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Nath Balakrishnan

The Pidilite bond-wagon

INVESTORS with a long-term perspective can contemplate taking an equity exposure to the stock of the sealant and adhesive major Pidilite Industries, at the current price of Rs 226.

Pidilite is the market leader in the premium adhesives and sealants category with a share in excess of 80 per cent. Its product bouquet includes an array of such formidable brands as Fevicol, Fevikwik, Fevistik, M-Seal, Dr Fixit and Piditint.

Financial performance

For the half-year ended September 2002, the net sales at Rs 288.5 crore rose almost 14 per cent compared to Rs 253.3 crore for the corresponding previous period.

Raw material costs, as a percentage of net sales, were lower for the current half-year at about 37 per cent (41 per cent).

The company benefited from the bottoming out in the prices of some of its key raw materials, especially vinyl acetate monomer.

Going forward, with the prices of raw materials likely to inch up, profitability at the operational level may decline.

Pidilite registered an operating profit of Rs 65.1 crore for the period under review, close to 31 per cent higher than the Rs 49.8 crore posted in the corresponding previous period.

Profit before tax stood at Rs 52.8 crore compared to Rs 38.5 crore, a jump of 37 per cent.

After a higher provision for current taxation (Rs 18.1 crore compared to Rs 7.8 crore) as a consequence of the reduction in tax holiday benefits, the company posted a net profit of Rs 34.6 crore compared to Rs 26.6 crore posted in the previous half year, moving up 29.7 per cent.

Business divisions

Pidilite's business can be broadly divided into two segments: Consumer and bazar products and industrial products.

The present revenue mix is heavily skewed in favour of the consumer products group, which accounts for more than 70 per cent the earnings. It is in this category that the company has some of its strongest brands.

Mr M. B. Parekh, Managing Director, Pidilite Industries

Within this group, a lion's share of sales comes from the adhesives and sealants, followed by construction/paint chemicals, and art materials and other products.

Clearly, this is a company that is driven by strong brands — Fevicol and M-Seal are prime examples — that give it the leverage to command a premium vis-à-vis the competition in the market.

In a product category where consumer involvement could be low, Pidilite's emphasis on branding has lent the category a distinct FMCG hue. Going forward, the consumer and bazar products segment will continue to serve as the driver of topline.

The company has been aggressively pursuing opportunities for inorganic growth. It started off with an acquisition of Ranipal, a fabric whitener brand, and followed it up with the acquisition of M-Seal and Dr Fixit.

Its latest acquisition has been that of Steelgrip from Bhor Industries, a leading player in the electrical insulation tape category with a marketshare of 25 per cent. While these businesses do appear to be disparate, given the company's record of building and sustaining brands, these acquisitions would supplement the contributions of the other major brands in the company's stable.

Industrial products

The other segment of the company's business — the industrial products group — contributes in excess of 25 per cent of revenue.

Efforts to locate a partner for this line of business have been going on for the past few years, but have not fructified yet.

A look at the segmental numbers for the current half-year bears out the difference in the profitability between the consumer products division and the industrial products group.

The former posted a profit before interest and tax (PBIT) of Rs 29.8 crore, on a capital employed of Rs 162.7 crore, which represents a return of 18.3 per cent.

On the other hand, the industrial products group posted a PBIT of Rs 3 crore on a capital employed of Rs 101.1 crore, which works out to a return of just 3 per cent.

It is against this backdrop that the company's increasing focus on the consumer and bazar products should be seen.

If resources from the industrial products segment could be freed up and redeployed in the consumer products division, profitability numbers could be in for a significant upward revision.

Concerns

During fiscal 2001-02, the company also commissioned 14 windmills, on an expenditure of Rs 20.3 crore.

Ostensibly, this has been done to get certain tax benefits that would accrue to the company.

Having no commonality with the company's other lines of business, its plans to steer this business would merit a close watch.

Stock outlook

Being a family-owned outfit, more than 70 per cent of the equity is held by the promoters. This, in turn, means fairly low trading volumes of the stock.

If one were to look at the P/E multiple, Pidilite trades at 8.2 times its half-yearly earnings (annualised).

The valuations are on the low side compared to other players in the FMCG arena, such as Asian Paints, Colgate Palmolive or Hindustan Lever.

A part of the reason for the market valuing this stock on the lower side could be the fact that the company is now in multiple business segments, which are unconnected.

Looking ahead, should the company decide to either exit or find a partner for its industrial products group, the stock valuation would undergo a re-rating, considering that it would then get closer to being treated as a pure play FMCG company.

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