by In this article, we will do a fundamental analysis of Pidilite Industries Ltd, as usual, we will cover the company and the management of Pidilite, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if the Pidilite Idustries Ltd are fundamentally strong or not then we will do the valuation analysis of Pidilite Industries Ltd to decide if it is worth investing in the company at current levels or not.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Introduction
Pidilite is the largest adhesive manufacturing company in India. the company started its operations in the year 1959 with its most popular adhesive brand named Fevicol and since then it has established its presence in 80 plus countries across the world.
The company now manufactures adhesives, sealants, pigments, industrial resins, construction, and paint chemicals, etc.
It currently has a portfolio of 500-plus products. As the ratings are based on long-term past performance they are relevant for at least three years in the future until FY 2022.
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Fundamental Analysis of Pidilite
Fundamental Analysis of Pidilite is differentiated into different categories are as follows, all units are in millions except ratios and per share data.
Economic Model
- Pidilite industries have a total of 23 plus manufacturing plants in India and a solid market presence of over six decades.
- The company has expanded into 18 international and 9 domestic subsidiaries and has established 8 R&D centers.
- The company operates some well-known brands like Fevicol, M-Seal, Dr. Fixit, etc which has a strong awareness in both consumer and industrial segments.
- The focus of the company is on-brand premiumization and innovation some of their brands like M-Seal have 70 percent market share in the plumbing segment and Dr. Fixit has achieved 98 percent market share top-of-the-mind awareness among consumers.
- Fevicol has also been the most trusted adhesive brand for many decades.
- Overall the company has a solid economic model with its innovative, adhesive solutions, and brand awareness.
- Its market dominance is also near-monopolistic in Fevicol and M-Seal brands which contributes a major portion of the revenue.
- Therefore this category gets five stars in Pidilite shares fundamental analysis.
Business Model of Pidilite
The company has distributed its brands across 3 major categories are as follows:
Core Brands
- The core brands include Fevicol, Fevicol Marine, Fevikwik, M-Seal, and Fevicryl.
- These brands have a very wide distribution and have market dominance even in remote areas.
- They are high-volume medium-margin products.
Growth
- The second category is growth these brands have high awareness in their niche categories like wd-40, Dr. Fixit, Nina, etc.
- They drive revenue growth, especially in urban areas.
Pioneers
- Another category is pioneers which have Sippy, Howat, and Roth brands.
- These are innovative solutions and are in a nascent stage.
Revenue Breakup
- The business model is such that 56% of the revenue comes from adhesives and sealants.
- 20% from construction and paint chemicals.
- 8% from arts and crafts materials.
- 5% from pigments and the rest from industrial adhesives and resins.
- This has helped the company to diversify its product portfolio and achieve sustainable growth in revenue.
Management of Pidilite
- Mr. Bharat Puri is the managing director of the company and has four decades of experience across industries.
- Previously he held leadership roles at Asian paints and Mandalas.
- Mr. Vivek Sharma is the chief marketing officer and has over 25 plus years of experience.
- He has held senior leadership positions at Phillips, MIRC Electronics, Ogilvy Advertising, and Cadbury Craft.
- Overall the company has a qualified management team that has been successful in delivering robust growth over the years.
- Therefore this category gets five stars in the Fundamental Analysis of Pidilite.
Strengths & Limitations
Strengths & Limitations of Pidilite Industries are as follows:
Strengths
- Company has been maintaining healthy ROE of 24.17% over the past 3 years.
- Company has been maintaining healthy ROCE of 32.82% over the past 3 years.
- Company is virtually debt free.
- Company has a healthy Interest coverage ratio of 86.73.
- The Company has been maintaining an effective average operating margins of 23.24% in the last 5 years.
- The company has an efficient Cash Conversion Cycle of 51.86 days.
- The company has a high promoter holding of 70.13%.
Limitations
- The company has shown a poor profit growth of 4.23% for the Past 3 years.
- The company has shown a poor revenue growth of 5.10% for the Past 3 years.
- The company is trading at a high PE of 90.06.
- The company is trading at a high EV/EBITDA of 61.91.
Competitors of Pidilite
- If you look at the competitors of pidilite has strong competition from the other Chemical sectors giants like Deepak Nitrite, AArti Industries, Alkyl Amines, Atul, Tata Chemicals etc.
- The Pidilite has positioned itself as a monoply brands in FEVICOL, FEVICOL MR, DR. FIXIT, Fevi Kwik, M-Seal, Fevi Stik, Fevicryl, etc.
- Overall on competitive strength, I would rate it 4 on 5.
- Other Competitors Include in construction sectors Future Enterprise, SRF, India Cements, etc.
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Company Financials
Company Financials of Pidilite are as follows:
Growth Ratios
- The revenue has seen a growth of 12.4% CAGR over the last 10 years.
- The operating income and net income have also seen a growth of 13.6% and 13 CAGR respectively.
- This shows improving efficiency for the company.
- The working capital has also increased.
- Over the years this indicates a surplus of current assets like cash receivables and inventory.
- The capital expenditure has also remained stationary over the years.
- Overall this indicates steady and sustainable growth.
- Therefore this category gets five stars in the Fundamental Analysis of Pidilite.
Profitability Ratios
- The margins have mostly been consistent over the years and have witnessed a recent dip due to the increasing cost of raw materials.
- The gross margin decreased last year and had a trickle-down effect over the other margins.
- The return on assets also declined due to reduced net income margin.
- Overall this is only temporary and the margins are expected to improve in the future due to the decline in crude oil prices.
- Therefore this category gets four stars in the Fundamental Analysis of Pidilite.
Cash Flow Ratios
- The capital expenditure as a percentage of sales has declined which indicated over capacity or moderate growth in the future.
- The free cash flow as a percentage of net income has been stable and operating cash flows have also seen improvement.
- This overall indicates a good cash position for the company.
- Therefore this category gets four stars in the Fundamental Analysis of Pidilite.
Liquidity and Solvency Ratios
- The current ratio has seen a decent improvement over the years along with the quick ratio.
- This indicates a surplus of cash and receivables available with the company to meet the short-term obligations.
- The financial leverage has been going down and the debt-to-equity ratio is also very low.
- This overall indicates robust liquidity and solvency positions for the company.
- Therefore this category gets five stars in the Fundamental Analysis of Pidilite.
Efficiency Ratios
- The business efficiency has not shown any significant improvement over the years.
- The inventory days have gone down slightly and the payable period has improved.
- The receivable days have also increased from 53 days to 63 days but this is necessary for increasing distribution reach for their products.
- Overall the cash conversion cycle has been positive which means an additional working capital requirement.
- Therefore this category gets four stars in the Fundamental Analysis of Pidilite Industries ltd.
ROE & ROCE Analysis
- If you look at the profitability of the company.
- The latest ROE for FY21 is 21.65% and ROCE is 29.24%.
- The asset turnover has flattened over the years and the interest burden ratio has remained almost 100.
- This is due to the zero long-term debt in the capital structure.
- The tax efficiency has remained stable and the operating margin has shown some recovery after Covid.
- Overall the ROE has flattened and has not seen any significant improvement.
- Therefore this category gets four stars in the Fundamental Analysis of Pidilite.
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Shareholding Pattern
- If you look at the shareholding pattern.
- Its promoter has more than 70.13% stake in the company.
- Foreign institutions hold a 12.1% stake.
- Domestic institutions hold 7.15% stake.
- General public holds a 10.64% stake.
Future Growth Prospects
- Some insights for the coming years from the analysis management discussions and conference calls are as follows:
- The Covid 19 outbreak will have a negative impact on sales across the countries.
- Exports will also show a significant decline in the demand for industrial adhesives will recover only after manufacturing companies start operating at their full capacity.
- As of now, the company does not appear to be concerned about the impact of coronavirus on china-based manufacturing of VAM that is vinyl acetate monomer but is monitoring the situation closely.
- The disrupted supply chain can be an issue in the coming years for the company.
- Pidilite will also benefit from the fall in the crude oil price as it constitutes a major portion of raw material cost.
- The actual impact will only be seen after the factories start operating.
- The company is taking initiatives to achieve 15 to 16% value growth in the coming years.
- Expected demand scenario to improve from FY 2021 onwards in India.
- This may get delayed due to the Covid 19 lockdown if locdown happens in 3rd phase.
- Pidilite acquired a stake of 30 million dollars in the home lane due to evolving market dynamics and innovation.
- The company has an interest in interior design space and wants to be part of the changing landscape due to technology.
- Tile adhesives are doing good with the category sales growing at a fast rate the product is witnessing higher market acceptance with consumers increasingly.
- Switching from cement to tile adhesives the company shows promising growth opportunities once the temporary disruption due to covid 19 clears.
- Therefore this category gets five stars in Fundamental Analysis of Pidilite.
Valuation
- The company is a near-monopoly in the adhesive segment in India and its market is witnessing a seven to eight percent annual growth rate.
- For the last few years, the company also has a good track record of profitability and innovation.
- Therefore the market has started pricing its shares at higher multiples.
- The growth is driven by fundamentals and is sustainable.
- The Pidilite Industries Ltd is currently trading at a price of 2392 at a PE of 89.32.
- Although at current levels It is looking slightly overvalued I think that Pidilite Industries Ltd has a bright future and it will continue to grow at a very good rate. So it is worth investing in the company.
- A better strategy would be to invest periodically or buy on dips.
- Hence this category gets four stars out of five in the Fundamental Analysis of Pidilite Industries Ltd.
Conclusion
Overall if we conclude Pidilite Industries ltd has an excellent business and its management, strong competitive advantage and solid financial and a very bright growth prospect which makes it a fundamentally super strong company.
It is currently available at a fair valuation. What is your take on Pidilite Industries Ltd have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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