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Pidilite Industries Equity Research

HomeCompanyPidilite Industries Equity Research

Date of Research – 20 January 2016

Price – Rs. 241.00

About the Company

Incorporated on 28th July 1969, Pidilite Industries Limited (“Pidilite” or the “Company“), together with its subsidiaries, manufactures consumer and craftsmen products, and specialty industry chemicals in India and internationally. The Company’s product range includes adhesives, construction and paint chemicals, automotive chemicals, art materials, and industrial & textile resins. Pidilite enjoys leadership position in adhesives and sealants, construction chemicals, and hobby colours in India. The Company’s brand name ‘Fevicol’ has become synonymous with adhesives in India. The Company’s other brands include Dr. Fixit, Fevikwik, Motomax, M-Seal, and Fevistik.

Pidilite’s business can be divided into two main segments:

Consumer and bazaar products — This segment covers a wide range of products for consumer and craftsman applications that contribute nearly 81 % to the total sales. Within this segment, adhesives and sealants contribute nearly 48 % to consolidated revenues. The Company derives around 18 % revenues from construction products like coating and paints, waterproofing, tile fixing, sealants etc., under the ‘Dr. Fixit’ brand. 

Specialty industrial chemicals — This segment includes products like industrial adhesives, industrial and textile resins, and organic pigments and preparations. Through these products, Pidilite caters to packaging, textiles, paints, printing inks, paper and leather industries.

The Company has 19 manufacturing plants and 14 overseas subsidiaries in USA, Brazil, Singapore, Thailand, China, Egypt, Dubai and Bangladesh. Pidilite also established a state-of-the-art research centre in Singapore that is now a member of Singapore Chemical Industry Council (SCIC).

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 3,678.11 4,283.20 4,844.11 5,369.45  6,062.31
Expenses 3,077.58 3,606.20 4,067.53 4,190.74  4,802.52
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 600.53 677.00 776.58 1,178.71  1,259.79
Depreciation 68.58 81.16 117.76 133.13  115.14
Finance Costs 21.38 16.33 15.64 13.27 13.93
Other income 70.47 44.86 45.49 50.99  112.25
Exceptional items (0.29) 12.05 10.74 4.81 
PBT 581.33 612.32 677.93 1,078.49  1,242.97
Tax 159.51 165.27 169.41 322.11  385.05
PAT (before Minority Interest and share of Associates) 421.82 447.05 508.52 756.38  857.92
Profit/ (loss) attributable to Minority Interest 0.24 0.29 0.98 3.76 
Share of profit / (loss) of Associates (2.41) (3.04) (5.02) (2.93)  (5.30)
Consolidated Profit / (Loss) for the year 423.99 449.80 512.56 755.55  863.22

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 16.33 15.81 16.03 21.95  20.78
Net Profit Margin Ratio 11.47 10.44 10.50 14.09  14.15

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 50.77 51.26 51.26 51.27 51.27 
Reserves & Surplus 1,275.36 1,600.27 1,901.36 2,219.31 2,731.64 
Net worth (shareholders funds) 1,326.13 1,651.53 1,952.62 2,270.58 2,782.91 
Minority Interest 0.53 0.96 4.16 5.10 42.73 
Long term borrowings 92.30 0.50 9.36 
Current liabilities 890.75 857.68 885.92 958.04 961.44 
Other long term liabilities and provisions 13.35 15.19 31.92 23.92 41.56 
Deferred Tax Liabilities 46.80 49.87 53.73 57.67 70.20 
Total Liabilities 2,369.86 2,575.23 2,928.36 3,315.81 3,908.19 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 1,011.49 1,074.74 1,164.20 1,418.76 1,507.48 
Noncurrent Investments 7.37 8.48 26.16 90.74 117.79 
Current assets 1,324.22 1,467.02 1,641.60 1,670.68 2,148.24 
Long term advances and other noncurrent assets 26.79 24.99 73.42 113.04 107.53 
Deferred Tax Assets (net 3.22
Goodwill on Consolidation 23.93
Total assets 2,369.86 2,575.23 2,928.36 3,315.81 3,908.19 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 34.10 36.34 34.60 34.12 41.58 
ROE / RONW 24.46 25.67 23.04 22.57 27.18 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 3,678.11 4,283.20 4,844.11 5,369.45  6,062.31 
Growth (%) 17.64 % 16.45 % 13.10 % 10.84 %  12.90 % 
PAT (Rs. Cr.) 423.99 449.80 508.52 756.38  857.92  
Growth (%) 30.71 % 6.09 % 13.75 % 48.74 %  13.42 % 
Earnings Per Share – Basic (Rs. ) 8.27 8.77 10.00 14.74  16.77 
Earning Per Share – Diluted (Rs. ) 8.27 8.77 9.99 14.73  16.77 
Price to Earnings 31.81 34.52 59.58 40.14  45.68 

Dividend History

The Company has maintained an average dividend yield of 0.86 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Pidilite’s average current ratio over the last 5 financial years has been 1.70 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Pidilite’s average long term debt to equity ratio over the last 5 financial years has been 0.06 which indicate that the Company is operating with a law level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Pidilite’s average interest coverage ratio over the last 5 financial years has been 30.04 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Pidilite reported a promoter holding of 69.59 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 19.68 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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