Stock Update

Pidilite Industries Limited

Eyeing strong post-pandemic recovery
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3R MATRIX + = - Summary
Š We maintain our Buy recommendation on Pidilite Industries Limited (Pidilite), with
Right Sector (RS) ü a revised PT of Rs. 2,315. Pidilite’s dominance in the construction chemical and
adhesive space and strong balance sheet will keep valuations at premium levels.
Right Quality (RQ) ü Š With 50% drop in COVID-19 cases from its peak of 3.9lakh cases in the second wave,
India is gearing up for unlock. Gradual unlock in respective states would result in
Right Valuation (RV) ü recovery in construction chemical products due to pent-up demand.
Š Low penetration for waterproofing products, improved demand for construction
+ Positive = Neutral - Negative chemicals in rural areas, and market share gains from small players are key growth
drivers in the medium term.
What has changed in 3R MATRIX Š Spike in VAM prices and uncertain demand in the current environment are key
headwinds in the near term. The company is targeting to maintain OPM of 20%-24%
Old New in the medium term.
RS  Pidilite Industries Limited (Pidilite) reported flat sales at Rs. 7,293 crore in FY2021. Sales
declined by ~28% in H1FY2021, but the company posted strong recovery in H2FY2021 with
RQ  a 29% revenue growth. Robust growth was seen across categories – adhesives, construction
chemicals, and do-it-yourself (DIY) categories, driven by continued demand momentum in
RV  both rural and urban areas in the second half of year. With a recovery in the macroeconomic
environment and a consequential improvement in industrial/construction activities, the B2B
business clocked strong double-digit growth. The second wave of COVID-19 will affect the
Reco/View Change company’s performance in the near-term performance, as the spread is deeper in rural India.
With a 50% drop in COVID-19 cases from its peak of 3.9 lakh cases in the second wave, India
Reco: Buy  is gearing up for easing of lockdowns again. Our interaction with various small construction
CMP: Rs. 2,065 companies and dealers suggest that full recovery is expected by August 2021/September
2021 with easing of restrictions and consumers allowing plumbers/workers to perform
Price Target: Rs. 2,315 á internal plumbing/waterproofing activities/home improvement activities. This is in line with
the trend seen during the first wave when a recovery was visible from Q2FY2021. Two key
á Upgrade  Maintain â Downgrade differentials in the first wave and second wave were 1) government projects/ construction
activities continued in the some of the less affected states in the second wave, resulting in a
Company details steady demand for B2B industrial products; and 2) international markets such as America,
Middle East, and Africa are expected to perform well as most markets have opened up
Market cap: Rs. 1,04,929 cr after significant drop in cases and massive vaccination drive. PIL’s management expects
strong recovery post the normalisation of the pandemic due to improving penetration of
52-week high/low: Rs. 2,124 / 1,307 waterproofing products in urban and rural markets, shift to branded products in the rural
NSE volume: market, and market share gains from small players in the current environment of rising
7.4 lakh input prices and liquidity concerns. The sharp increase in VAM prices will put margins under
(No of shares) pressure in the near term. Management believes a sharp increase in VAM prices is due to
BSE code: 500331 supply disruption as demand remains stable. Hence, from July 2021 the company expects
prices to correct once supply normalises. The company has hiked prices by 5-6%, which
NSE code: PIDILITIND covers 75% of raw-material inflation. Further price hikes will be undertaken if input prices
continue to surge from current levels. The newly-acquired Huntsman Advanced Material
Free float: Solutions Pvt. Ltd. (HAMSPL) is expected to contribute revenue of ~Rs. 500 crore annually,
15.2 cr
(No of shares) which is achieving an operating profit margin (OPM) of about 35%. Thus, the company is
focusing on maintaining OPM of 20-24% in the medium term. The working capital cycle stood
stable at 62 days and cash & cash equivalents on books stood at Rs. 625 crore.
Shareholding (%)
Our Call
Promoters 70.2 View: Retain Buy with a revised PT of Rs. 2,315: Low penetration of water-proofing activities
as compared to other countries, shift to branded products (especially in rural markets), and
FII 11.9 introduction of new products augur well for the company from a long-term perspective. With a
strong brand portfolio, Pidilite has a monopoly in the domestic adhesives market and acquisition
DII 7.6 of the Araldite brand further strengthens its position in this space. The stock currently trades
at 64.8x its FY2023E earnings. A monopoly in the adhesives market, consistently strong cash-
Others 10.37 generation ability, and robust growth prospects will continue to keep valuations at a premium.
We maintain a Buy recommendation on the stock with a revised price target (PT) of Rs. 2,315.
Price chart Key Risks
2200
Any sustained slowdown in domestic business performance due to frequent lockdowns or increase
1900 in VAM prices would act as key risks to our earnings estimates in the near to medium term.

1600
Valuation (Consolidated) Rs cr
Particulars FY19 FY20 FY21 FY22E FY23E
1300
Revenue 7,078 7,294 7,293 8,204 9,926
1000
OPM (%) 19.3 21.6 23.0 22.7 23.8
Jun-20

Jun-21
Oct-20

Feb-21

Adjusted PAT 946 1,177 1,130 1,247 1,619

Adjusted EPS (Rs.) 18.6 23.2 22.2 24.6 31.9
Price performance
P/E (x) 110.8 89.1 92.9 84.1 64.8
(%) 1m 3m 6m 12m P/B (x) 25.3 23.5 18.8 16.6 14.1
Absolute 14.0 19.6 29.1 36.7 EV/EBIDTA (x) 68.4 60.1 60.0 54.4 42.8
Relative to RoNW (%) 24.5 27.4 22.5 20.9 23.5
7.6 16.7 13.0 -15.5
Sensex RoCE (%) 22.6 22.7 16.7 16.3 19.6
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

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H2FY2022 is expected to see strong recovery

GST implementation, deepening roots in rural India, and adding more consumer-centric products aided
Pidilite to post strong recovery in H2FY2021 after dismal H1 was affected by surge in COVID-19 cases and
subsequent lockdowns. Consumer bazar business, which registered a decline of 57% in revenue in Q1, saw
a sharp recovery of 7% in Q2 and grew in strong double digits in H2FY2021. Industrial product business saw
little late recovery but posted double-digit growth in H2Y2021. Resurgence in industrial and manufacturing
activities and resumption of real estate and construction led to improvement in the industrial (B2B) business.
Average COVID-19 cases have corrected by ~50% from its peak of 3,91,263 cases and are expected to further
recede in the coming days. Some states have already started working on easing lockdown norms. However,
in the second wave, states will be gradually opening the lockdown. Hence, recovery, which was anticipated
in Q2, might be seen from Q3FY2022.
Chart of growth/decline in various business
60
46
40
21 18
20 11
7.3
y-o-y growth

0
Q1FY21 Q2FY21 Q3FY21 Q4FY21
-8
-20

-40

-60 -53
-57

-80
Consumer Bazaar Industrial (B2B)
Source: Company; Sharekhan Research

Waterproofing segment to be the company’s key growth driver

Penetration of waterproofing products in India is very low with only 4 out of 10 households using waterproofing
while constructing new house, which is much lesser compared to other countries. It was the first segment
that saw early recovery post the easing of first wave of COVID-19 in India. With consumers now focusing on
the quality of the constructions and government standards improving, demand for waterproofing products
will improve in the coming years. Moreover, top companies coming into the space will help in improving
awareness about various waterproofing products. The traction for waterproofing products is also improving
in rural markets. Thus, the company expects this segment to be one of the key growth drivers in the long
run. Nina Percept Private Limited business got significantly impacted during the lockdown, but it saw strong
improvement in H2FY2021. In Q4, the business registered low single-digit growth due to strong resurgence in
construction/infrastructure activities. The company expects the business to strongly recover post normalisation
of the second wave.
Sustained focus on expanding rural penetration; Alternate channels to improve penetration
Pidilite’s products are available in 4 million outlets. Projects such as ‘Housing for All’ and rapid urbanisation
have improved demand for construction chemicals and waterproofing in rural markets. The company has
maintained its focus on expanding its reach in rural markets. The company has added 700 sub-stockists,
covering 7,000 villages in India. Further, the company is banking on alternate channels to increase awareness
and improve penetration of construction chemical products. Pidilite Ki Duniya (PKD) merchandise outlets are
available in sub 12,000 population villages, which are set up to create awareness and provide training to end-
users. At present, there are 60 such outlets. PKD’s sales grew by 1.3x in FY2021. E-commerce and modern
trade channels are also performing well, which grew by 4x and 1.3x in FY2021.

June 02, 2021 2

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Financials in charts

Trend in revenues and PAT Revenue break in various segments

8000.0 7294.5 7292.7
7078.0 Pigments & Others, 1.4
7000.0 6218.8 preparations,
6062.3 Industrial 5.9
6000.0 resins, 6.4
5000.0 Industrial
Rs crore

adhesives, 5.7
4000.0
Arts & crafts
3000.0
material, 7.1
2000.0 1174.2 Adhesive &
857.9 961.5 942.8 1125.7
1000.0 construction sealants, 54.2
& paint
0.0 chemicals,
FY2017 FY2018 FY2019 FY2020 FY2021 19.9
Revenues PAT

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Trend in OPM Working capital remained stable

24.0 66 66
65
23.0
64
22.0
63 62
21.0 62
OPM(%)

62 61
Days

20.0 61
60
60
19.0
59
18.0
58
17.0 57
FY2017 FY2018 FY2019 FY2020 FY2021 FY2017 FY2018 FY2019 FY2020 FY2021
Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Liquidity position remained strong Dividend payout remained high in FY2021

1600 1490 9.0 8.5
1423
1400 1342 8.0
1279
7.0
1200
6.0
1000
DPS (Rs.)

5.0
Rs crore

800
625 4.0
600 2.5
3.0 2.3 2.3
2.0
400 2.0
200 1.0
0 0.0
FY2017 FY2018 FY2019 FY2020 FY2021 FY2017 FY2018 FY2019 FY2020 FY2021
Source: Company, Sharekhan Research Source: Company, Sharekhan Research

June 02, 2021 3

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Outlook and Valuation

n Sector outlook - Long-term growth prospects of construction chemicals intact
India’s construction chemicals industry is at a nascent stage with a market size of Rs. 6,500 crore- Rs. 7,000 crore,
which is just 4%-5% of the global construction chemicals market. An increase in construction and infrastructure
activities with a strong adherence to quality will drive demand for construction chemicals in the near to medium
term. Further, growing adoption of green-building concept and increasing government regulations pertaining to
the use of high-quality waterproofing systems with low volatile organic compounds (VOC) and insulation would
result in a shift to branded products in the medium to long term. With the government focusing on improving the
growth prospects of the furniture segment and converting it into one of the major exporting hubs, demand for
adhesives is expected to increase in the coming years.
n Company outlook - Strong growth expected in FY2023
Despite a disrupted Q1FY2021 quarter, PIL ended FY2021 on a good note with flat revenue y-o-y and OPM improving
by 140 bps to 23%. Management expects strong recovery post normalisation of the pandemic environment due
to improving penetration of water-proofing products in urban and rural markets, shift to branded products in the
rural market, and market share gains from small players in the current scenario of rising input prices and liquidity
concerns. Further, recovery in international markets will give a boost to export revenue and performance of
international subsidiaries. The company endeavours to maintain its OPM at 21%-24% in the medium term.
n Valuation - Retain Buy with a revised PT of Rs. 2,315
Low penetration of water proofing activities compared to other countries, shift to branded products (especially in
rural markets), and introduction of new products augur well for the company from a long-term perspective. With a
strong brand portfolio, Pidilite has a monopoly in the domestic adhesives market and acquisition of Araldite brand
further strengthens its position in the domestic adhesive space. The stock currently trades at 64.8x its FY2023E
earnings. A monopoly in the adhesives market, consistently strong cash-generation ability, and robust growth
prospects will continue to keep valuations at premium. We maintain our Buy recommendation on the stock with a
revised price target (PT) of Rs. 2,315.
One-year forward P/E (x) band
2000.0

1800.0 70x

1600.0 60x

1400.0 50x
1200.0
40x
1000.0
30x
800.0

600.0

400.0

200.0
Sep-15

Feb-17
Jan-16

Sep-20

Jan-21
Mar-14

Mar-18
Dec-14

Jun-17

Dec-19

Jun-21
Aug-14

Jul-18

Aug-19
Oct-16

Oct-17
Apr-15

May-16

Apr-19
Nov-18

May-20

Source: Sharekhan Research

Peer Comparison
P/E (x) EV/EBIDTA (x) RoCE (%)
Particulars
FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
Asian Paints 86.9 75.8 62.2 53.8 48.0 40.1 20.7 19.7 22.7
Pidilite Industries 92.9 84.1 64.8 60.0 54.4 42.8 16.7 16.3 19.6
Source: Company, Sharekhan estimates

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About company
Pidilite is a leading manufacturer of adhesives and sealants, construction chemicals, crafts products, DIY
products, and polymer emulsions in India. Pidilite has divided its business into two segments: consumer and
bazaar products segment (C&B; includes adhesives, sealants, art and craft material, and others, construction
and paint chemicals) and industrial product segment (IP; includes industrial adhesives, synthetic resins,
organic pigments, pigment preparations, and surfactants). C&B accounts for ~84% of Pidilite’s standalone
revenue, while the balance is contributed by the IP segment. The company’s brand name, Fevicol has become
synonymous with adhesives to millions in India and is ranked amongst the most trusted brands in the country.
Some of the other major brands are M-Seal, Fevikwik, Fevistik, Roff, Dr. Fixit, and Fevicryl.

Investment theme
Pidilite has a monopoly in the domestic adhesive market on account of its strong product portfolio. Over the
years, the company has transformed itself from B2B to B2C players by consistently introducing consumer-
centric products in the domestic market. Though FY2021 and FY2022 will be affected by the pandemic
situation, its long-term growth prospects are intact as the company is continuously launching new products
under core brands, entering into new categories, expanding into neighbouring countries, and enhancing the
domestic distribution reach. Strong cash flows, lean balance sheet, and decent payout make it the safest
better in the volatile market environment.

Key Risks
Š Sustenance of the pandemic situation: If the global pandemic situation takes time to get under control,
recovery in the business environment will take more time, which will continue to affect the financial
performance of Pidilite in the near term.
Š Increased competition: Any increase in competition from established players would act as a key risk to
our earnings estimates in the near to medium.

Additional Data
Key management personnel
Bharat Puri Executive Director – MD
Apurva Parekh Executive Director
Pradip Menon Chief Financial Officer
Puneet Bansal Company Secretary
Source: Company Website

Top 7 shareholders
Sr. No. Holder Name Holding (%)
1 Genesis Indian Investment Co. Ltd. 5.0
2 Life Insurance Corporation of India 3.0
3 Axis Asset Management Co. Ltd. 2.3
4 Vanguard Group 0.9
5 Blackrock Inc. 0.8
6 Norges Bank 0.7
7 UTI Asset Management Company 0.4
Source: Bloomberg (old data)

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

June 02, 2021 5

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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