Pidilite Industries - Glue it to your portfolio... - ICICIdirect

Pidilite Industries (Pidilite), is a dominant play in India's growing adhesive and industrial chemical market with a market share of ~70% in its leading brand categories in the organised segment. The company's two major segments, consumer & bazaar (C&B) and speciality industrial chemical have grown at a CAGR of 18% and 12% (standalone), respectively, in FY07-12. The growth was largely driven by Pidilite's deep penetration into the domestic market and regular product innovations to leverage its flagship brand 'Fevicol' for launching new products. The company operates through a 4000+ dealer network with over 10 lakh retail reach across India. With the strong distribution network, high brand recall value, light balance sheet and virtually no competition, we believe the consolidated topline and PAT will grow at a CAGR of ~17% and ~22%, respectively, in FY12-15E. We are initiating coverage on the stock with a HOLD rating.

Strong brand, deep product penetration to drive revenue

Few brands enjoy the status of being synonymous with the category of products they represent like Fevicol. The company's wide penetration in rural India with strong brand image provides Pidilite an edge over its competitors (mostly unorganised). A strong brand and sizeable advertisement expenses (~3-4% of sales) have created an entry hurdle for organised players as well as other cheap imported products from China. We believe the business would continue to be driven by growth in construction activities, furniture demand and rising trend of interior decoration with improved standard of living (rising middle class population).

Elastomer project and overseas subsidiaries: a hangover Pidilite has incurred a capex of ~Rs. 360 crore for the Elastomer project in Dahej Gujarat. However, the project is stalled currently and the company is undertaking a detailed techno-commercial review of the feasibility of the project. Besides, Pidilite's overseas subsidiaries are still making losses despite growth in sales (three year's CAGR of 11%) mainly due to overseas competition, geopolitical issues and slowdown in global economy.

Strong brand and dominant play justify premium valuations

At the current price, the stock is trading at 27.7x FY14E earnings and 23x FY15E earnings. The stock has traded in the range of 15x-30x on price to earning. With the increasing free cash flow on the back of reducing interest payments and improvement in return ratios, we expect the stock to trade at discount to average multiple (i.e. 28x) of FMCG index. We have valued the stock at 25x (at 10% discount to average multiple of FMCG index) its FY15E earnings with a target price of Rs. 288 and HOLD rating.

Source : Equity Bulls

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