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Sunday, February 21, 2010

Stock Analysis - Pidilite Industries

Pidilite Industries Ltd is a classic all-weather stock to buy that must be bought on severe market declines.

It reports excellent revenues and profits, year after year, has a suite of impregnable brands which it nurtures well, is a fine domestic consumption play, is run by smart promoters—and is usually expensive, which is why it should be bought when the market sells off crazily.

Pidilite is the leading manufacturer of crafts materials, adhesives and glues, DIY (do-it-yourself) products and industrial specialty chemicals in India. Its flagship brand, Fevicol, is the largest selling synthetic adhesives brand in India. Pidilite operates in two main segments—consumer/bazaar products and industrial products. The consumer and bazaar segment includes products like adhesives, sealants, art materials, construction chemicals and paint chemicals. This segment contributes more than 70% of its revenue. The industrial product segment includes industrial adhesives, synthetic resins, organic pigments, pigment preparations and surfactants. These are consumed by various industries including packaging, textiles, paints, printing inks, paper and leather.

The key driver to sales and earnings growth for Pidilite is the steady increase in the proportion of branded products with a clear edge in the marketplace. Pidilite has powerful brands like Fevicol, Steelgrip, Acron, Dr Fixit, Fevitite M-seal (acquired from Mahindras), Fevistik, Fevikwik, Fevibond, Piditint, Fevicryl, Prime, Ranipal (acquired from Mafatlals), etc, pushed through a marketing network of 40,000 dealers and over 400,000 retail outlets—an unmatched promotional and distribution reach. It is also known for a series of terrifically humorous TV commercials that lift the profile of its mundane, utilitarian products, especially adhesives.

While Pidilite has so far been focused on chemicals and, within that, different versions of adhesives, it did the unthinkable and launched a snack food called Chikkers. Chikkers were a kind of sweet crispies that were positioned as a health snack but sank without a trace. Its idea of creating a retail chain of Hobby Ideas to sell art materials and many of its own products under one roof in an attractive promotional environment has not worked either. The good thing is that the management is slow to commit funds to such experimental ideas and quick to pull the plug when they don’t work. Pidilite is uniquely placed due to its strong market position, product innovation, a wide distribution network, its ability to exploit brand loyalty and increased demand due to the construction boom. It also exports its products to over 50 countries including Brazil, South Africa, Egypt and USA and to countries of the Middle East and Europe. In FY09, exports accounted for about 26% of the total revenue.

A key issue with Pidilite is its susceptibility to swings in raw material prices. When raw material costs shoot up, margins are squeezed and the stock, which has low institutional ownership and following, stagnates or falls. The past two quarters have been great because raw material prices were low. In Q2FY10, net profit was up by 240%. Operating profit for the September quarter, at Rs119.59 crore, was the highest ever, even though margins will go down in the coming quarters as raw material prices have risen. On the other hand, topline growth will be higher, thanks to increased construction.

The Pidilite stock is never cheap and sports a P/E of around 14 on FY10 net profit. Buy stocks of Pidilite at around Rs 150 for long term investment portfolio.

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