Pidilite Industries - Another best-in-class acquisition - ICICI Securities

After successfully scaling up brands it acquired in the past - e.g. Dr. Fixit, M-Seal, Roff and Steelgrip - Pidilite Industries (PIDI) has now acquired an established and a premium brand Araldite, a market leader in epoxy adhesives (where PIDI has been struggling with its brand Fevitite). The acquisition of HAMSPL - a subsidiary of Huntsman Corp (US) in India for a cash consideration of Rs21bn - would catapult PIDI into a leadership position in epoxy adhesives and would further consolidate its place in the PVA and epoxy putty segments (in which HAMSPL is present). The cost of acquisition (at 15x CY19 adjusted EBITDA multiple and 5x HAMSPL's sales) also appears reasonable vis-à-vis PIDI's current valuation at ~11x FY20 sales and 50.7x FY20 EBITDA. Maintain HOLD.

- Valuation and outlook. Factoring-in the HAMSPL acquisition, we increase our revenue/earnings estimates by 2.7%/5.7% and -3.7%/6.6% respectively for FY21E/FY22E. We now expect PIDI to exhibit revenue/PAT CAGRs of 8.2%/17.2% respectively over FY20-FY22E. Considering the recent surge in stock price, we maintain our HOLD rating with a revised target price of Rs1,508 (50x FY22E earnings) vs Rs1,415 earlier.

- Another best-in-class acquisition at reasonable valuations. PIDI over the years has had a successful track record in acquiring leading brands (in categories where its presence was limited) and scaling them up meaningfully on the back of its own strong brand equity and distribution reach. Even in the epoxy adhesive category where HAMSPL is a market leader and enjoys premium pricing, PIDI has lagged in the past. The cost of acquisition (at 15x CY19 adjusted EBITDA and 5x HAMSPL's sales) too appears reasonable when compared with PIDI's current valuation at ~11x FY20 sales and 50.7x FY20 EBITDA.

- Deal likely to be earnings-accretive for PIDI. HAMSPL's revenues in adhesive and sealants in CY20 are estimated at Rs4bn with EBITDA margin at 35%. This is much higher than PIDI's existing margins thereby making the acquisition margin-accretive for PIDI. Besides, the likely revenue and cost synergies for PIDI in epoxy adhesive business (accounting for ~80% of HAMSPL business) would drive further improvement in the profitability of this business segment.

- PIDI becomes an unassailable leader in epoxy adhesive category. Besides being a market leader in epoxy adhesives in India, HAMSPL manufactures and sells other adhesives and sealants under well-known brands such as Araldite Karpenter and Araseal in India. This acquisition would now catapult PIDI into a leadership position in epoxy adhesives, and would also enable it to consolidate its position in the PVA (Fevicol) and epoxy putty (M-Seal) product segments. PIDI's strong nationwide distribution network and extensive reach in the retail trade would also help it penetrate and further scale up HAMSPL's adhesive business over the next 3-4 years.

Shares of PIDILITE INDUSTRIES LTD. was last trading in BSE at Rs.1570.45 as compared to the previous close of Rs. 1590.35. The total number of shares traded during the day was 25240 in over 2420 trades.

The stock hit an intraday high of Rs. 1591 and intraday low of 1558.2. The net turnover during the day was Rs. 39740744.

Source : Equity Bulls

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