulvitech business in Brazil. The business continues to struggle and the company has made diminution provisions due to weak profitability


Below is a summary of performance of these subsidiaries in this phase

Exhibit 26: Performance of international subsidiaries in this phase

Year Brazil Bangladesh USA Egypt Thailand Dubai

FY07

Acquired Cyclo and Sargent

FY08

Sales `882.3 Mn Successful in expanding its reach to various markets

FY09

No major sales growth due to uncertain economic environment

Process of completing construction of plants

Process of completing construction of plants

FY10 Sales growth 28%, along with reduced costs posted cash profit

Manufacturing operations begin

Sales remain flat, while losses reduced by 38% due to reduced costs

Manufacturing operations begin

Posted cash profits on the back of 26% growth in sales

Impacted by poor trading conditions, resulting in losses


Synthetic elastomer: In its 50-year history, the biggest mistake of Pidilite’s capital allocation was the decision to set up a synthetic elastomer project in FY08. The company began civil work of the plant in FY11 but in FY12 it mentioned that construction has been put on hold as a detailed commercial review was underway. In FY13, the company suspended the construction of the project and mentioned that it has decided to explore induction of a strategic partner for the project. Pidilite is yet to find a strategic partner or make any meaningful progress in this business.

Excerpt from Pidilite’s FY08 annual report: “The Company acquired plant and machinery, patents, trademark and technology of a Synthetic Elastomer (Polycholoroprene Rubber) plant in June 2007. The plant was located in Champaigner, France and was owned by Polymer Europa Elastomers, France. The Company is in the process of dismantling & shipping the plant. The plant will be setup in a Special Economic Zone (SEZ) in Dahej in the State of Gujarat in India. The plant is expected to commence commercial production in March 2010 and will have an initial capacity of 25,000 tonnes per annum. The capacity can be increased to 35,000 tonnes per annum by debottlenecking. The total capital investment in the plant excluding debottlenecking is estimated to be ` 5.3 billion. The Company is also considering putting up a Caustic Chlorine plant at an additional investment of ` 0.9 billion at the same location.”

In this phase the company ventured in international geographies and also ventured into elastomer.

The biggest mistake of Pidilite’s capital allocation was the decision to set up a synthetic elastomer project in FY08.

Pidilite Industries


Snacks business! Pidilite launched snacks under the brand Chikkers, which failed and the company decided against expanding this business.

A few small acquisitions in India: The company continued to acquire small brands to expand its product portfolio. None of these brands forms a significant proportion of overall revenue or cash flows. However, they have helped the company fend off competition.

Exhibit 27: Companies acquired by Pidilite in this phase Company Year Product Tristar Colman FY06 Fine arts Pagel concrete FY07 Industrial grouts Hardcastle and Waud FY07 Sealants and adhesives Bhimad Commercial FY07 Adhesives Madhumala traders FY07 Adhesives


Capacity expansion: The company commissioned its fourth unit in Himachal Pradesh for synthetic adhesives. It also set up two more plants, one for consumer products and the other for construction chemicals.

Continued SKU addition: Pidilite continued to add SKUs in the core businesses to increase shelf presence at the dealer shops and to premiumise its portfolio.

Exhibit 28: New launches by Pidilite during FY05-10 Adhesive Plumbing Waterproofing Stationary Auto Construction/Industrial

FY06

Dampfree (injection grout), M-seal wet set (wet surfaces)

Krystalline (capillary waterproofing)

Fevicryl ceramic colours & other products

Motomax (premium car care)

Industrial colorants, Industrial adhesives

FY07

Marble Glue, Wood adhesive(with export variants), Fevitite Super Fast, Cheetah Blue

Heatshield (Exterior heat coat)

Dr.Fixit Gapfill, Newcoat (Terace),Raincoat (Wall)

Masking Tape

FY08

Fevicol BWP

Fevicol 1KPUR, Kwikgrab & Vertifix

FY09

Dr.Fixit, Roofkote & Roofseal, Safeguard (Internal Tank wall)

Fevicol Glue Drops, Fine Art Colours

Dr. Fixit Waterbar

FY10 Binders (Water based links)

M-seal super (DIY applications)

SMARTCARE Products (Healthcare)

Woodlok acquired(Henkel wood retail arm), Roff products(Tile fixing)


Financials: Pidilite’s sales/EBITDA expanded at a 20%/27% CAGR over FY06-10. EBITDA margin expanded to 18.7% in FY10 as against 14.9% in FY06. RoE averaged at 26% over FY06-10. Note that the company’s RoE dropped below 20% in FY09 (the only instance in the last 25 years) due to a sharp increase in capital employed due to non-capitalised machinery of the elastomer project and decline in margins due to increase in vinyl acetate monomer ((VAM), the key raw material) prices (11.2% in FY09 as against 14.5% in FY08).

Exhibit 29: RoE dropped in FY09 due to sharp increase in VAM prices


Exhibit 30: Elastomer accounted for 20% of CE in FY10


16

21

26

31

36

41

10

12

14

16

18

20


(%)(%)


Elastomer, 19%

Other, 81%

Capital employed FY10 (`13.8bn)

Pidilite Industries


2010-16 – professionalizing management Pidilite was run as a family driven organization for 5 decades. Whilst the promoters had done an excellent job of building the franchise, rising business complexities meant that the company needed professionals to enhance management bandwidth. The journey towards professionalising management began in FY09 – Pidilite hired Mr. Bharat Puri as an independent director on 28 May 2008 (elevated to MD in FY15), who helped the company build the leadership team. Hiring veterans in HR: Pidilite hired Manish Modi (former CEO of Datamatics Technologies) as the head of HR function. Modi recruited over 80 top executives for Pidilite, alongside headhunting firm Egon Zehnde. In one of the media interviews, Mr. Modi highlighted: "We made a list of 20 organisations we admire. We wanted to recruit professionals from these companies, who had spent at least 12 years with the company and risen up the ranks." Anil Jayraj joined Pidilite as Chief Marketing Officer from Castrol-BP. In a media article, he highlighted: "I liked the idea of working with a great brand like Fevicol, that virtually required no sales push." However, Pidilite's employer branding was diluted by the fact that it was known to be a family-run company, with one or the other family member heading every business line and function. "We were recruiting very senior people so it was a challenge," says Parekh. "There were long conversations where I had to articulate the company's values and convince them that family members were preparing to disengage from day-to-day management." The company recently hired Salil Chinchore (ex-Mondelez and Asian Paints) as President, HR. International businesses continued to suffer: Whilst the domestic business continued to do well (18% revenue CAGR over FY10-15), growth of the international business tapered (6% YoY growth) due to weak performance of subsidiaries such as Brazil, where Pidilite continued to post losses.

Exhibit 31: International businesses did not do well in this phase Year Brazil Bangladesh USA Egypt Thailand Dubai Singapore

FY11

Sales growth of 10%, but incurred loss from operation due to high input costs.

Continues to gain strength with increased market penetration.

Sales growth at 11% along with operating profits led to cash profits.

Performance disturbed due to political developments in the country and neighbouring areas.

Reported higher cash profits, but sales growth lower than expected.

Performance impacted due to adverse conditions in target markets.

FY12

Sales down by 4.3%, performance below expectations due to competitive pressure.`97mn has been provided for diminution in value of investment in Company's subsidiary.

Market position strengthened by sales growth of 20%, one more manufacturing facility being set up.

Sales down by 2.5%, EBITDA up by 10% due to cost control measures.

Signs of recovery due to sales growth of 63%.

Sales growth of 12% despite of weak economic situation and floods.

Sales growth of 15%, still company reported a cash loss.

FY13

Continued to perform Sub-par. Goodwill impairment provision is `97mn.Provision for disputed tax liabilities and other disputed items is `46mn.

Facility was expanded to produce a wider range of adhesives. Sales grew by 34%.

Sales up by 10%, EBITDA down 21% due to higher material costs.

Sales growth of 25%, losses significantly reduced.

One manufacturing facility shut down to reduce operating costs. Sales growth at 22%.

Sales decline of 42%, losses lower than last year due to cost reduction measures.

FY14

Sales grew by 18% and margins improved by 7.9% over last year,

Reported sales growth of 36% in spite of political unrest and market disturbance.

Improvement in margins by 2%,Sales growth of 2.5%, EBITDA growth 58%

Improved margins and controlled costs resulting in a positive EBITDA as compared to marginal loss last year. Sales growth-19.6%

Sales grew by 14.2%,EBITDA grew by 38.2%

Losses increased due to lower sales and higher staff cost. Sales fall by 7%.

Sales doubled due to higher sales from traded products, losses were marginally higher due to provision for slow moving inventory.

FY15

Sales growth at 3% due to slow growth in Brazilian economy; but cost cutting measures in place.`127mn has been provided for impairment.

Sales growth of 21% due to increase in prices and volumes.

Sales growth of 11% driven by strong growth of Sargent art business in retail segment

Margin under stress due to devaluation against USD. Reported marginal losses of `.5 million at EBITDA level.

Sales grew by 10% but business was affected due to political disturbance/elections and slowdown in economy.

Expanded its business by distributing the products in GCC & CIS countries. Company also acquired the brand "ROK" and a new management team.

Reported drop in sales by 20%, losses were lower than last year by 10%.


The journey towards professionalising management began in FY09 – Pidilite hired Mr. Bharat Puri as an independent director on 28 May 2008.

We made a list of 20 organisations we admire. We wanted to recruit professionals from these companies.

Pidilite Industries


Domestic acquisitions: Pidilite made two reasonably large acquisitions – Blue coat and Nina waterproofing – in FY15. The company spent ~`3bn for acquiring these companies.

Blue coat: Pidilite acquired Blue Coat as it was a strong brand in Gujarat, especially in white glue, and Pidilite was struggling to gain market share in the state. It acquired Blue Coat for `2.6bn – 12% of FY15 net worth and 48% of FY15 CFO.

Nina waterproofing: Pidilite acquired Nina waterproofing, a leading waterproofing contractor in Mumbai, to enhance its presence in institutional contracts and provide end-end solutions rather than just waterproofing material. The company spent ~`1bn to acquire Nina waterproofing, which formed ~4% of FY15 net worth and 18% of FY15 CFO.

Exhibit 32: Sharp expansion in margins and RoE in FY16 due to lower input prices


Exhibit 33: Better inventory management led to shrinking of working capital cycle


16

18

20

22

24

26

28

30

32

10

12

14

16

18

20

22

24


(%)(%)


- 10 20 30 40 50 60 70 80 90

100

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16


Pidilite spent ~`3bn for acquiring Blue Coat and Nina waterproofing.

Pidilite Industries


Secret sauce: The strength of diversity Pidilite has challenged conventions since the company began operations. From the choice of its products to approach to the channel or branding, it has not shown traits of a run-of-the-mill Indian corporate. Whilst brand is Pidilite’s most apparent competitive advantage, other less-appreciated advantages are its widest reach amongst peers, a top-class professional management team (see exhibit 51) and strong management.

Understanding Pidilite’s competitive advantages We scan Pidilite’s competitive advantages and its sustainability through John Kay’s IBAS framework (Innovation, Brand, Architecture and Strategic Assets):

#1: Innovation Every large company gets into a certain kind of inertia; but if you don’t keep looking out for new opportunities and innovating, growth will peter out in the long run

Madhukar Parekh

Product – good things in small (and simple) packages

Despite no major complexity in product chemistry, Pidilite’s innovation lies in its capability to continuously launch new SKUs – this has helped it increase target market. The company ties it up with innovative branding and packaging to enhance product recall.

Product chemistry is not Pidilite’s key strength as most of its products are not technology intensive or highly capital intensive. Pidilite has spent ~0.4% of revenues in the last two decades for R&D, which is significantly lower than that of peers such as 3M, which Pidilite looks up to.

Exhibit 34: R&D cost is lower than that of several Indian corporates

R&D as % of sales FY10 FY11 FY12 FY13 FY14 FY15 FY10-15

3M India 3.4 3.4 8.4 2.4 2.7 2.4 3.7

SRF Ltd 0.9 0.9 0.8 1.0 1.1 1.5 1.0

Atul Ltd 0.8 0.6 0.6 0.8 1.0 0.8 0.8

PI Industries 0.9 0.6 0.6 0.7 0.4 0.7 0.6

Asian Paints 0.6 0.6 0.6 0.6 0.5 0.5 0.6

Pidilite 0.5 0.4 0.4 0.5 0.6 0.5 0.5


Branding — a commodity product turned consumer through branding

Pidilite is a testament of innovative branding in India, starting from the 1970s when the company launched the first-of-its-kind furniture catalogue to create its connect with carpenters. In the past two decades, Pidilite has followed innovative television, print and outdoor advertisements, which helped it establish a utility product such as adhesive into one of the strongest consumer brands in India. See page 17 for details.

Innovative advertising also helped the company re-position its products in the market. The company re-positioned M-seal from a sealant to a multi-purpose adhesive to expand applications in 2012.

Nilesh Majumdar, president of sales & marketing (consumer products-maintenance), in a media interview, highlighted: "MSeal has been a synonym for water leakage sealant. Since the brand defined the epoxy putty category, the only way for us to enhance sales was to expand the category. After the market research about the product, we tested it extensively in-house for various other applications and shortlisted the ones which we found were the most relevant”

Packaging — small packages, big benefits

Pidilite’s first innovation in packaging was during 1970s when it launched collapsible tube packaging for Fevicol. Over the years, the company continued to launch small-sized packaging in multiple products which helped the company expand its reach.

Despite no major complexity in product chemistry, Pidilite’s innovation lies in its capability to continuously launch new SKUs.

Pidilite Industries


One instance of packaging innovation by Pidilite was Fevikwik. Whilst there was an addressable market for Fevikwik, the product wasn’t doing well because it was priced at `20, and once opened, it would harden making the adhesive unusable. In the early 2000s, Pidilite re-engineered the packaging of Fevikwik. The company created a plastic packaging material that did not absorb ambient moisture and could hold small quantities. Fevikwik was then sold in 0.5 gram packs costing `5 and is now a market leader in the product.

Pidilite continuously launched different variants of the same product with minor changes to increase shelf space at the dealer level and to lure consumers. It launched Fevistik Blue and Purple in FY11, which were minor upgrades of the existing Fevistik but positioned differently – coloured when applied but the colour disappears in a few seconds, enabling controlled application of glue. Although this has not been a major success, it shows the company’s ability to do micro innovations with limited capital commitment.

Recently, the company changed the packaging of Fevicol to attract school children (see image below).

Exhibit 35: Pidilite’s innovation in packaging of Fevicol..


Exhibit 36: …and Fevistik


#2: Brand – generic to the product category “The success of Fevicol lies in its earthiness and its ability to connect with the consumers across segments. All communication designed for Fevicol exploits the traditions and culture of India and carries with it a sense of “ghar ka banaya hua Fevicol”

As a client, Fevicol likes to experiment. They always say let's do something new. They are innovative and not risk averse. They have no problem in taking risks. They are not formula driven and have tremendous speed of movement. There is never any delay in work from their side. They are really quick at taking decisions, something I have never seen in MNCs.

Piyush Pandey (chairman and creative director, O&M, India)

Yeh Fevicol se bhi mazboot jod hai (this bond is stronger than that of Fevicol)

Narendra Modi, India’s Prime Minister on Indo-Japan ties

Fevicol se…

A famous song from Bollywood movie Dabbang 2

The company created a plastic packaging material that did not absorb ambient moisture and could hold small quantities.

Pidilite Industries


For over two decades now, Fevicol is synonymous with adhesives in India. The company hired Ogilvy and Mather in 1980s for its mass branding and advertising exercise. From its iconic logo in the 1970s to catchphrases in the 1980s to highly successful television commercials during the 1990s and 2000s, Fevicol continued to innovate in branding, which now makes it the 45th most trusted Indian brand and 3rd most trusted Indian brand in household care. For several years, Pidilite’s advertisements won awards at the Cannes Lions awards and the Abby awards for its advertisements.

The company’s ad-spending over the last decade has been the highest amongst key building material franchises in India, which depicts the focus of the company in strengthening its brand.

Exhibit 37: PIDI’s ad-spend as a percentage of sales is one of the highest in the building material companies’ space


Exhibit 38: Legendary advertisements of Pidilite

Source: Media, Ambit capital research

0%

1%

2%

3%

4%

5%

6%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Ad expense as a % of sales

Asian Cera Havells

Kajaria Pidilite Supreme

For several years, Pidilite’s advertisements won awards at the Cannes Lions awards and the Abby awards for its advertisements.

Pidilite Industries


#3: Architecture Channel connect – akin to no other Indian company

No other Indian company has a channel connect similar to that of Pidilite. The company sells its products through mom and pop grocery shops, paan (betel) shops, stationary shops, hardware shops, automotive spare part shops and wood marts.

Below is a depiction of the channels through which the products are sold. We visited each of these shops to understand Pidilite’s competitive advantages. The following table summarizes the key takeaways.

Exhibit 39: Pidilite has the maximum channel coverage Company Grocery Paan shops Stationary Hardware Wood marts Automotive Electricals Cement

Pidilite

- Fevicol

- FeviKwik

- M-seal

- Fevistik

ITC

FMCG Brands (HUL)

Paints (Asian, Berger)

Tiles/Sanitaryware (Kajaria, Somany)

Ply/Laminates (Century, Green)

Electricals (Havells, Bajaj)

Adhesive (Araldite, Resinova)

Pipes (Supreme, Astral)


Exhibit 40: Channel penetration of Pidilite’s products

Channel Pidilite's Products Competition Rank Positives Negatives

Ply & Laminates

Fevicol SH,SR, Fevicol Marine

Eurobond, Araldite (Carpenter), Falcofix & Falcobond

1-Pidilite 2-Araldite 3-Falcofix 4-Eurobond

1) Carpenters prefer Fevicol given its well-established brand and quality 2) The switching cost for the dealers is very high; previously they have been stuck with slow-moving inventory of other brands 3) Given the low cost of adhesive in furniture making, carpenters do not down-trade 4) Shop owners say "They have been selling Pidilite for generations and have built a relationship beyond business, there is no other reason than Company shutting down that they will stop selling Pidilite"

1) Smaller dealers aren't happy with the distribution network due to large delays in delivery 2) Araldite gives 1 month credit to retailers whereas Pidilite gives 15 days credit.

Hardware

Fevikwik, Fevicol, Fevitite, M-seal, Roff, M-seal

Astral-Resimet, Bondtite

1-Araldite 2-Astral 3-Pidilite

1) Roff is doing well for tiling and grouting applications 2) Fevicol remains the preferred brand for wood applications 3) Multiple SKUs, hence the company always gets shelf space 4) M-seal remains the preferred sealant for leakages at home

1) Not been able to build a brand for epoxy adhesives 2) Araldite specializes for stronger bonding and also for marble and tile applications. 3) Astral is the consumer's favourite for Pipe applications and solvents.

Electrical Steelgrip Unorganised brands 1- Pidilite

1) Only brand that shops keep usually. 2) Steelgrip is directly requested by the customer i.e. consumer's favourite & trusted product.

1) Threat from competing products of Araldite and Astral.

Paan Shop Fevikwik, Fevicol

No Competition

1- Pidilite

1) Ease of access to consumers 2) Only adhesive that paan shops keep 3) Never ending applications make it a universal product.

1) Low contribution to earnings of the paan shop

General Stores, Grain stores

Fevicol, Fevikwik

No Competition 1-Pidilite

1) Basic utility adhesive 2) Pidilite is the only brand of adhesives that shops keep i.e. a near monopoly 3) Expansive SKU count and continued innovation in product launches

1) Low margin for shops, competitors offer higher margins and credit as a bait to gain market share

Repairs Fevikwik, Fevitite

Astral-Resimet, Bondtite

1-Astral-Resimet 2-Pidilite 3-Araldite

1) Repairers identify various applications only possible with Fevikwik if in case they want to reverse.

1) Resimet has a much stronger &unbreakable bond then Pidilite, hence, repairers prefer Resimet over Pidilite.

Stationary Shop

Fevikwik, Fevicol, Pidilite's stationary products

Kores, Camlin, Camel

1-Pidilite 2-Kores

1) Consumer's favourite brand for Home and Office products. 2) No major competition in this segment.

1) Low margin for shops, competitors offer higher margins and credit as a bait to gain market share

Source: Channel checks, Ambit Capital research

Pidilite Industries


Distribution architecture — timely deliveries leading to low working capital investments by distributors?

Pidilite has a robust distribution management structure, which helps the company manage its inventory (43 inventory days) despite an extensive SKU count. The company transports its products from its plant to mother godowns. Thereon, the goods are transported to C&F agents/company depots, from where the wholesale dispatches are managed.

The company has appointed TSI (territory sales managers) who gauge demand at the retail shops, based on which they give the orders to the wholesalers. The wholesalers then place the order on an online portal for the goods, which are dispatched within 36 hours. The entire distribution is managed through trucks and the last mile transportation is managed through mini-vans.

Exhibit 41: Distribution and sales structure of Pidilite


Exhibit 42: Pidilite’s products are sold through multiple channels


Factory

Mother godown

Companydepot/c&f agent

Distributor

Retailer Retailer

Online portal Places orderDistributor

Territory sales incharge

Retailer

End consumer

Primary

Secondary

Tertiary

Tra

nsp

ort

Despite extensive inventory count, Pidilite maintains low inventory days

Pidilite Industries


End-use connect across the value chain

Pidilite in the only company in India which has a strong influence across users:

B2C business: Stationery (including hobby ideas and Fevicryl) and general purpose adhesives (Fevicol, Feviquik, Fevistik etc),

B2I business: Most of its core products – Fevicol, M-seal, Steelgrip, etc. – are dependent on intermediaries (as explained in exhibit 32)

B2B business: Industrial and specialty chemical division is largely a B2B business wherein clients are real-estate developers or manufacturers of products such as footwear and other industries.

Exhibit 43: Influence on the end-users

B2C B2I B2B

Pidilite


Tiles

Ply

Adhesive


Sanitaryware

Laminates

Source: Ambit capital research

Employee architecture – a top class senior-level management

Pidilite has hired a strong set of professional managers with most of the senior employees having over 20 years of experience in top corporates such as Asian Paints, Mondelez and Saint Gobain.

Also, Pidilite has a high quality of independent directors – a trait not seen in most Indian corporates. The promoter family recently appointed Mr. Bharat Puri as Managing Director; he has over 30 years’ experience in managing consumer businesses. Mr. Puri started with Asian Paints in the 1980s and worked with Mondelez during 1998-2015, where he was the President, Global chocolate, Gum and Candy.

Note, in the table below, that the independent directors in Pidilite are senior industry professionals with several years’ experience in large Indian corporates and professional firms.

Exhibit 44: The board members (non-family members) of Pidilite have a wealth of experience in senior positions

Name Designation Experience Credentials

Bansi Mehta Independent Director 50+ years Taxation expert with over five year experience. Also an independent director at companies such as Gillette, Procter and Gamble, Atul Ltd, HDFC and SBI

Sanjeev Aga Independent Director 40+ years Operating partner at Kedaara Capital. Also an independent director at Idea Cellular and UFO Moviez

Ranjan Kapur Independent Director 40+ years Chairman at Bates India. Also an independent director at Abbott India

Uday Khanna Independent Director 40+ years Served as Managing Director of Lafarge India during FY05-12. He was also the senior vice president of Group strategy at Hindustan Unilever, where he spent 30 years

Meera Shankar Independent Director 40+ years

She is an independent director in other Indian companies such as ITC and Adani transmission. She has served as the Ambassador of India to Germany from 2005-09 and to the United States from 2009-11. She has had extensive experience in South Asia having worked on Bangladesh, Sri Lanka and Maldives as Under Secretary and Deputy Secretary in the Ministry of External Affairs. She headed divisions as Joint Secretary dealing with neighbours, Nepal and Bhutan, and the South Asian Association of Regional Cooperation (SAARC)


Presence across several consumer bases

Hired a strong set of professional managers with most of the senior employees having over 20 years of experience in top corporates

Pidilite Industries


#4: Strategic assets Intermediary connect – bonds will all

One of Pidilite’s biggest strengths is the connect it has across intermediaries. Pidilite is the only company in India which has a direct connect with all the home building intermediaries – carpenter, mason, electrician and plumbers. Other building material companies have an influence only on a specific intermediary; for example, the paint companies only influence painters.

Exhibit 45: Pidilite has the maximum intermediary coverage Intermediaries Carpenter Plumber Painter Mason Electrician

Pidilite (Fevicol)

(M-seal, Dr Fixit)

(Dr Fixit)

(Roff, Dr Fixit)

(Steelgrip)


Tiles/Sanitaryware (Kajaria, Somany)

Ply/Laminates (Century, Green)

Electricals (Havells, Bajaj)

Adhesive (Araldite, Resinova)



This advantage not only helps create brand equity with the intermediaries but also a reverse feedback mechanism wherein the intermediaries feed ideas into the company, which has led to creation of opportunities. For example, the company launched variants of Fevicol like HeatX, SpeedX and Marine based on feedback from carpenters. These value added products now account for ~50% of Fevicol sales.

Exhibit 46: Thanks to inputs from carpenters, Pidilite premiumised Fevicol portfolio


Loyalty and reputation with users and intermediaries

Pidilite has built a strong loyalty with the entire ecosystem through its continued branding exercise for decades and consistently high quality products:

End-Users: Carpenters prefer Fevicol given the strong recall and most of them refer to adhesive as Fevicol. One of the shopowners told us, in case we run out of Fevicol inventory the carpenter says “Koi aur brand ka Fevicol hai?” (give me Fevicol of another brand). Since adhesive is not a major cost for furniture making, carpenters are reluctant to shift from Fevicol to other brands.

In a media interview, Mr Madhukar Parekh highlighted:

“We have maintained a norm of sending furniture design and books to carpenters every quarter. The idea is to add value to the carpenters' jobs. We knew this was a good way of connecting to carpenters, as they would have a wide variety of designs. This is one strategy the company adopted of identifying with the customer and providing wings to his creative imagination, thereby selling our products. For the carpenter community, we have formed the 'Fevicol Champion Club'.

Pidilite Industries


This is an exercise to bring them together, and, more importantly, to add value to their life. We bring these carpenters to our office and demonstrate each product. We invite them by rotation. Club members from all over the country come here and are received at the railway station like people from the bridegroom's side. We also organise kite festivals for them. All these are a token of appreciation from our side towards this community, which has helped us grow.”

Intermediaries’ training: Pidilite continues to train intermediaries to use its products effectively and to educate them about new launches. These programmes also help the company to further strengthen its ties with the intermediaries.

Exhibit 47: Training initiatives by Pidilite

Product Programme Influencer reached Comments

Fevicol Fevicol champions club Carpenter FCC Was Founded In 2002 By Pidilite Industries Ltd. Exclusively For The Wood-Working Contractor Community, With More Than 300 Chapters In Over 120 Towns And About 35,000 Members Across The Country. http://fcc.pidilite.com/

M-seal Regular training programmes Plumber

Tied-up with Indian Plumbing Skill Council (IPSC) for organising skill development workshops for plumber. Pidilite has been training plumbers through one of the largest contact programs on safe plumbing practices, besides providing solutions to their day-to-day problems by offering a range of well-suited products.

Dr. Fixit Dr. Fixit Institute Plumbers, Masons, Contractors

Use global standards of waterproofing in India. Conducting several programmes all over the country for creating awareness and skill development http://www.drfixitinstitute.com/


Channel and dealers: Most dealers of Pidilite have been associated with the company for over two decades and hence have a strong sense of loyalty to the company. Strong IT systems and robust deliveries make transacting with the company easier than at other companies. Continued innovation in products enhances the addressable opportunity of the channel (without any incremental cost to the channel), which no other adhesive company in India enjoys.

Also, unlike its peers, the company does not force the channel to over-stock inventory. The dealers work on minimal inventory (10-11 days) which enhances the RoCE for their business.

IBAS mapping with other leading franchises We map the leaders across building material categories with Pidilite to ascertain the strength of Pidilite’s franchise. We compare Pidilite with Asian Paints in paints, Supreme in pipes, Kajaria in tiles and Havells in electricals.

Exhibit 48: IBAS framework for top building material franchises in India – Asian Paints and Pidilite – almost flawless

Innovation Brand Architecture Strategic asset

Overall rank

Rural Urban Manufacturing reach

Distribution reach

Asian Paints

Pidilite Industries

Havells

Supreme Industries Kajaria Ceramics Source: Ambit Capital research; Note : - Strong; - Relatively Strong; - Average; - Relatively weak.

Innovation: Asian Paints and Pidilite are the champions of innovation. The innovation of these companies does not stem from product but the ability to create a unique positioning for the product through packaging, branding and expanding application. Asian Paints opened a new market for itself with its aggressive entry in external paints, which hitherto did not exist in India. Pidilite has created multiple sub-segments, which previously did not exist as an established category. Havells carved a large chunk of the highly competitive electricals industry for itself through focus on differentiated products and selling propositions. Supreme Industries has shown exceptional innovation in plastic processing and built a strong portfolio of products. Kajaria’s innovation has been limited to early entry in premium tiles and entering into JVs with the smaller players.

Unlike its peers, the company does not force the channel to over-stock inventory.

Innovation of Asian Paints and Pidilite does not stem from product but the ability to create a unique positioning for the product through packaging, branding and expanding application.

Pidilite Industries


Brand: Again, Asian Paints and Pidilite rule the roost. Few Indian companies can credit themselves with being able to build brands in commoditized businesses and being able to create a strong brand with the entire ecosystem with the vigor that these companies have done. Havells has also built a premium brand recall in electricals though it lacks in rural connect. Supreme and Kajaria are way behind in terms of their brand recall compared to the other mentioned companies.

Architecture: Asian Paints and Pidilite’s architecture is centered not only on manufacturing and distribution but also the level of influence these brands have on the channel and the intermediary, which has made their businesses less susceptible to volatility. It has also helped restrict entry of competition. Havells stands apart in its dealer relationships. Qimat Rai Gupta’s origin as a trader has helped him understand the needs of dealers and this has helped Havells build unique, long-term relationships with its dealer community. Supreme and Kajaria’s architecture strengths are scale and distribution that are akin to no other brands in their respective categories.

Strategic assets: Strategic assets in most of the top building material franchises is their reputation in the ecosystem, which helps these brands expand in existing products and launch new products with relative ease compared to competitors. A top-notch professional management is a strategic asset for Asian Paints, and Pidilite has also taken steps to building a similar asset. Most other companies are way behind in building an employee ecosystem as Asian and Pidilite.

Pidilite Industries


Exhibit 49: SWOT analysis of the adhesive and sealant industry


Exhibit 50: Pidilite Industries’ SWOT analysis Strengths Weaknesses

Pidilite’s strong brands such as Fevicol, M-seal, Fevikwik are leaders in their respective categories and have a high loyalty with consumers. The company has six brands >`1bn in revenue

Pidilite has built strong ties with channel and intermediaries which helps the company fend off competition.

A long history of FCF generation and continuing WC improvement

Strong unlevered Balance sheet helps the company mothball competition from fragmented peers and invest in products and reach expansions

Pidilite has established a strong professional management team in the last five years to ensure growth longevity

Pidilite has not managed to build a strong epoxy adhesive franchise, Araldite and Resinova have a superior franchise

Elastomer business (~13% of FY16 capital employed), continues to remain a drag on RoCE with nil revenue contribution.

International subsidiaries, especially Brazil and Middle East continues to struggle with weak profitability

Opportunities Threats

Construction chemicals in India is a currently a small market but is a large opportunity, given rising penetration as quality of building construction improves. The current market size in India is `40bn and has been growing at a 15% CAGR for the last decade, yet less than 1% of Indian households have waterproofing

Growth in international markets such as Asian and MENA markets, the company recently hired Bain capital to chart out its international plan

Disruption in furniture construction pattern, with rising usage of ready- made MDF furniture wherein carpenter intervention is limited

Rising competition from cross category players, such as Asian Paints and Astral, which could impact Pidilite’s market share

Rising competition in waterproofing from domestic majors – Asian and Berger, international chemical companies (BASF, Sika etc) and small fragmented players

Possibility of extension of product portfolios by tile players into grouts etc, which will impact sales of Roff products

Source:, Ambit Capital research

Bargaining power of suppliers

MEDIUM

VAM accounts for ~15% of overall raw materials of the company, the prices of which are crude linked. Hence, procurers have limited bargaining power

Bargaining power with outsourcing partner is high, given that incumbents are a major proportion of the former’s revenues

Bargaining power of buyers

LOW

Adhesive/Sealants is not a major cost of construction, hence intermediaries are not price conscious

Bargaining power of buyers in construction chemicals/waterproofing is high, due to high competition and fragmentation

Competitive intensity

MEIDUM

Competitive intensity is low in white glue and epoxy sealants, where Pidilite is the undisputed leader

Competitive intensity is high in waterproofing, wherein several manufacturers (from global and domestic manufactures) compete in a small market (`25bn)

Barriers to entry

HIGH

Intermediaries are highly brand conscious which is a significant barrier to entry for a new player

Dealers have been associated for long with category leaders and have a high switching cost to other brands

Barriers to entry is relatively lesser in institutional products such as as construction chemicals

Threat of substitution

LOW

Adhesives is a basic construction material and hence has little substitutes

Change in product chemistry can lead to innovation in new products which could be substitutes

Unchanged Improving Deteriorating

Pidilite Industries


Gauging longevity of PIDI’s growth Pidilite’s transition from a family run organization to a professional set-up has been gradual and over a period of time, the company has built a team of strong professionals. Moreover, the company has institutionalized processes such as distribution, inventory management etc, which is also resulting into reduction in working capital investments and capital intensity. Its adhesives and sealants business is well-guarded against competition, due to its moats such as brand, scale, distribution and relationships with the intermediary. Lastly, construction chemicals is a nascent opportunity in India and Pidilite is built a leading franchise, which will support growth in the future, another Pidilite-like-scale-business in the making.

The last five decades of Pidilite’s success story were largely orchestrated by the promoter family, which built the brands and concluded successful domestic acquisitions. The key concerns on the next leg of Pidilite’s growth are:

Promoters taking a back seat in operations could impact sustainability of growth: We believe the company has done a credible job of inducting senior industry professionals with experience at top companies in India which are involved in mass consumer brands and businesses dependent on supply-chain management such as Asian Paints, Castrol, Mondelez, etc.

Competition by domestic majors in adhesives for the first time: About 70% of Pidilite’s adhesive/sealant portfolio is well-guarded against competition given its brand, scale and intermediary connect. Since adhesive is a small proportion of overall cost, competitors will have little to offer to the intermediary to gain share.

Over-crowding in construction chemicals: Construction chemicals is still a nascent market in India (~`4bn in size) and has a lot of room to grow. Entry of 2-3 high quality players usually leads to expansion in the market size. The globals are largely focused on the institutional business and Pidilite has a significant lead over the domestic manufacturers in terms of influence on the intermediary, product positioning/portfolio and channel presence; hence, we do not think that the company’s positioning can be challenged easily.

Struggling international business: Whilst the profitability of the international subsidiaries has been sub-par (low single-digit margins and RoCEs), we note that management has managed to improve operational performance in the last few years. Brazil (17% of overall revenue) remains the only geography where the company is posting losses at EBITDA level. The company’s future strategy in international markets will largely to build brands, rather than operate as a commoditized product seller.

The section below addresses the abovementioned apprehensions in detail

I] People, process and product planning in place We came to the conclusion that the role of professionals from the family should be at the strategic and directional side and on the operational side we would have set of professionals. Considering the size and complex nature of the business we are in, this was indispensable. All these years, we didn't have much of a talent pipeline and we were looking for professionals. Hence, a conscious decision was taken to change the structure on the operational side having division heads and CEOs.

These recruitments would be done in such a way that the core values and the functioning of the company are not compromised. We are very careful about hiring people. We look for our own values in prospective candidates. We ask for feedback on our company. Those candidates who look for flamboyance in our way of functioning don't conform to our work ethics and hence are not considered at all. These are not long-term employees for us

Madhukar Parekh, Oct-10

Hired talent, set up processes to effectively tackle competition

Pidilite Industries


People – building longevity and sustainability through management:

For five decades, Pidilite has been a family-driven organization, wherein the promoters managed capital allocation, product launches, etc. However, given the significant increase in scale of operations alongside rising complexities (entry in multiple international geographies and expansion in product portfolio, especially waterproofing), the company is professionalizing its management to ensure longevity of the business.

#1: Hired Mr. Bharat Puri as managing director. Mr. Puri is experienced in running a champion Indian building material brand given his 16-year association with Asian Paints. The decision to hire Mr Puri was well evaluated since he spent seven years as an independent director in the company before taking over as MD.

#2: Set up executive committee in the last five years. This comprises ex-senior employees of champion Indian franchises such as Asian Paints (See Exhibit 51)

#3: Young talent management programme (YTM). The company started hiring young professionals from top business schools and chartered accountants to nurture talent and create management bandwidth given the increasing size of the business. The company realized it had a deficit of young talent compared to other franchises such as Asian Paints and Marico.

In the table below, note that most of the senior management members of Pidilite previously held leadership positions in well-established companies in India.

Exhibit 51: A strong management team, with experience from strong Indian franchises Name

In Pidilite since

(years)

Total experience Previous Employers Previous Experience

Bharat Puri 1 33 Mondelez International, Cadbury, Asian Paints

President Global Chocolate, Gum and Candy division - Mondelez Director - Sales and Marketing - Global Chocolate (Cadbury) Spent 16 years in Asian Paints - General Manager-Marketing.

Vivek Subramanian 2 22 Asian Paints Head of the Industrial Coatings and Chemicals' businesses at Asian Paints.

National Head of Sales of Decorative Paints at Asian Paints.

Nilesh Mazumdar 10 25 Subhiksha, Onida, Asian Paints

National Sales head (CTV, AC) , Business head and Chief operating officer of Mirc group company.

Salil Dalal 4 19 Nokia, Future Group, Asian Paints, Godrej GE Appliances

Awarded Economic Times - India's Hottest Business Leaders 2013-14 - India's Top 40 under40. Experienced in varied functions like Marketing, Sales, IT implementation, Production at middle and senior management levels.

Anand Jain 6 20 Saint Gobain, NAPCO(Oman), Terrazzo Limited

Head of Institutional and coated glass businesses in Saint Gobain - spent 10 years in the company He has experience in interfacing with various government & non government bodies.

Vishal Malhan 17 17 NA Launched the 2 variants of Fevicol - Fevicol Marine and Fevicol Speedx. Developing the wood preservative category and establishing Terminator Wood Preservative.

Prabhakar Jain 7 21

Goodyear India, Akzo Nobel, ICI Speciality chemicals & Paints, Asian Paints

Ex- Chairman and Managing Director of Goodyear India Ex- Chairman and Managing Director of Akzo Nobel Been in the building material industry since 1981

Pradeep Jain 6months 26 Pepsico, Eicher Motors Portfolio Program Management of key projects across PepsiCo business footprint in Asia, Middle-East and Africa CFO-Beverage Business Unit(Pepsico)

Salil Chinchore 7months 19 TE Connectivity, Mondelez International, Cadbury, Asian Paints

HR responsibilities in areas of Organization Strategy & Design, Talent & Leadership Development, Employee Engagement, Global HR, Labor Relations & Collective Bargaining, Change Management, Mergers & Acquisitions.

Rajesh Balakrishnan 3 23

Dystar, BASF, Hindustan Spinning and Weaving Mills Limited

Several positions in BASF starting with Business Development Manager in BASF India Ltd., Regional Technical Marketing Manager, Asia Pacific with PT. BASF Indonesia, Manager Asia Pacific Innovation and Strategy with BASF South East Asia Pte. Ltd at Singapore, Manager Asia Pacific, Global Strategic Management, Performance Chemicals for Textiles and Leather with BASF East Asia Regional HQ., Hong Kong He is also the Vice President of the Textile Association Of India (Mumbai Unit).

Sanjay Panigrahi 8 34 SREI Sahaj, Pidilite Industries, Amul

He has have handled Business leadership, Sales and Marketing leadership, TQM and HR leadership roles across Consumer Products and Services Sector in FMCG and ICT enabled e Commerce Domains both in Urban and Rural Diaspora. Turned around Srei-Sahaj, successfully building New market segments in Pidilite, building a strong Amul Brand in India.

Ashish Prasad 5 19 IIJT, Madura Garments Lifestyle(Aditya Birla), Coca Cola, Asian Paints

At IIJT, executed merger with TeamLease, India's largest staffing company. Founding Member of the team responsible for launch of High End Speciality Fashion Brand "The Collective" which is part of the Aditya Birla Group. At Coca Cola India, he managed a P&L of INR 150 crores, having 2 production units and managerial strength of 30 managers, 150 staff and 500 workers.


Hiring the best talent in the business for the next leg of growth

Pidilite Industries


Over FY06-10, Pidilite’s employee headcount increased by 55% and employee cost CAGR in this period was 31% as the company aggressively invested in the employee architecture. Employee addition of 3.5% CAGR in the last five years has been accompanied by significant improvement in employee productivity (revenue/employee increased to `10mn from `3mn in FY06).

Exhibit 52: Sharp increase in total employee cost over FY06-09…


Exhibit 53: ..as the company increased employee count and improved employee productivity


Process – improving architecture

#1: Distribution: As per our checks with distributors, the company has significantly improved its distribution architecture in the last few years through online procurement, which facilitates better inventory management. Improvement in distribution is also evident in the contraction of the working capital cycle from 87 days in FY08 to 47 days in FY16.

Exhibit 54: Working capital cycle contracted sharply over FY08-16


#2: Kaizen: The company adopted Kaizen in FY11 at its manufacturing unit to improve the process to enhance plant level efficiencies.

#3: Implemented TOC: As per media articles Pidilite is implementing theory of constraints (TOC), under the guidance of consulting group Vector, to improve distribution and better SKU/inventory management.

#4: Employee incentives: Our checks suggest that the company has streamlined its HR processes to ensure improve incentive/bonus management to better motivate its employees.

0%

10%

20%

30%

40%

50%

60%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

(` mn)

Employee cost YoY growth (RHS)

2 3 4 5 6 7 8 9 10 11

-

1,000

2,000

3,000

4,000

5,000

6,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

(` mn)Nos

No of Employees Revenue/Employee (RHS)

40

50

60

70

80

90

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16


As per our checks with distributors, the company has significantly improved its distribution architecture in the last few years through online procurement

Pidilite Industries


Products – continuous brand flanking

In the last five years, Pidilite has continued to expand product portfolio (see table below). It also premiumised its Fevicol portfolio by launching variants like Marine and Heat-x, which now account for half of Fevicol sales. Moreover, it repositioned M-seal as an all-purpose home adhesive as against only a water leak sealant.

Exhibit 55: New launches by Pidilite during FY11-15

Adhesive Plumbing Waterproofing Stationary Auto Construction/Industrial

FY11 Fevicol Marine(Waterproof)

Wudfin Ezeestein(Water based wood stainer) DDL XT Booster(Durability to paints)

FY12 Wudfill (cynoacrylite wood adhesive)

Sparkling Pearl colours

Rustolene Maintenance Spray (Multipurpose)

Dr.Fixit Kwikflor Cementitious (Industrial Flooring)

FY13

Variants of Industrial colorants& industrial adhesives

FY15 Fevicol Hi-per (Waterproof adhesive)

M-seal PV seal(solvent cement to join pipes)

Dr.Fixit Blueseal (spray for roofs)

Motomax Instashine (polish sponge)


II] Adhesives and sealants – competition threat overstated Whilst Pidilite has been able to effectively deal with competition across most of its products so far, the key worry in investors’ minds is how it will tackle entry of large players such as Astral in adhesives (through acquisition of Resinova and Seal IT) and Asian Paints (through partnership with Henkel for Loctite). Also, given high penetration of Pidilite in legacy products (Fevicol, Fevikwik, M-seal, etc), growth of these products is also a worry.

Competitive threat is not as significant as it seems: We believe ~70% of Pidilite’s portfolio is well-guarded against competition and we do see any significant risk of market share losses there.

Pidilite already faces competition from international peers such as Henkel, 3M and Sika and domestic peers such as Resinova, Atul, etc. Hence, competition from new entrants such as Asian Paints (tie-up with Henkel) and Astral (with Resinova) is not new for Pidilite. Moreover, the competition is in categories, where Pidilite does not have a strong presence – epoxy adhesives. In its core categories, we believe that Pidilite has a significant lead, which cannot be disrupted easily. Lastly, we believe that innovators like Asian Paints will not fight for market share in Pidilite’s legacy products (as they won’t make a large contribution to Asian’s revenue) and will look for emerging opportunities in adhesives and construction chemicals.

Exhibit 56: Rising competition – we do not see any major risks to Pidilite’s core portfolio

Segment Market

Size (̀ bn)

Pidilite's market

share

Risk of competition Competitor Pidi's competitive advantage

Polyvinyl acetate (Fevicol) 23 70% Low Karpenter – Huntsman

Jivanjor – Jubilant

Connect with carpenters Legendary brand Low cost in overall construction, high cost of failure Influence and relationship with the channel

Cyanoacrylates (Fevikwik) 5 60% Low Polyfix

Vetra – Resinova

Scale - sourcing advantage, bulk purchase from China Well-established brand Unparalleled retail reach

Glue stick (Fevistik) 3 70% Low Kores Faber Castell

Scale - sourcing advantage bulk purchase from Korea, China Well-established brand Superior distribution with depots spread across the country

Rubber Adhesives (Fevibond) 11 45% Moderate Bostik

Chandra Chemicals Strong relationships with end-user industries An industrial product, hence competition could impact Pidilite

Epoxy Adhesives (Fevitite) 7.5 7% High Araldite- Huntsman

Bondtite – Resinova No major presence, Huntsman is the leader Expansions by Astral could impact Pidilite’s market share

Epoxy Sealant (M-seal) 3 60% Low Araseal – Huntsman

Bondset – Resinova

Strong connect with plumbers Low unitary cost and hence little incentive for plumbers to shift Astral’s aggressive entry could impact market share


~70% of Pidilite’s portfolio is well-guarded against competition and we do see any significant risk of market share losses there.

Pidilite Industries


Under-penetration across end-user industries

Adhesive is an ancillary product and mirrors growth of related industries. Industries/segments wherein adhesive is a key raw-material still have very low penetration in India. For example, the penetration of furniture in Indian households is ~10% of overall adhesive consumption and flooring only 11%. Similarly, the footwear industry in India still has a lot of room to grow given rising income levels and aspirations. Lastly, innovation in segments such as disposable hygiene, packaging, etc., will lead to further expansion in the addressable opportunity.

Exhibit 57: Significant penetration scope across end-user industries

End-user Industry

% of overall adhesive

consumption Comments

Woodworking ~10%

Furniture penetration in India is significantly lower than global economies. Pick up in organised housing and increase in nuclear families will keep the growth rates of the industry buoyant.

Industry experts expect a 20% CAGR in furniture construction over the next decade as against ~30% CAGR in the last decade

Packaging ~25% As per the recent research note published by FICCI and Tata strategic management, Indian packaging industry is likely to expand at an 18% CAGR with flexible packaging and rigid packaging growing at 25% and 15%, respectively

Construction ~10% Adhesives used in construction are largely tile bonding, coating, repairing and gap filling. Whilst GFCF growth in India has been weak for the last five years, government's impetus on infrastructure

development and gaps in infrastructure quality gives visibility of growth of this sector

Automotive ~10%

Adhesives in the auto industry are used for gasketing, sealing and bonding. Penetration of two-wheelers and passenger vehicles is still very low in India compared to other developing

economies. Moreover, affordability of automobiles in India has increased given no major price inflation in the last decade

Flooring ~5% As per the 2011 census only 11% of households have flooring material such as tiles, mosaic etc. Rest of the houses in

India either have a mud, bamboo or cement flooring. As organised housing picks-up, quality of flooring materials and penetration of tiles will increase

Source: Industry sources, Ambit capital research

III] Waterproofing – a lot of leaks to be plugged Despite strong growth in the last two decades, the usage of construction chemicals in India is way inferior compared to China or western countries due to lack of awareness and construction standards. Reliance on conventional and outdated systems and lack of trained expertise in using modern products are some of the reasons that have restricted penetration of water-proofing in India. Since more than 85% of the concrete produced in India is still made by volume batching, there is hardly any control on the water to cement ratio at these sites. In a knowledge paper, FICCI estimated the market size to double in the next five years. Whilst it is difficult to estimate the growth of the Industry given paucity of data, we note that historically as the ecosystem gets aware of the benefits and applicators learn how to use the product, innovative building material products go through a non-linear growth phase. We have seen this dynamic play out in plastic pipes (Astral launched CPVC which was earlier non-existent in India) and in external paints (where Asian Paints created a market). Hence we believe waterproofing could be a large opportunity in India.

Exhibit 58: Construction chemicals…

Source: BASF presentation, Ambit Capital research

…usage is way lower in India…

Units – US$/m3 of concrete

...compared to China and US/EU

1.5

3.0

5.0

0

1

2

3

4

5

6

India China US/EU

Infra

0.5

1.5

4.0

0

1

2

3

4

5

India China US/EU

Housing

1.0

2.0

4.5

0

1

2

3

4

5

India China US/EU

Overall

As the ecosystem gets aware of the benefits and applicators learn how to use the product, construction chemicals could go through a non-linear growth phase

Pidilite Industries


Waterproofing sales in rural houses are close to nil as rural consumers use cow-dung for waterproofing due to lack of awareness. Similarly, IHB houses with site-mixed concrete do not use waterproofing materials. As awareness increases and companies innovate in reach, right-sized packaging (as seen in paints), the size of the market can expand significantly.

Low awareness of the builders and applicators: Most Indian households, especially in tier II/III cities, have a water leaking problem in old brick and mortar construction. The conventional solution for plugging water leakages in India has been bitumen sheets, which is a temporary cheap-fix. Lack of awareness of construction chemicals and the long-term savings that accrue due to that are yet to be appreciated by the builders. Also, given that masons in most parts of India are still unskilled, the proliferation is limited.

Weak regulation: Construction in India lacks regulation, due to which most contractors avoid spending on better quality construction chemicals to save the costs.

Just what the Dr. (Fixit) ordered Pidilite is using its tried and tested formulae for building its franchise in waterproofing, which can be understood as follows. Pidilite has posted 20% revenue CAGR in this segment in the last 13 years and is currently the largest retail waterproofing chemicals brand in India.

Exhibit 59: Pidilite has posted strong growth in waterproofing segment in the last 13 years


Product innovation: As per our checks, the company has built a strong product portfolio with presence across the construction chemical range. Its product Dr. Fixit LW+ is the leader in retail waterproofing in India. Apart from its R&D centre in India, Pidilite has also established a research centre in Singapore, which is a member of Singapore Chemical Industry Council (SCIC).

Branding: Dr. Fixit is the most aggressive player in retail waterproofing in India in terms of brand-building. Apart from mass media advertisement programmes, the company has been doing innovative advertising such as printing on rickshaws and raincoats of the Mumbai traffic police (see images below). The company has been aggressively marketing Dr. Fixit in small cities in India as a product which is sold alongside cement for better quality construction.

Sanjay Bahadur, Global CEO, construction chemicals division of Pidilite highlighted:

“The marketing challenge was to make the target audience (trade dealers) aware of the benefits of this product, as well as to position 'Dr. Fixit LW+‘ as a must-use component with cement. The wedding between cement and LW+ communicates it beautifully. The activation not only met with our set objectives, but also gained high recall value in the minds of our target audience.

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(` mn) Pidilite's construction chemicals revenue

Construction/Paint chemicals YoY growth (RHS)

Pidilite Industries


The activity was divided into two phases. In the first stage, invitation cards for the ‘marriage' were distributed among dealers by traditionally dressed promoters who invited and educated the target audience about the event. A lucky dip contest also featured in this stage. The second stage saw the actual marriage between Dr Fixit Pidiproof LW+ and cement, wherein a pandit spoke about the concept of marriage in general, interwoven with the bond between the two products. This was followed by an AV session featuring a demonstration of the product along with LW+ commercials. The attendees then proceeded for dinner where the winners of the lucky dip were announced. All the guests were given a gift bag consisting of the LW+ brochure, along with a gift and a small LW+ bottle.”

Exhibit 60: Dr. Fixit advertisements during monsoons on rickshaws…

Source: Google, Ambit Capital research

Exhibit 61: …and on raincoats of Mumbai traffic police


Channel building: Dr. Fixit has been expanding its reach. Whilst the product was initially sold at hardware stores, the company started selling Dr. Fixit in cement channels in the last few years. As per our checks, Dr. Fixit is the strongest brand in the cement channels in India.

Intermediary connect: Pidilite regularly conducts intermediary training programmes to educate them about the quality and the application of the product, a process very similar to the way the company established M-seal. The company has also set up a knowledge centre called Dr. Fixit Institute to educate the ecosystem about global standards and practices of waterproofing, repaid and rehabilitation. Under this, the company conducts seminars and trainings at a corporate (builder) level and also workshops in engineering practices across various colleges in India. It also does research and publishes papers to increase awareness of waterproofing.

From product to application: The company recently acquired two leading waterproofing contractors – Nina waterproofing in Mumbai and Percept waterproofing in Bangalore – to provide end-to-end solutions to institutional consumers rather than just selling the raw materials. Given that penetration of organized real estate construction in these cities is significantly higher than in smaller cities, the company has adopted this strategy in these tier I cities.

How worrying is the rising competitive intensity?

Whilst waterproofing is a large opportunity, the competitive intensity in the segment has risen sharply given that international peers have been aggressively launching new products, domestic paint companies such as Asian Paints and Berger have entered this segment, and small fragmented players also have a sizable presence in specific segments.

Pidilite Industries


Exhibit 62: Key competition in waterproofing in India

Company Comments

BASF

New admixture solution, sureTEC for durability of finished concrete structures.

Launched new products like MasterEase, MasterSeal spray-applie polyurea and MasterSeal Traffic System.

Built its largest construction chemicals plant in India (Nellore, Andhra Pradesh).

Fosroc

Been in India since 1981, with three manufacturing facilities at Bangalore, Ankleshwar and Rudrapur.

In June 2014, Fosroc commenced production at its 4th plant in India located at Uluberia in Howrah, West Bengal.

Aims to make India an export hub and export products to Sri Lanka, Bangladesh and Nepal as these countries are also facing increasing demand for construction chemicals. Also exports to Malaysia, Thailand and Africa. Specialises not only in above ground waterproofing solutions but also in underground waterproofing solutions for construction activities on contaminated land.

Sika

In 2014, Sika India started its 6th R&D centre and manufacturing facility in Jhagadia, Gujarat. This plant focusses on concrete admixtures, mortars, resin floors and adhesives for the booming construction markets

Company has an experience of over 100 years in waterproofing

Waterproofing is included in the core target markets of Sika. Divides products based on area of usage, e.g. pool, tank, wet rooms, podium, terrace etc.

Asian Paints

The waterproofing products are in the brand name of 'Smartcare' and mainly aim at the problem of dampness.

Asian Paints is focussing on in-house product development of waterproofing products.

Company gives a separation of preventing solutions & solving solutions for almost all problems and they distinguish their products on basis of place of usage. Company has 2 manufacturing facilities at West Bengal and Gujarat. It had started waterproofing products with cement-related products.

Berger Paints

Company aims to launch various new products in the construction chemicals segment and improve its packaging in order to gain market share.

Company sells construction chemicals under the brand name "Homeshield".

Company's construction chemicals products mainly include wall repair, water proofing and tile adhesives for various surfaces and conditions.

Structural Waterproofing Company

It had started in 1930; hence it has more than 80 years of experience in waterproofing. Waterproofing is the only segment in which the company operates.

It has 4 manufacturing plants strategically located in Mumbai, Kolkata, Delhi and Chennai.

The parent company of SWC is CHRYSO - a leader in innovation. CHRYSO, a 100% shareholder of SWC, is one of the largest in Europe in the line of construction chemicals.

Won largest waterproofing contract ever awarded to a construction chemical company – the DELHI METRO.

In 2005, SWC had started its new manufacturing plant at Chennai with large orders pending.

Extensive range of products. Waterproofing is the only market in which the company functions. Distinguishes products based on type of waterproofing products (sealants, cement aid, coating etc.) and material on which it is to be used ( cement, tile, flooring etc.).

Source: Industry Sources; Ambit Capital research

Pidilite vs international companies – different focus

The international waterproofing companies are global chemical giants, with strong product innovation and experience of waterproofing for decades. However, we do not think that these companies pose a major threat to Pidilite, because:

Their focus is largely on the institutional segment, where they supply the chemical in bulk, and have limited presence in retail where Pidilite is the leader.

None of the global manufacturers are investing in brand-building or intermediary training, which is a must to build a retail recall in India.

A few global manufacturers like Fosroc view India as an exports hub and manufacture here but sell in other countries.

Pidilite vs Indian competitors – Pidilite has the lead

Pidilite has been in waterproofing for close to a decade and has built a strong architecture in this segment. Not only does the company have the strongest brand, but the widest range of products across waterproofing segments. Moreover, the company has been strengthening its positioning through pre-active intermediary training and also through set-up of knowledge centres such as the Dr. Fixit institute.

Lastly, we believe the market is still small in India but there is significant latent opportunity, which makes us believe that the market size there is enough room for 2-3 champion franchises to co-exist. We do not think that the fragmented regional manufacturers pose a significant threat as neither do they have strong product chemistry nor established brands.

Pidilite Industries


IV] International business – cutting the slack International foray has been a bitter-sweet experience for Pidilite. Whilst international revenue expanded at a 12% CAGR over FY11-16, led by strong growth in South-East Asia, Middle East and North America, EBITDA margin remained low (1-4.5% over FY14-16; losses prior to that) due to the weak margins of its Brazil and Middle East subsidiaries.

Exhibit 63: North and South America account for ~60% of Pidilite’s international revenue


Exhibit 64: International subsidiaries account for ~10% of Pidilite’s overall revenues


Exhibit 65: Improving EBITDA of international businesses


Exhibit 66: EBITDA margin/RoCE has picked up from the trough


Acquired businesses/brands in Brazil struggling: Weak performance of international business has largely been on account of inability to grow or control costs in Brazil. The company acquired an existing company and struggled due to increase in competition. Since adhesives in these markets are sold as a commodity, the company could not implement its strategies (branding, packaging) that have worked well in Indian and other emerging markets. That said, the company has managed to cut Brazil’s EBITDA losses from `178mn in FY14 to `19mn in FY16. Emerging markets have continued to do well: The company’s sales in South-East Asia expanded at 27% CAGR over FY11-16 and EBITDA margin averaged 11% in the last six years. Similarly, in SAARC, the company more than doubled its sales in last two years with healthy EBITDA margin of 13%. The better success in EMs is because these markets are similar to India and the company has been able to sell its products as brands and through retail channels. Improvement in North American operations: Whilst revenue growth of North American operations has been fairly strong at 15% CAGR over FY11-16, margins were weak initially (1-3% over FY11-13). The company managed to improve margins to 9% by end-FY16. Management, in the 4QFY16 conference call, highlighted that the US subsidiary operations have improved due to better acceptance of products in online domestic chains in America and other international geographies.

North America,

42%

South America,

17%

SAARC, 14%

SEA, 9%

MEA, 18%

Int'l revenue split (FY16)

9%

9%

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11%

11%

12%

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(100)

(50)

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(` mn)

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-4%

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EBITDA margin RoCE (RHS)

Pidilite Industries


Exhibit 67: Whilst the South America and Middle East operations have not done well, the other international geographies has performed well

Revenue (̀ mn) FY11 FY12 FY13 FY14 FY15 FY16 CAGR FY11-16

North America 1,227 1,276 1,610 1,811 2,098 2,432 15%

South America 1,255 1,261 1,218 1,406 1,254 1,002 -4%

SAARC - - - - 93 216 NA

South east asia 339 417 603 811 854 1,139 27%

Middle east and Africa 199 296 297 346 635 1,027 39%

EBITDA (̀ mn)

North America 57 62 28 98 137 221 31%

South America 33 (93) (178) (154) (75) (19) NA

SAARC - - - - 14 26 NA

South east asia 31 45 89 135 41 108 28%

Middle east and Africa (81) (49) (23) (54) 64 (134) 11%

EBITDA margin

North America 4.6% 4.9% 1.8% 5.4% 6.5% 9.1% 6%

South America 2.6% -7.4% -14.6% -10.9% -6.0% -1.9% -7%

SAARC - - 15.1% 12.0% 13%

South east Asia 9.1% 10.8% 14.8% 16.7% 4.8% 9.5% 11%

Middle east and Africa -40.7% -16.7% -7.9% -15.7% 10.0% -13.0% -10%


Recent acquisitions: The company recently acquired the PVA business of Sri-Lanka-based CIC Holdings along with its brand Chemifix, which is the leader in white glue in the market.

Global strategy: Pidilite will continue to explore entry into other emerging markets where the adhesives industry is fragmented and it can sell its product as a brand rather than a commodity. As in its previous international forays, the company will keep capital intensity low. The company recently hired Bain Capital to grow its business in North Africa, Asian and Middle Eastern markets.

Pidilite Industries


Financial assumptions Pidilite’s revenue growth has been tepid for the last two years due to slow-down in end-user industries such as furniture, footwear etc. Pick-up in growth rates of the end user industries (as discretionary consumption revives in India), will catapult revenue growth rate in the next few years. We estimate 18% revenue/EBITDA CAGR over FY16-18.

Revenue linked to growth of end-user industries Given the expansive SKUs and limited data around products, it is difficult to project Pidilite’s product-wise revenues. Hence, we project revenue based on reported segments, which are:

Adhesives and sealants: Revenue growth of this segment was 14% in FY16 and five-year CAGR was ~17%. We expect revenue growth of 15% in FY17 and 14% in FY18. We note that sales of adhesive are closely linked to other ancillary construction such as furniture, flooring, footwear, etc. and all these segments’ growth decelerated significantly in FY16. Hence, growth acceleration in these end-user industries will lead to a pick-up in revenue growth for adhesives and sealants. Whilst we do not think that Pidilite will take any major price hikes, realisation growth will be a function of premiumisation of products – for example, higher penetration of Fevicol’s premium variants such as Heat-x etc.

Construction/paint chemicals: Whilst the five-year revenue CAGR of this segment has been ~15%, the growth rate receded to 2% in FY16 due to a sharp deceleration in real-estate construction and increased competition. Ramp-up in construction activities and rising penetration in smaller markets, which is largely untapped, will support the longevity of this segment’s growth. We estimate 10% revenue growth in FY17 and 15% in FY18 as construction ramps up in India.

Art materials: We build in 10-12% revenue growth in this segment, in line with historical growth rates.

Specialty industrial chemicals: Due to slowdown in industrial output, revenue of this segment declined by 4%. Building in a marginal recovery, we expect revenue growth of 7% and 10% in FY17 and FY18, respectively.

International businesses: International subsidiaries posted stellar growth in FY16 (+21%) due to strong growth in the USA, SAARC and Middle East. We expect 11% and 10% revenue growth in FY17 and FY18, respectively.

Exhibit 68: Revenue assumptions

Revenue FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

Adhesives & Sealants 11,519 15,085 17,996 19,280 21,874 25,093 29,610 36,124

YoY growth 22.3% 31.0% 19.3% 7.1% 13.5% 14.7% 18.0% 22.0%

Construction/Paint chemicals 4,467 5,916 7,057 7,327 8,750 8,996 10,255 12,306

YoY growth 29.1% 32.4% 19.3% 3.8% 19.4% 2.8% 14.0% 20.0%

Art material & others 2,116 2,366 3,529 4,627 5,250 5,681 6,477 7,643

YoY growth 10% 12% 49% 31% 13% 8% 14% 18%

Specialty Industrial Chemicals 5,334 6,405 6,204 7,132 7,875 7,575 8,281 9,223

YoY growth 23% 20% -3% 15% 10% -4% 9% 11%

International 2,902 3,102 3,491 4,045 4,456 6,069 7,286 8,326

YoY growth 10% 7% 13% 16% 10% 36% 20% 14%

Consolidated revenue 26,338 32,874 38,277 42,411 48,204 53,414 61,908 73,622

YoY growth 20.5% 23.6% 18.7% 9.9% 13.1% 10.8% 17.1% 18.9%


Pidilite Industries


Margins – peak margins will not sustain In FY16, Pidilite posted its highest ever gross margin of 51.8% (up 720bps YoY) driven by a sharp reduction in crude prices which led to lower procurement costs of key raw materials such as Vinyl acetate monomer (VAM). We believe the recent increase in crude prices will dilute some of the savings and, hence, build in a 100bps margin contraction in FY17; we build in 30bps expansion in FY18 led by operating leverage as revenue growth recovers. Our estimates imply 14% EBITDA CAGR over FY16-18.

Exhibit 69: Increase in RM costs...


Exhibit 70: …will lead to slight margin contraction


Strong FCF generation likely to sustain Pidilite’s cumulative FCF as a percentage of cumulative CFO is ~60% over FY11-16. We expect FCF generation to remain strong in FY17 and FY18 as well (63-64% of CFO) assuming that it will reinvest `3bn-3.5bn annually for expansions. Whilst PAT growth will be in single digits in FY17, we expect ~20% PAT growth in FY18 as revenue growth picks up and margins improve slightly.

Exhibit 71: FCF generation likely to remain strong


Exhibit 72: PAT growth likely to accelerate in FY18


44%

46%

48%

50%

52%

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56%

FY11

FY12

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E

FY18

E

RM costs (as a % of sales)

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E

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(4 mn)

PAT YoY growth (RHS)

Pidilite Industries


Exhibit 73: Summary of financial assumptions

Particulars (̀ mn) Actual Estimates Growth

Comments FY16 FY17 FY18 FY17 FY18

Income statement Revenue 54,214 62,845 74,703 16% 19% We expect revenue growth to recover from the

trough of FY16 as building material construction ramps up. We expect revenue growth in construction chemical to pick up sharply

Consumer and Bazaar 39,770 46,341 56,072 17% 21%

Industrials 7,575 8,281 9,223 9% 11%

International 6,069 7,286 8,326 20% 14%

Others 800 937 1,081 17% 15%

EBITDA 11,792 13,385 16,341 14% 22%

We expect margins to contract in FY17 led by higher cost of procurement of input costs. Thereon, we expect margin expansion driven by operating leverage

EBITDA margin 21.8% 21.3% 21.9% (45) 58

EBIT 10,971 12,742 16,087 16% 26%

EBIT margin 20.2% 20.3% 21.5% 4 126

PBT 10,839 12,625 15,986 16% 27%

PBT margin 20.0% 20.1% 21.4% 10 131

PAT 3,221 4,040 5,116 25% 27%

PAT margin 6% 6.4% 6.8% 49 42

Profitability and cash flows RoCE 29% 27% 28% (218) 139

Lower margin will lead to contraction in return ratios and improve thereon. We build in 1 day reduction in FY17 and 3 days in FY18

RoE 30% 28% 29% (218) 124

CFO 8,421 8,928 10,345 6% 16%

Capex (2,457) (2,000) (2,250) FCF 5,964 6,928 8,095 16% 17%

Working Capital days 47 46 43 (1) (3)

Bloomberg, Ambit Capital research

Exhibit 74: Ambit Vs Consensus

Particulars (̀ mn)

Actual Ambit Ambit Divergence Comments

FY16 FY17 FY18 FY17 FY18 FY17 FY18

Revenue 53,695 62,845 74,703 61,439 71,282 2.3% 4.8% Our revenue estimates are higher than consensus as we expect the construction chemical business to scale up and pick-up in growth of adhesives and sealants as demand for end-user industries improve

growth 10.8% 17.0% 18.9% 14.4% 16.0% 262bps 285bps

EBITDA 11,792 13,385 16,341 13,280 15,231 0.8% 7.3% Our margin estimates are lower than consensus in FY17 since we expect dilution due to higher cost of input materials. Our margin estimates are higher in FY18 led by operating leverage

EBITDA margin 22.0% 21.3% 21.9% 21.6% 21.4% (32 bps) 51bps

PBT 10,839 12,597 15,923 12,294 14,304 2.5% 11.3% Our PAT estimates are higher in FY18, due to higher revenue growth and margin expectations PAT 7,615 8,606 10,867 8,616 9,892 -0.1% 9.9%

Source: Bloomberg, Ambit Capital research

Exhibit 75: Description of flags on the first page

Segment Score Comments

Accounting AMBER Pidilite falls is the fourth decile of our accounting model. Whilst its CFO/EBITDA is ~100%, it gets a low score due to high contingent liabilities, high CWIP as a % of GB (due to elastomer) and mediocre cash yield.

Predictability GREEN Whilst the business has several moving parts, the management has been fair in giving guidance and does not have a reputation of being over-optimistic.

Earnings momentum GREEN Consensus EPS estimates have been increased by 5% in the last 3 months


Pidilite Industries


Valuation: Near-term valuations the right parameter for this franchise? Like all great Indian companies, Pidilite looks expensive on one-year forward earnings. However, authors of Ambit’s Coffee Can portfolio notes opine: “Over long periods, it is how the underlying fundamentals evolve for the firm that plays a more important role in determining returns than the beginning of the period valuation itself. In our building material notes, published in the past, we made a similar point”. Hence, the key question is whether Pidilite can sustain earnings momentum in the long term. Growth of adhesives will be driven by penetration in end-user categories and in construction chemicals/waterproofing as awareness on construction standards improve; this gives us confidence on the longevity of Pidilite’s revenue and earnings growth. Our target price implies 40x FY18 EPS, similar to trading multiples of other champion franchises such as Asian Paints.

DCF based valuation – `835/share We value Pidilite based on discounted cash flows, given stable cash generative traits of the business. Revenue growth, EBIT margin, capital expenditure and working capital turnover are the key variables in our DCF model.

Revenue growth: Our revenue growth assumption builds in a demand recovery of end-user industries over the next five years, which will catapult the growth rates for Pidilite (18% CAGR over FY16-20). For the next 20 years, we expect a12% revenue CAGR as penetration of furniture, flooring, automobiles, etc. increases in India and also through harnessing opportunity in nascent sectors such as construction chemicals.

EBIT margin: We expect a 100bp moderation in FY17 due to higher prices of input material. We build in 200bps expansion over FY17-20, led by operating leverage. Thereon, we marginally reduce our margin assumption till the end of the DCF term – by 200bps over FY22-40.

Working capital turnover: Pidilite’s working capital days reduced from 90 days in FY05 to 41 days in FY16. We gradually reduce working capital cycle to 20 days by the end of the DCF term. Management highlights that the company will reduce its SKU count to better manage working capital.

Capex and depreciation: Pidilite will not have to invest significantly to grow revenues as most of its products are not capital intensive. Moreover, products such as Feviquik and Fevistik are imported and half of Fevicol production is outsourced. Capital deployment will largely be towards new products. We build in 1.5-2% of sales for capex (or ~10% of gross block). We build in depreciation at 7% of gross block.

We extend the term of the DCF till FY40 since we view Pidilite as a consumer brand business wherein the tail of earnings is longer than that of non-branded businesses and Pidilite’s well-established brand, architecture and management bandwidth ensure that it is set for a long innings.

Our DCF valuation is split into two phases

Phase I – FY16-20: recovery from the trough

Pidilite’s revenue growth moderated in the last three years to 9-10% from 19% CAGR over the last decade. In our view, deceleration in revenue growth was largely a function of slowdown in end-user industries such as woodworking, automotive, etc. We expect revenue growth trajectory to improve in the next five years and hence build in revenue CAGR of 17.6% and EBIT CAGR of 20%. We build in cumulative capex of `7.5bn. We expect WC cycle to reduce by 6 days to 44 days by FY20.

Pidilite Industries


Exhibit 76: We expect 18% revenue CAGR and 21% EBIT CAGR over FY17-20


Exhibit 77: We expect working capital cycle to reduce by six days by FY20


Phase II – FY20-40: Fade period

We expect revenue CAGR of 12.5% in this phase vs 18% CAGR over the last two decades. Whilst penetration and growth will stagnate in legacy adhesive products, we expect Pidilite to grow sharply in opportunities like construction chemicals. Pidilite has a strong history of innovation, which gives us comfort that the company can re-invest cash flows to expand the addressable opportunity. Moreover, rising penetration in emerging markets could also be another for long-term growth of the company. We expect gradual reduction in EBIT margin by 100bps by the end of the DCF term.

Exhibit 78: We expect gradual moderation in EBIT growth and margins; we assume Pidilite will reach Asian Paints’ FY16 EBIT of `25bn in FY21

Source: Ambit capital research

Sensitivity to WACC and terminal growth: We have assumed 13% WACC, similar to other consumer businesses in India. We build in 6% terminal growth rate, which is the long-term nominal GDP growth rate of India.

Exhibit 79: Sensitivity analysis to WACC and terminal growth rate

WACC

Term

ina

l gro

wth

ra

te

11% 12% 13% 14% 15%

4% 1,071 880 738 630 545

5% 1,149 928 769 650 559

6% 1,258 992 809 676 576

7% 1,421 1,082 861 708 597

8% 1,693 1,216 935 752 624

Source:, Ambit capital research

18%

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FY17 FY18 FY19 FY20

Revenue growth EBIT growthEBIT margin (RHS)

40

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Working capital cycle (days)

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EBIT (Rs mn) EBIT growth (RHS) EBIT margin (RHS)

Pidilite Industries


Displays traits of two stellar franchises Pidilite’s business model is not comparable to any other company’s in India or abroad. Hence, relative comparison for the company is difficult. We believe that in India the business model is partially comparable to Asian paints – both have a high level of intermediary influence and largely commoditized products internationally but consumer brands in India. Moreover, both these companies’ have evolved from a utility product to a discretionary brand and now to a staple product. Internationally, the only company that we think is comparable to Pidilite is 3M as both have a large presence in adhesives, consumer franchises in stationary, and caters to various industries, end-use segments and intermediaries.

Pidilite vs Asian Paints – two legendary Indian brands

#1: Business comparison

Pidilite and Asian Paints are examples of Indian companies that have successfully transitioned commoditized products into consumer brands through innovative advertising, packaging and creating a strong connect with the intermediaries (carpenter and painter, respectively).

However, the key difference between the two companies is that paints is a primary product whereas adhesive is an ancillary product. Moreover, repainting cycles are significantly shorter that replacement cycles for furniture.

Exhibit 80: Similarities and differences between PIDI and APNT

Pidilite and Asian Paints

Similarities Differences

Brand: Both companies have created a strong brand recall in products which are globally considered as commodities

End-use: Paints is a primary product for exterior and interior walls and is visible, whereas adhesive is an intermediary product for furniture construction, which is not visible

Intermediary connect: Asian Paints has a strong connect with painters, whereas Pidilite has a strong connect with carpenters/plumbers - a moat which is not easily replicable by competition

Replacement cycle: Repainting cycles are 2-3 years and are shortening further. However, replacement cycle of furniture is 10-12 years, which makes growth dependent on new construction

Professional management: Whilst Asian Paints started recruitment of top quality management as early as 1980s, Pidilite began its journey of professionalizing management in the last decade and now has a strong talent pool

Channel: Asian Paints' products are available only in 1-2 channels (hardware and paints shops), whereas Pidilite has a coverage across the spectrum of channels

Product overlap: Whilst the core products of both the companies are based on simple chemistry, these brands are now deploying capital in building waterproofing franchise

Intermediary coverage: Asian Paints only influences the painter, whereas Pidilite influences several intermediaries - carpenters, electricians, plumbers, painters, etc


#2: Financial comparison – little to choose between the two

Sales growth: Whilst Pidilite’s revenue growth over FY97-FY16 was 17%, Asian Paints’ was a tad lower at 15%. However, both the companies have been fairly consistent in growing sales, with no major volatility in growth rates.

Exhibit 81: Sales CAGR over FY96-16 of Asian Paints (15%) has been slightly lower than Pidilite (17%) though Asian Paint’s scale is higher


0%

10%

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(` mn)

Pidilite rev (LHS) Asian rev (LHS) Pidilite rev growth Asian revenue growth

Pidilite Industries


EBITDA margin: Pidilite’s EBITDA margin was significantly higher than Asian Paints’ over FY97-FY06. However, margin for Pidilite contracted as it incubated multiple products and entered international geographies. On the other hand, Asian Paints focused on the core product and gained scale which led to margin improvement. Margins of both the companies converged in FY16.

Exhibit 82: Asian Paints’ EBITDA margin has been higher than Pidilite in recent years


RoCE comparison: Asian Paints’ RoCE has been higher than Pidilite’s since FY02. Pidilite’s RoCE dipped due to investments in the elastomer business, which accounts for 13% of the capital employed, but did not contribute to revenue or earnings.

Exhibit 83: Asian Paints’ RoCE has been significantly higher than Pidilite’s due to superior margins


Valuations – both have moved in sync

Pidilite and Asian Paints’ P/E multiples have been largely moved in sync over the last two decades. The multiples of these companies evolved as investor perception of these companies changed from commodities to consumer discretionary to consumer staples.

FY97-FY05 – commodity business: During this phase, the valuation multiples of both Pidilite and Asian were in the range of 10-15x. Valuation multiples mirrored a commodity franchise as investors perceived these companies as manufacturers of commodities. In this phase, Fevicol’s largest competing brand VAMICOL did a rebranding exercise, leading to apprehensions around market share losses, which also contributed in restricting multiple expansion.

FY05-FY09 – consumer discretionary: Pidilite expanded its product range and built multiple brands such as Fevistik, Fevikwik and M-seal, which led to stable earnings growth and RoE expansion. Pidilite’s valuation multiples converged with those of a discretionary business, with consistent revenue growth and margins alongside stable cash flows. Valuation multiples reached the peak in FY08, but by the end of FY09 they shrank due to the global economic crisis.

10%

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Pidilite Asian

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Pidilite Industries


FY09-16 – consumer staples business: A sharp pick-up in building material usage in India meant that Pidilite posted strong revenue growth over FY10-13, continued to generate strong free cash flows, and set up a professional management team, which led to a sharp multiple expansion. The company posted 32% EPS CAGR alongside >30% RoEs, which led to a sustainable re-rating.

Exhibit 84: Valuation multiples of PIDI and APNT have largely moved in sync

Source: Bloomberg, Company, Ambit Capital research

Pidilite Vs 3M (Global) – the supreme innovators

#1: Business comparison

Pidilite and 3M have an overlap in products as both have relatively large presence in adhesives and have well-established consumer brands like Fevicol and Fevistik for Pidilite and Post-It and Scotch for 3M.

However, 3M is way ahead of Pidilite in terms of product innovation and spends 5-6% of its revenue for R&D as against 0.5-0.6% by Pidilite. In the BCG survey of 2015, 3M was listed as the 40th most innovative company in the world. 3M is over a century old; it started as an abrasive manufacturer but later established its brand in multiple other categories such as healthcare, industrials, electronics and consumer goods. 3M’s consumer business accounts for ~24% of revenue, significantly lower than Pidilite.

Exhibit 85: Similarities and differences between Pidilite and 3M (Global)

Pidilite and 3M

Similarities Differences

Consumer brands: Both the companies have strong established end-user consumer brands. The companies also have overlapping products such as glue sticks, instant adhesives, etc in DIY segment

R&D: 3M spends 5-6% of revenue for R&D expenditure, whereas Pidilite's spending on R&D is significantly lower

Innovative advertisement: Both the companies have relied on innovative advertisements and intermediary education to build their consumer brands

Industries serviced: 3M has a much wider coverage than Pidilite. 3M supplies to healthcare, electronics and energy segments

High SKU count, multiple end-users: Both the companies have a high SKU count through which they service a wide number of industries and end-users


#2: Financial comparison – Pidilite is still way behind 3M

Sales growth: 3M’s sales growth has been significantly lower than Pidilite’s – 4% CAGR over FY97-16 as against 17% of Pidilite. Note that 3M’s revenues are 40 times the size of Pidilite. Majority of 3M’s revenues are from developed countries, which explains lower revenue growth for the company.

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Oct

-01

Apr

-02

Oct

-02

Apr

-03

Oct

-03

Apr

-04

Oct

-04

Apr

-05

Oct

-05

Apr

-06

Oct

-06

Apr

-07

Oct

-07

Apr

-08

Oct

-08

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

PIDI APNT PIDI One yr fwd P/E APNT One-yr fwd P/E

Pidilite Industries


Exhibit 86: Sales CAGR of 3M has been lower than Pidilite’s


EBITDA margin: 3M has consistently maintained 20%+ EBITDA margin for the last 20 years (20-28% range) given its specialized and branded products where it has strong pricing power. Pidilite’s margins have been significantly lower than 3M’s and have been volatile as the company incubated multiple brands in the last two decades and, hence, had to incur significant expenses in building those brands.

Exhibit 87: 3M’s EBITDA margin has been significantly higher than Pidilite’s


RoCE comparison: RoCE levels of both Pidilite and 3M have been largely similar, at ~20% average over the last two decades.

Exhibit 88: Asian Paints’ RoCE has been significantly higher than Pidilite’s


-20%

-10%

0%

10%

20%

30%

40%

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Sales growth

Pidilite 3M

10%12%14%16%18%20%22%24%26%28%30%

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

EBITDA margin

Pidilite 3M

0%

5%

10%

15%

20%

25%

30%

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

RoCE

Pidilite 3M

Pidilite Industries


Are the expensive multiples justified?

Pidilite vs global chemical manufacturers: Globally, adhesive manufacturers are chemical giants and sales are largely B2B in nature. Hence, intermediary influence is limited, thereby limiting brand recall. On the contrary, in India, intermediaries are brand-conscious and companies such as Pidilite have a strong influence on them. Hence, their business displays traits of a branded consumer business.

Since Pidilite is more like a B2C franchise, it is highly cash generative and its drivers of competitive advantages include brand recall, distribution and supply-chain management. Pidilite has built formidable strengths in each of these facets, which set it apart from most other building material franchises in India and adhesive manufacturers globally.

Exhibit 89: Relative valuation summary

Companies Mcap EV/EBITDA (x) P/E (x) P/B (x) RoE (x) CAGR (FY12-15) CAGR (FY16-18)

US$ mn FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 Sales EBITDA EPS Sales EBITDA EPS

Indian Building Material Cos

27,554 20.9 18.3 34.2 29.6 9.4 7.7 27.5 27.3 23.2 23.2 25.2 15.6 14.7 17.0

Pidilite Industries 5,552 27.8 24.2 43.4 37.7 11.3 9.4 27.4 26.5 24.8 24.7 25.1 15.5 13.7 14.5

Asian Paints 14,389 29.5 25.3 46.3 39.4 14.7 12.5 33.6 33.4 20.8 21.9 18.8 15.6 15.8 19.4

Havells India 3,315 22.7 20.1 34.7 30.0 10.3 7.0 24.2 24.7 2.6 2.1 2.1 (3.7) 14.0 (21.5)

Supreme Industries 1,696 14.1 12.1 26.1 22.1 NA 5.8 27.7 28.5 3.4 3.2 3.0 1.4 1.9 1.7

Kajaria Ceramics 1,448 18.4 15.8 34.1 28.2 8.4 6.2 26.6 26.0 29.1 30.7 43.8 15.6 17.2 22.8

Cera Sanitaryware 472 18.3 NA 30.0 NA 6.2 NA 22.1 22.1 60.4 47.3 NA 18.6 21.1 24.2

Century Plyboards 683 15.6 12.0 24.4 20.1 5.6 5.3 30.9 30.1 21.5 32.7 58.6 19.5 21.1 16.7

Global chemical cos 282,047 9.1 8.8 15.4 14.1 5.1 4.7 30.1 32.2 (3.3) 10.7 47.0 4.7 5.9 9.1

3M 106,061 12.5 11.9 19.6 17.9 10.6 11.2 53.3 64.3 0.6 3.9 9.8 3.5 4.7 9.0

BASF GR 67606 7.0 6.5 13.2 12.0 1.8 1.8 14.3 15.2 -1.2 5.6 -9.1 4.3 7.3 10.1

Dow 54,264 7.2 7.3 12.2 12.1 2.2 2.0 17.6 16.9 (7.3) 25.9 201.4 4.5 2.8 6.6

SIKA NA NA NA NA NA NA NA NA NA 6.6 20.9 NA 6.6 8.7 10.7

Du Pont 54,116 9.7 9.2 16.8 14.5 5.7 3.9 35.1 32.6 (15.0) (2.7) (14.1) NA NA NA

Global building material cos

58,932 12.0 11.1 19.7 17.8 6.8 5.2 33.7 31.5 3.9 12.6 18.9 6.7 8.6 9.8

Sherwin Williams 27,943 13.4 12.6 21.3 19.5 11.1 8.6 63.4 56.8 9.1 27.5 36.0 5.2 7.8 10.6

Akzo Nobel 15,066 6.9 6.7 13.9 13.1 2.1 1.9 14.9 14.7 (1.7) NA NA 3.1 3.9 4.9

PPG Industries 683 15.0 12.6 24.6 20.2 6.8 5.3 30.4 29.0 (2.4) (6.3) 10.1 16.7 17.1 16.6

Valspar Corp 8,587 13.4 12.6 20.5 18.9 9.1 6.2 37.7 35.3 4.5 13.4 24.6 4.5 6.6 8.4

RPM International 6,654 11.4 10.7 18.2 17.0 4.8 4.0 22.0 21.9 10.3 15.8 4.7 3.9 7.3 8.5


Pidilite Industries


Key catalysts Recover in growth of end-user industries: After two years of tepid growth in

building material sales, pick up in home-improvement expenditure – furniture, tiling etc, will drive volume growth for adhesives. We have built in 17-18% revenue growth in the next two years as against 9-13% in the last three years.

Success in construction chemicals: We build in strong revenue growth in construction chemicals over the next few years (17% CAGR over FY16-20), since we believe that the market size will expand as awareness rises. We believe that construction chemicals can drive non-linear earnings growth for Pidilite.

Key risks Market share losses in adhesives: Pidilite has a market leadership in most

adhesive sub-segment in India. In our DCF model, we assume that the company’s competitive advantages will be able to combat competition from new entrants and maintain market share. If peers such as Astral and Asian Paints aggressively gain market share from Pidilite, our revenue estimates will have to be downgraded

Inflation in RM prices: We have built in 100bps EBITDA margin contraction due to increase in adhesive inputs. A higher cost inflation will lead to earnings downgrades.

Weak performance of international subsidiaries: We expect international geographies’ performance to improve in the next few years – 16% CAGR over FY16-18. If the revenue growth tapers off in the international markets, we will have to moderate our growth expectations.

Capital allocation Pidilite’s capital allocation analysis during the last two decades suggests the following:

Generation – CFO funded entire cash needs: For 20 years, the company has funded its entire cash needs from CFO.

Deployment – largely prudent barring a few forays: Pidilite remained focused on its core portfolio and built 4-5 strong brands. International forays have included both hits and misses, with the company struggling in developed markets but doing relatively well in developing markets. Synthetic elastomer is the only flawed capital deployment of the company.

Dividend payments – does not hoard cash: Unlike several Indian companies, Pidilite did not hoard cash for fanciful aspirations; most of the spare cash has been paid as dividends.

Capex – small ticket sizes: Pidilite maintained low capital intensity in its businesses and has not incurred any mega capex that could hit financial health.

Pidilite Industries


Exhibit 90: CFO accounted for majority of the company’s sources of funds


Exhibit 91: 86% of cash went into capex and dividend payments


Exhibit 92: Even in this decade, CFO was the main source of cash inflows…


Exhibit 93: …and 80% of cash inflows were either re-invested or paid out as dividends


CFO, 99%

Interest + Dividend ,

1%

FY96-05

Capex , 65%Inc in cash,

2%

Interest, 12%

Dividend, 21%

FY96-05

CFO, 98%

Int+div, 2%

FY06-15

Capex, 56%

Inc in cash, 2%

Interest, 6%

Dividend, 24%

Investments , 9%

Debt repaid, 2%

Others, 2%

FY06-15

Pidilite Industries


Appendix I] Understanding the adhesive usage in India Penetration in a misnomer: Adhesive industry still has a lot of room for innovation: Adhesives market in India is US$900mn, ~2% of overall adhesive consumption globally. The global adhesive market has gone through continuous innovation, as new applications expanded the market size. In India as well, new chemistries, specifically in flexible packaging, disposable hygiene, medical products and construction, is leading to expansion of the market size and addressable opportunity.

As per Jeremy Hunter, President Henkel adhesives: China and India remains the fastest growing region for adhesives and sealants on a global basis through to 2015. Asia-Pacific remains the dominant market followed by Europe due to increase in applications for labels. In terms of individual countries, India is a fast growing market due to heavy automotive sector and wide range of industries present in the market. Global manufacturers such as Henkel have established innovation centres in India for R&D into new adhesive varieties. Other large players such as Bostik (subsidiary of Arkema) have recently expanded capacities to cater to rising applications.

Exhibit 94: Competitive landscape of Indian adhesive market


In India, Polyvinyl acetate (Fevicol) accounts for 38% of the overall adhesive market (white glue), followed by rubber based adhesives. Packaging, furniture and construction account for ~2/3rd of adhesive usage in India.

Pidilite, 30%

Henkel, 20%

3M, 7%Huntsman, 4%Resinova, 3%

Bostik, 2%

Anabond, 2%

Metlok, 2%

Sika, 2%

Atul , 2%

Unorganised, 26%

Pidilite Industries


Exhibit 95: PVA accounts for 38% of adhesive production in India


Exhibit 96: Packaging and wood-working are the largest end-user industries


A] Polyvinyl Acetate (PVA) – white (water-based) glue Characteristics: An emulsion made of vinyl acetate monomer (VAM) in water. These are thermoplastic homopolymers that are odorless and non-toxic, which makes it suitable for domestic use as well. Our estimation is that the size of the industry is ~`23bn in India.

End use: Furniture, packaging and home/office use accounts for majority use of PVA in India. Carpenters use PVA because of ease of application (fast setting), availability and low cost. In the packaging industry PVA is used to bind perforated outer bodies of packaging material, filter paper and pleats sealing.

Positioning of players: Pidilite with its flagship brand – Fevicol is the undisputed leader in this segment (~70% market share). The other relatively large manufacturers are Huntsman (Karpenter) and Jubilant (Jivanjor).

Exhibit 97: Fevicol is the undisputed leader in PVA

Source: Techsci research, Ambit Capital research

Exhibit 98: Furniture and packaging accounts for 70% of PVA usage in India


Competitive threat for Pidilite: Pidilite has been in this segment for the last five decades and over this period, has developed strong brand equity with the carpenters, who are resistant to changing to other brands of adhesives. Given that adhesive is not a major cost of overall furniture construction, carpenters are usually brand conscious and use Fevicol. Very few dealers offer shelf space to other brands in this category. Hence, we do not see a major threat for Pidilite due to entry of competitors in this segment.

Polyvinyl acetate, 38%

Acrylic, 15%Polyurethane

, 10%

Epoxy, 12%

Rubber, 18%

Others, 7%Industry split by product type

Packaging, 27%

Woodwork, 18%

DIY, 6%

Construction, 18%

Assembly, 10%

Others, 8%

Transport, 8%

Footwear, 5% Industry split by end-use

Fevicol, 70%

Karpenter, 10%

Jivanjor, 10%

Others, 10%

Market share of top brands

Furniture , 40%

Packaging , 30%

Others, 30%

Usage by end-use

Pidilite Industries


Pidilite’s growth visibility in PVA: As per our estimation, PVA accounts for 33% of overall sales of Pidilite The volume growth of PVA will largely mirror the growth of furniture and packaging in India. Furniture construction has been tepid in recent years, due to slow-down in real-estate absorption, which should normalize in the next few years. Given low penetration of furniture in India alongside continued growth in packaging (due to rising organized manufacturing), there is fair visibility of the longevity of growth of this category.

We believe that volume growth of PVA is likely to be 6-7% over the next 4-5 years. Furthermore, Pidilite has premiumized its portfolio, through launching new variants such as Marine, Heat-X and Speed-X, which have found good acceptance with the carpenters.

Disruption threat from organized furniture: The major disruption possibility in this category is proliferation of organized furniture as against bespoke furniture manufactured by carpenters. Institutional consumers will be brand agnostic which will lead to not only margin contraction (as pricing premium wanes), but will also market share loss for Pidilite.

B] Rubber adhesive (RA) Characteristics: Tackifiers are added to natural rubber to produce RA; tackifiers are chemical compounds used in formulating adhesives to increase the tack, the stickiness of the surface of the adhesive. RA is relatively higher priced as compared to their mediocre resistance and low temperature resistance. Majority of rubber adhesives in India is imported from South Korea.

Our estimation is that the size of the industry is ~`11bn in India.

End use: Mainly used in footwear applications and packaging and tyre applications. This is largely an industrial product with limited retail sales

Positioning of players: Pidilite is the leading manufacturer (45% market share) with its brand Fevibond and Fevicol SP. Other large manufacturers are French firm (Bostik) and Chandra chemicals (Dendrite).

Exhibit 99: Pidilite is the leader in RA


Exhibit 100: Footwear industry is the major usage of RA


Competitive threat for Pidilite: None of the recent entrants have targeted RA as their core segment. However, since it is an institutional product, there is a likelihood of market share loss to lower priced brands. However, competition in this segment is nothing new, Pidilite has managed to gain market share, despite severe competition. Pidilite’s growth visibility in RA: RA accounts for 10% of Pidilite’s overall sales. Footwear industry has grown at a 15% CAGR over the last five years and our retail analyst’s estimation is that there is still ample scope for growth in footwear as income levels rise. Hence the segment can sustain high single digit volume growth. Disruption: Industry experts suggest that replacement with other thermoplastic elastomeric rubber adhesives such as ethylene-propylene diene monomer rubber (EPDM). The automotive sector, in particular, is replacing rubber-based adhesives with EPDM.

Pidilite, 45%

Chandra, 20%

Bostik, 23%

Atul, 6%

Others, 6%

Market share of top brands

Footwear, 38%

Rubber cluster, 22%

Packaging, 20%

Carpentry, 15%

Others, 5%

End industry usage

Pidilite Industries


C] Epoxy adhesives Characteristics: It is an engineered adhesive with high strength and better chemical and heat resistance. Epoxy resin is mixed with hardeners to manufacture epoxy adhesive. Epichlorohydrin (ECH) is the key raw material for manufacturing epoxy adhesive, which is largely imported from Thailand, Germany and South Korea.

Our estimation is that the size of the industry is ~`7.5bn in India.

End use: Unlike western countries, epoxy adhesive is not used in industrial applications but largely in after-market applications. Windmill blades is one of the leading application areas of epoxies. Epoxy adhesives are also used for laminates, tiles, glass etc.

Positioning of players: Huntsman (Araldite) is the leader in epoxy adhesives in India with 30% market share, followed by Resinova with ~15% market share. Other manufacturers are Atul Industries, Pidlite and Momentif.

Exhibit 101: Araldite (Huntsman) is the strongest brand in epoxy adhesives


Exhibit 102: Windblades is the largest consumer of epoxy adhesives in India


Competitive threat for Pidilite: Pidilite does not have a strong franchise in epoxy adhesives and in our visits to hardware shops, very few stocked its brand – Fevitite. Hence, we do not think that it is at a major risk of a market share loss due to aggressive expansion by Astral, post-acquisition of Resinova.

Pidilite’s growth visibility: As per our calculations, Pidilite’s sales from epoxy adhesive would not be more than ~`500-750mn. Even if Pidilite lags industry growth rates of 7-8% in this segment due to aggressive entry of Astral (through Resinova) and Asian Paints (through Loctite), it is not very concerning.

Huntsman, 30%

Resinova, 15%

Atul, 15%

Others, 40%

Market shareof top brands

Wind blades,

30%

Product assembly,

20%

Auto, 10%

Others, 40%

Usage by end-use

Pidilite Industries


D] Acrylics (Cyanoacrylates) Characteristics: Cyanoacrylates (super glue) are instant bonding, easy application and have high viscosity. It is generally imported in India from China, US, Taiwan and Korea. It goes through instant curing at room temperature. China accounts for 70% of cyanoacrylates imports in India.


End use: Majority of the use is for consumer segment for DIY applications. Apart from that, other uses are in automotive applications.

Positioning of players: Pidilite is the leader with its Fevikwik brand. The company has the widest distribution reach of the product in India.

Competitive threat for Pidilite: Currently, Pidilite commands ~60% market share in this segment. Resinova has a small presence in this segment (~`200mn sales). We do not see a major threat to Pidilite because of Astral’s entry, given that Pidilite’s reach in this product is unparalleled and given the low-ticket size of this product, consumers are not price conscious.

Pidilite’s growth visibility: We believe that Fevikwik’s contribution to Pidilite’s sales would be ~6-7%. We believe that the company can manage to sustain 6-8% growth in this segment in-line with the growth rates of other adhesive products.

E] Epoxy sealant Characteristics: It is a room temperature hardening substance used as a space-filling adhesive. It is stored until use as two components of clay-like consistency which are kneaded into each other and creates an exothermic chemical. Unlike many other types of glues, an epoxy adhesive can fill gaps and even be molded into a structural part.


End use: Epoxy putty is used as a sealant to plug water leakages and fixing/repairs. It is also used for leveling uneven surfaces.

Positioning of players: Pidililte is the market leader with ~60% market share, the other competing brands are Araseal by Araldite and Bond-set by Resinova.

Competitive threat for Pidilite: We believe that the only risk that Pidilite faces here is through the aggressive entry of Astral in this product. Given that this is largely a plumbing product, Astral with its strong plumber connect can garner some of the market share. However, Pidilite has administered a rebranding exercise

Pidilite Industries


II] Construction Chemicals – still nascent Construction chemicals are a niche segment of speciality chemicals which is used as a catalyst while building concrete structures or to impart durability and strength. The size of the industry has more than tripled in the last decade, with better building construction practices, rising awareness by Indian corporates after these companies made significant investments in setting up capacities and capabilities for production of construction chemicals. Admixtures (binding material mixed with concrete) is the largest component of construction chemicals in India, accounting for ~45% of the overall construction chemical market. Waterproofing is the second largest – 15% of overall market.

Exhibit 103: Admixtures account for majority of the construction chemical sales in India


Exhibit 104: Construction chemicals: 16% CAGR over the last two decades


Exhibit 105: Key categories of construction chemicals in India

Source: Ficci, Ambit Capital research

Admixture, 45%

Grouts, 12%Flooring, 10%

Waterproofing, 14%

Sealants, 5%

Tiling, 12%Others, 2%

Split of construction chemicals in India

25

12

27

40

0

10

20

30

40

50

1995 2000 2005 2011 2015

Construction chemicals size (` bn)

CONSTRUCTION CHEMICALS

CONCRETE ADMIXTURES

WATER PROOFING

FLOORING COMPOUNDS

REPAIR AND REHABILITATI

MISCELLANEOUS

Ligno based

*SNF & SMF based

*PCE based

Polyurethane based

Bitumin based

Polymer - SBR, Acrylic

Epoxy & floor hardners

Polyurethane coatings

Polyurea based

Cementitious repair mortars

Polymer repair mortars

Epoxy based resin mortars

Sealants

Grout

Adhesives

Pidilite Industries


Exhibit 106: Segments of construction chemicals

Segment Size (` mn) Features Pidi's products

Admixtures 18,000

Mixed with concrete to reduce water content and increase durability of concrete Dr Fixit LW+ Dr Fixit Pidicrete

Flooring Agents 5,000 Epoxy and Polyurethane based used at finishing stage of construction to avoid moisture penetration, strengthening of damaged floors Dr Fixit repair mortar

Waterproofing agents 6,000 Products based on bitumen, PU and polymers to stop water infiltration Dr Fixit Roofseal

Repair and rehab 5,000

Retrofitting is addition of new features to older systems and improving the structures with energy efficiency. These products include cementations repair mortars, epoxy based mortars and other products like rust removers, anti-corrosion products etc.

Dr Fixit Microconcrete

Miscellaneous 6,000 Sealants used to seal expansion joints. Grouts and tile adhesives provide strength to load-bearing structures

Roff Grout. Dr Fixit Modern tile adhesive


Pidilite Industries


Balance Sheet

Rs mn unless mentioned FY14 FY15 FY16 FY17E FY18E

Share capital 513 513 513 513 513

Reserves and surplus 19,014 22,193 27,316 33,047 40,349

Total Networth 19,526 22,706 27,829 33,559 40,862

Loans 459 584 843 843 843

Minority Interest 42 51 427 427 427

Deferred tax liability (net) 537 566 670 670 670

Sources of funds 20,565 23,907 29,769 35,499 42,802

Net block 7,062 9,569 10,696 11,203 11,812

Capital work-in-progress 4,580 4,618 4,618 4,618 4,618

Investments 2,603 3,599 6,490 6,490 6,490

Cash and bank balances 1,772 860 1,319 8,123 14,650

Sundry debtors 5,244 5,861 7,294 8,609 9,824

Inventories 5,997 6,410 6,290 7,404 8,596

Loans and advances 1,612 1,885 1,777 1,722 2,047

Total Current Assets 14,809 15,146 17,246 25,857 35,116

Current liabilities and provisions 8,719 9,240 9,281 12,669 15,234

Net current assets 6,090 5,905 7,965 13,188 19,882

Application of funds 20,565 23,907 29,769 35,499 42,802


Income statement

` mn unless mentioned FY14 FY15 FY16 FY17E FY18E

Revenue 42,832 48,441 53,695 62,845 74,703

yoy growth 10% 13% 11% 17% 19%

Total expenses 36,117 40,734 41,902 52,603 62,097

EBITDA 6,715 7,708 11,792 13,385 16,341

yoy growth -18% 15% 53% 14% 22%

Depreciation 812 1,178 1,331 1,493 1,641

EBIT 6,352 6,985 10,971 12,742 16,087

Interest and financial charges 163 156 133 117 101

Other income 449 455 510 850 1,388

Adj PBT 6,189 6,828 10,839 12,625 15,986

Provision for taxation 1,653 1,694 3,221 4,040 5,116

Adjusted PAT 4,519 5,122 7,618 8,585 10,871

yoy growth -29% 13% 49% 13% 27%

Reported PAT 4,499 5,126 7,615 8,625 10,911

EPS basic (`) 9 10 15 17 21

EPS diluted (`) 9 10 15 17 21

DPS (`) 3 3 4 5 6


Pidilite Industries


Cash Flow statement

` mn unless mentioned FY14 FY15 FY16 FY17E FY18E

PBT 6,124 6,779 10,839 12,625 15,986

Depreciation 812 1,178 1,331 1,493 1,641

Interest paid 163 156 133 117 101

CFO before change in WC 7,122 7,862 11,792 13,385 16,341

Change in working capital (1,514) (593) (150) (417) (880)

Direct taxes paid (1,669) (1,749) (3,221) (4,040) (5,116)

CFO 3,939 5,520 8,421 8,928 10,345

Net capex (1,894) (4,091) (2,457) (2,000) (2,250)

Net investments 488 (807) - - -

Interest received 145 111 510 850 1,388

CFI (987) (4,359) (1,947) (1,150) (862)

Proceeds from borrowings - 5 259 - -

Change in share capital - - - - -

Interest & finance charges paid (203) (157) (133) (117) (101)

Dividends paid (1,559) (1,619) (2,468) (858) (2,855)

CFF (2,415) (1,651) (2,342) (974) (2,956)

Net increase in cash 538 (490) 4,131 6,803 6,527

FCF 5,833 9,611 10,878 10,928 12,595

Opening cash balance 645 1,182 692 1,319 8,123

Closing cash balance 1,182 692 4,823 8,123 14,650


Ratio Analysis

Particulars FY14 FY15 FY16 FY17E FY18E

Revenue growth 9.9 13.1 10.8 17.0 18.9

EBITDA growth (18) 15 53 14 22

PAT growth (30) 14 49 13 26

EPS norm (dil) growth (30) 14 49 13 26

EBITDA margin 16 16 22 21 22

EBIT margin 15 14 20 20 22

Net margin 11 11 14 14 15

RoCE 24 24 29 27 28

RoIC 21 38 45 48 61

RoE 25 24 30 28 29


Valuation Parameter

Particulars FY14 FY15 FY16 FY17E FY18E

P/E (x) 82 73 49 43 34

P/B(x) 19 16 13 11 9

Debt/Equity(x) 18 18 20 19 18

Net debt/Equity(x) (8) (5) (6) (25) (37)

EV/Sales(x) 9 8 7 6 5

EV/EBITDA(x) 54 48 31 27 22


Pidilite Industries


Institutional Equities Team Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research Analysts

Name Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected]

Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected]

Aakash Adukia Oil & Gas / Chemicals / Agri Inputs (022) 30433273 [email protected]

Abhishek Ranganathan, CFA Retail (022) 30433085 [email protected]

Achint Bhagat, CFA Cement / Home Building (022) 30433178 [email protected]

Anuj Bansal Mid-caps (022) 30433122 [email protected] Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected]

Gaurav Khandelwal, CFA Automobile (022) 30433132 [email protected] Girisha Saraf Mid-caps / Small-caps (022) 30433211 [email protected]

Karan Khanna, CFA Strategy (022) 30433251 [email protected]

Kushank Poddar Technology (022) 30433203 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave, CFA Healthcare (022) 30433212 [email protected]

Parita Ashar, CFA Metals & Mining / Aviation (022) 30433223 [email protected]

Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected]

Rahil Shah Banking / Financial Services (022) 30433217 [email protected]

Rakshit Ranjan, CFA Consumer (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected]

Ritesh Vaidya, CFA Consumer (022) 30433246 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Utsav Mehta, CFA E&C / Industrials (022) 30433209 [email protected]

Vivekanand Subbaraman, CFA Media (022) 30433261 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected]

Krishnan V India / Asia (022) 30433295 [email protected]

Nityam Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Shaleen Silori India (022) 30433256 [email protected]

Singapore

Pramod Gubbi, CFA – Director Singapore +65 8606 6476 [email protected]

Shashank Abhisheik Singapore +65 6536 1935 [email protected]

USA / Canada

Ravilochan Pola - CEO Americas +1(646) 361 3107 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Jestin George Editor (022) 30433272 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

mailto:[email protected]

Pidilite Industries


Pidilite Industries Ltd (PIDI IN, BUY)


0100200300400500600700800

Jul-

13

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-

14

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-

15

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Pidilite Industries Ltd

Pidilite Industries


Explanation of Investment Rating

Investment Rating Expected return (over 12-month)

BUY >10%

SELL <10%

NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs

NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs Disclaimer This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. Disclaimer 1. AMBIT Capital Private Limited (“AMBIT Capital”) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio

Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI 2. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes

to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information, opinions, views expressed in this Research Report are those of the research analyst as at the date of this Research Report which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein.

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