Pidilite Industries, a leading manufacturer of adhesives, sealants and chemicals, has remained resilient, thanks to its strong market penetration and brand recognition. Though the pandemic has impacted the company’s performance in the June quarter, business has resumed in non-metros and rural areas. Given its near-monopoly in the market and wide product portfolio, it is well-placed to benefit from an improving demand.

The company operates in two major segments — consumer and bazaar (C&B) and industrial products. It is the market leader in both the segments with dominant market share in various sections, with brands such as Fevicol, Fevi kwik and M-seal.

Further, a good distribution network and market share gains are key positives that could boost the company’s growth when demand recovers.

This, along with effective marketing initiatives, has aided revenues in the past, and could aid growth in the future as well.

While there is a slowdown in demand from construction and industrial segments, dampening the top-line growth of the company, benign crude oil prices can aid margins in the short run.

That said, the stock, trading at a pricey valuation, can limit the upside in the near term. At ₹1,371, it trades at 49 times its likely per share earnings for FY22 (62 times its trailing 12-month earnings).

Investors can hold on to the stock.



Strong product portfolio

Pidilite Industries derives about 80 per cent revenues from the C&B segment, which comprises adhesives and sealants, including Fevicol and Fevi kwik (53 per cent of revenue), construction and paint chemicals (19.2 per cent), and art and craft materials (8 per cent).

The adhesives and sealants market has many small regional players and a few large players, and Pidilite dominates this segment (C&B) with a market share of about 70 per cent. The firm is likely to maintain its market leadership, thanks to its brand recognition and product presence across sectors, including construction, paint chemicals, manufacturing, schools, offices, and others such as plumbers and mechanics. The company registered an annual average revenue growth of 11 per cent between 2010-11 and 2019-20.

The balance 19 per cent of revenues comes from its industrial segment that includes industrial adhesives and resins, construction chemicals, organic pigments, pigment preparation and speciality polymers and co-polymers. Such products are used in making paper, textiles, paints, printing inks, leather and packaging materials. It also derives revenue (about 1 per cent) from sale of specialty acetates and other raw materials.

The company has an extensive distribution network (over 6 lakh dealers/retailers) across the country and caters to both domestic and international markets. This has helped the company maintain its market leadership. It also plans to increase its market penetration, particularly in rural and semi-urban areas.

Further, the company has been slowly foraying into non-adhesives businesses such as water-proofing, floor coatings, and home interiors and decoratives in the last 2-3 years, adding value to its portfolio. The company’s revenue from newer categories is likely to be healthy, given its ability to offer customised products and its pan-India reach.

Pidilite’s strong penetration in multiple sectors, improving presence in urban and rural areas and the government thrust on infrastructure bode well for the firm’s long-term growth prospects.

Benign raw material costs

Since October 2018, crude oil has been on a downward trend. This has helped bring down the company’s cost of raw materials significantly (crude oil derivatives).

For Pidilite, in FY20, raw material costs (as a percentage of sales) stood at 41 per cent, lower by 5 percentage points compared with the same period last year (46 per cent). The operating margin in FY20 stood at 23 per cent, against 21 per cent in FY19.

Going ahead, with crude oil prices inching up recently, raw material costs could move up, too. In the near term, however, crude prices are expected to hover around $40-45 per barrel.

Importantly, since Pidilite has near-monopoly in the segments it operates in, it is able to command better pricing than small and regional players.

Stable financial position

Though the June quarter was impacted by Covid-19, a marginal recovery was witnessed in the semi-urban and rural areas. But it could mainly be due to the release of pent-up demand.

The company’s revenue fell about 57 per cent y-o-y to ₹877 crore, while profit declined 94 per cent to ₹16 crore in Q1FY21. Growth challenges could persist in the next 2-3 quarters. The company, however, has negligible debt levels, which offer comfort.