Pidilite MoST by icestar

VIEWS: 3 PAGES: 8

									                                                                                                       10 November 2011
                                                                                2QFY12 Results Update | Sector: Consumer



                                                                              Pidilite Industries
BSE SENSEX                 S&P CNX
17,362                       5,221     CMP: INR168                       TP: INR179                                   Buy
Bloomberg                    PIDI IN
Equity Shares (m)            506.1
52-Week Range              183/123
1,6,12 Rel. Perf. (%)      -3/17/30
M.Cap. (INR b)                 85.1
M.Cap. (USD b)                  1.7


     Pidilite Industries (PIDI) 2QFY12 results were below our estimates with the company reporting adjusted PAT of
      INR864m (v/s our estimate of INR1,009m). Standalone sales increased 20.5% to INR7.1b (v/s our estimate of
      INR7.3b) backed by volume growth of 12-13% and realization increase of ~8%.
     We estimate consumer and bazaar products volume growth of 14-15% and industrial products volume growth of
      ~9% in 2QFY12. Gross margins declined 420bp YoY and 120bp QoQ as VAM (vinyl acetate monomer) prices were
      up 45-50% YoY.
     Although PIDI increased prices of its flagship brand, Fevicol, by ~5%, towards the end of 1QFY12, it was insufficient
      to cover input cost inflation. Savings in employee costs (down 20bp) and other expenditure (down 130bp) restricted
      EBITDA margin decline to 280bp at 18.3%.
     EBITDA grew 4.8% to INR1.3b. PBT increased 5.2% and adjusted PAT increased only 2.2% due to a 260bp rise in
      the tax rate. International business reported 5% sales growth with EBITDA of INR5m v/s INR22m in 2QFY11.
      Margins were under pressure in North America, the Middle East and Brazil and sales declined by 17% in the US.


 Valuation and view: Cutting estimates 3-5%; maintain Buy
 We are reducing FY12 and FY13 estimates by 3-5%, factoring in (1) lower margins due to higher input costs and (2)
 increased cash balance due to a delay in the elastomers project. We are reducing our target price from INR193 to
 INR179 (20x FY13E EPS + INR4/share for the international business). The stock trades at 23.9x FY12E EPS of INR7
 and 19.2x FY13E EPS of INR8.8. Maintain Buy.




Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel:+9122 3982 5404
Harit Kapoor (Harit.Kapoor@MotilalOswal.com); Tel:+9122 3029 5120
                                                                                             Pidilite Industries



                      Pidilite Industries' (PIDI) 2QFY12 results were below our estimates, with PIDI reporting
                       adjusted PAT of INR864m (against our estimate of INR1,009m). Standalone sales
                       increased 20.5% to INR7.1b (against our estimate of INR7.3b), backed by volume
                       growth of 12-13% and realization increase of ~8%. We estimate consumer and bazaar
                       products volume growth of 14-15% and industrial products volume growth of ~9%.
                      Gross margins declined 420bp YoY and 120bp QoQ as VAM (vinyl acetate monomer)
                       prices were up 45-50% YoY. Although PIDI increased prices of its flagship brand,
                       Fevicol, by ~5%, towards the end of 1QFY12, it was insufficient to cover the input
                       cost inflation.
                      Savings in employee costs (down 20bp) and other expenditure (down 130bp) restricted
                       EBITDA margin decline to 280bp at 18.3%. EBITDA grew 4.8% to INR1.3b. PBT
                       increased 5.2% but adjusted PAT increased by only 2.2% due to a 260bp increase in
                       the tax rate.
                      International business sales grew 5% and EBITDA was INR5m v/s INR22m in
                       2QFY11. Margins were under pressure in North America, the Middle East and Brazil
                       and sales declined by 17% in the US.
                      PIDI indicated the appointment of a consultant and go-slow strategy in the completion
                       of its synthetic elastomers project in the backdrop of a volatile economic environment,
                       input costs and selling prices of finished products. We were modeling INR8/share as
                       value in our SOTP analysis but we now assign zero value.
                      The management seems to be confident of sustaining volume growth momentum.
                       However, a major slowdown in capex and industrial production can impact growth
                       with a lag. VAM prices are down ~20% from their peak and we expect PIDI to reap
                       the benefits from 2HFY12.


                   Standalone: Sales up 20.5%, margins down due to higher input costs; PIDI
                   to benefit from 20% decline in VAM prices in 2HFY12
                    Standalone sales increased 20.5% to INR7.1b (against our estimate of INR7.3b),
                       backed by volume growth of 12-13% and increased realization of ~8%. We estimate
                       consumer and bazaar products volume growth of 14-15% and industrial products volume
                       growth of ~9%.
                    Gross margins declined 420bp YoY and 120bp QoQ as VAM prices were up 45-50%
                       YoY. Although PIDI increased prices by ~5% in its flagship brand, Fevicol, towards
                       the end of 1QFY12, the increase was insufficient to cover input cost inflation.
                    Savings in employee costs (down 20bp) and other expenditure (down 130bp) restricted
                       EBITDA margin decline to 280bp at 18.3%. EBITDA grew 4.8% to INR1.3b. PBT
                       increased 5.2% and adjusted PAT increased 2.2% due to a 260bp increase in tax rate.
                    The management indicated sustained volume growth. However, a major slowdown in
                       capex and industrial activity can impact volume growth in the coming quarters. VAM
                       prices have come off ~20% from their peak. This, along with the full impact of PIDI's
                       June price increase, should provide a cushion to margins.




10 November 2011                                                                                              2
                                                                                                                                                                                    Pidilite Industries



Gross margins fall 420bp due to higher input costs                                                     260bp increase in tax rate ensures flat PAT for 2QFY12
                      Gross Margins %                         EBIDTA Margins %                                                    Tax rate %                           PAT Grow th %
                                                                                                                              513.3                                                           24.5 25.1
 48.7       48.4 49.1             49.7      48.2     47.7 46.5 47.9                                                                        21.8              22.5 21.6              23.0
                                                                                 44.7 43.5
                                                                                                        13.3       14.5        15.3


                                                                                                                                        -1.3
 23.5       23.9                            24.8 21.1                                                   37.3                                       18.4                 30.6
                        20.0                          20.0                       20.1 18.3                                                                                          -2.8      0.1         2.2
                                  15.5                                                                                69.4                                   -3.6
                                                                       14.7                                                             59.9




                                                                                                         1QFY10

                                                                                                                     2QFY10


                                                                                                                               3QFY10


                                                                                                                                          4QFY10


                                                                                                                                                    1QFY11


                                                                                                                                                              2QFY11

                                                                                                                                                                         3QFY11


                                                                                                                                                                                     4QFY11


                                                                                                                                                                                               1QFY12


                                                                                                                                                                                                           2QFY12
   1QFY10

             2QFY10


                         3QFY10


                                   4QFY10


                                            1QFY11


                                                     2QFY11

                                                              3QFY11


                                                                        4QFY11


                                                                                 1QFY12


                                                                                          2QFY12
                                                                                                                                                                            Source: Company/MOSL



                                                     Consumer and bazaar sales up 23%, industrial product sales up 18%
                                                      Consumer and bazaar sales rose 23.2% but EBIT was up only 9.7% as margins
                                                       declined 310bp YoY. We note that the margin decline was in spite of PIDI increasing
                                                       the price of Fevicol by 5-6% at the end of June 2011 as VAM prices were up 45-50%
                                                       YoY in 1HFY12. We estimate 14-15% volume growth in the segment, lower than the
                                                       16% achieved in 1QFY12.
                                                      Industrial product sales rose 17.6% and EBIT was up 8.4% as margins declined 110bp.
                                                       We estimate 8-9% volume growth in 2QFY12. PIDI increased prices by 8-9% in this
                                                       segment, which checked margin decline.

                                                     Sales momentum intact, margins under pressure
                                                     Segmental                            1QFY11           2QFY11                  3QFY11                4QFY11                   1QFY12                2QFY12
                                                     Consumer and bazaar
                                                     Sales (INR m)                             4,974              4,558                 4499                 4098                  6,127                 5,604
                                                     Sales growth (%)                           21.2               15.9                  26.5                 27.1                  22.8                  23.2
                                                     EBIT (INR m)                              1,505              1,186                 1144                   791                 1,586                 1,281
                                                     % contribution                             87.6               86.1                  83.9                 77.1                  87.7                  85.5
                                                     EBIT growth %                              23.7                 6.4                 28.2                 26.6                    5.4                   9.7
                                                     EBIT margin %                              30.2               26.0                  25.4                 19.3                  25.9                  22.9
                                                     Industrial products
                                                     Sales (INR m)                             1,394              1,400                 1425                 1575              1,662       1,646
                                                     Sales growth (%)                           21.7                 9.8                33.1                 24.4               22.8        17.6
                                                     EBIT (INR m)                                245                223                  261                   272               259         243
                                                     % contribution                             14.3               16.2                  19.1                 26.5              14.3        16.2
                                                     EBIT growth %                              24.3              -16.4                  27.8                 10.3                5.7        8.4
                                                     EBIT margin %                              17.6               15.9                  18.3                 17.3              15.6        14.8
                                                                                                                                                                            Source: Company/MOSL


                                                     International business reports lower growth, margin pressure; Go-slow in
                                                     elastomers project, we assign zero value
                                                      International business sales grew 5% and EBITDA was INR5m v/s INR22m in
                                                         2QFY11. Margins were under pressure in North America, the Middle East and Brazil
                                                         and sales declined by 17% in the US.
                                                      PIDI indicated the appointment of a consultant and go-slow strategy in the completion
                                                         of its synthetic elastomers project in the backdrop of volatile economic environment,
                                                         input costs and selling prices of finished products.


10 November 2011                                                                                                                                                                                                    3
                                                                                         Pidilite Industries



                    PIDI has so far spent INR3.4b on this project and was expected to spend another
                     ~INR2b in the current year. We note that a delay in the project implementation will
                     make PIDI a positive free cash company in FY12 itself.
                    Stalling the elastomers project for the second time raises doubts about its long-term
                     viability. We now assign zero value to the project in the SOTP analysis against an
                     earlier value of INR8/share.


                   Valuation and view: Cutting estimates 3-5%; maintain Buy
                    We are reducing our FY12 and FY13 estimates by 3-5% to factor in (1) lower margins
                      due to higher input costs, and (2) an increased cash balance due to the delay of the
                      elastomers project. We are reducing our target price from INR193 to INR179 (20x
                      FY13E EPS + INR4/share for the international business).
                    The stock trades at 23.9x FY12E EPS of INR7 and 19.2x FY13E EPS of INR8.8.
                      Maintain Buy.




10 November 2011                                                                                          4
                                                                                                                           Pidilite Industries




Pidilite Industries: an investment profile
Company description                                                   Recent developments
Pidilite Industries (PIDI) is the largest branded adhesives            A 20% decline in VAM prices is likely to provide some
player in India, and has an iconic brand like Fevicol. Besides          respite from margin pressure in 2HFY12.
having a strong presence in adhesives, PIDI expanded its
presence in emerging segments like mechanized joinery,
                                                                      Valuation and view
modular furniture, flooring, automotive care and
                                                                       We are reducing our FY12 and FY13 EPS estimates
waterproofing through brands like Dr Fixit and Roff.
                                                                         by 3-5% and factor in higher input costs and increased
Key investment arguments                                                 cash balance.
 We expect strong consumer-driven demand to continue                  The stock trades at 23.9x FY12E EPS of INR7 and
  and drive volume growth of over 15% for PIDI in future.                19.2x FY13E EPS of INR8.8. Maintain Buy with an
 Strong brand leadership and pricing power will assist                  SOTP-based target price of INR179.
  margin expansion in future.
 The successful completion of the synthetic elastomer
                                                                      Sector view
  project (estimated cost INR5.5b, of which INR3.4b has
                                                                       We have a cautious view on the sector due to slower
  already been spent) can provide earnings upside after
                                                                         income growth in the economy, which might impact
  FY12.
                                                                         volumes and profit margins.
Key investment risks                                                   Companies with low competitive pressure and broad
 A continued increase in VAM prices could impact                        product portfolios will be able to better withstand a
  margins in the near term as the benefits of price                      slowdown in a particular segment.
  increases would come with a lag.                                     Longer term prospects appear bright, given rising
 Delay in commissioning the elastomer project and a                     incomes and low penetration.
  longer than expected payback period could strain cash
  flows.
Comparative valuations                                                EPS: MOST forecast v/s consensus (INR)
                                    Pidilite        Asian Paints                                MOSL              Consensus       Variation
P/E (x)            FY12E             23.9               30.6                                   Forecast            Forecast          (%)
                   FY13E             19.2               24.7            FY12                       7.0               7.3             -4.4
EV/EBITDA (x)      FY12E             15.1               20.0            FY13                       8.8               9.7             -9.3
                   FY13E             11.6               15.8
EV/Sales (x)       FY12E              2.7               3.1           Target price and recommendation
                   FY13E              2.2               2.6             Current                 Target              Upside          Reco.
P/BV (x)           FY12E              5.8               10.9            Price (INR)           Price (INR)            (%)
                   FY13E              4.5               8.8                  168                   179               6.7             Buy



                                                                      Stock performance (1 year)

                                                                                      Pidilite Industries          Sensex - Rebased
                                                                       200

                                                                       175
Shareholding pattern (%)
                           Sep-11              Jun-11     Sep-10       150
Promoter                     70.5                70.7          70.6
                                                                       125
Domestic Inst                 6.8                 7.4           8.2
                                                                       100
Foreign                      11.9                11.0           9.8
                                                                         Nov-10         Feb-11           May-11       Aug-11          Nov-11
Others                       10.9                10.9          11.4




10 November 2011                                                                                                                              5
                           Pidilite Industries



Financials and Valuation




10 November 2011                            6
                               Pidilite Industries



                   N O T E S




10 November 2011                                7
Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.


        Disclosure of Interest Statement                                                              Pidilite Industries
        1. Analyst ownership of the stock                                                                      No
        2. Group/Directors ownership of the stock                                                              No
        3. Broking relationship with company covered                                                           No
        4. Investment Banking relationship with company covered                                                No


Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.

For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.




                                                                            Motilal Oswal Securities Ltd
                                                                3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
                                            Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

								
To top