AMBIT INSIGHTS

SELL Results Update Stock Information Bloomberg Code:

PIDI IN

CMP (`):

252

TP (`):

227

Mcap (` bn/US$ bn):

129/2.1

3M ADV (` mn/US$ mn):

51/0.8

Stock Performance (%) Absolute Rel. to Sensex

1M

3M 12M YTD

(11)

(12)

43

15

(9)

(7)

35

18

Source: Bloomberg, Ambit Capital research

Pidilite Industries Moderate revenue growth; weak industrial sales Pidilite’s 1QFY14 revenues were 4% below our estimates and PAT was in line with our estimates. Overall revenue growth of 12% YoY was supported by 14% YoY growth in the Consumer and Bazaar business. The industrial business remained weak, with revenue growth of only 1% YoY. Gross margin expansion of ~140bps flowed down to PAT, helping net income increase 27% YoY. We expect the Industrial Products segment to remain weak for a few more quarters. Pidilite remains a high-quality defensive play in the consumer sector. However, the performance of the company's foreign subsidiaries and uncertainty over the final outcome of the elastomer project does not justify the current trading multiple of 26.0x FY14 EPS. We reiterate our SELL stance with a target price of Rs227. Results overview: Pidilite’s 1QFY14 results were 4% below our estimates on revenues and 1% below on PAT. Revenues increased 12% YoY during the quarter with the Consumer and Bazaar business growing 14% YoY (we estimate ~8% YoY volume growth in the Fevicol portfolio) and the industrial products business growing at just 1% YoY. Lower raw material prices during the quarter helped gross margins expand 140bps YoY to 46%. Forex gains recorded during the quarter helped in EBITDA margin expansion of 215bps to 21%, with EBITDA growth of 25% YoY. Lower interest costs offset lower other income, leading to PAT growth of 27% YoY. The company also announced the acquisition of Suparshva Adhesives Ltd, a company with a turnover of less than 1% of Pidilite’s turnover (possibly ~Rs300mn). Where do we go from here? Whilst the Consumer and Bazaar segment remains a key strength for Pidilite, we believe the Industrial Products segment will continue to face a moderation in demand for a few more quarters. With strong brand recall in the Indian adhesives and sealants segment, lack of organised competition for its flagship product, Fevicol (accounting for more than 50% of total sales), and high customer loyalty, we continue to view Pidilite as a high-quality defensive play in the consumer sector. However, the performance of the company's foreign subsidiaries and uncertainty over the final outcome of the elastomer project does not justify the current trading multiple of 26.0x FY14 EPS. The Group has already spent more than Rs3.5bn in capex on the elastomer project over the past four years. We await clarity from the management on the outcome of the elastomer project. Valuation: The stock currently trades at 26.0x FY14 EPS and 22.5x FY15 EPS, at a ~15% discount to its FMCG peer median. Pidilite has reported revenue CAGR of 16% over FY08-13 and we expect the revenue growth momentum to continue over FY13-16. We estimate earnings CAGR of 18% for Pidilite over FY13-16 and we reiterate our SELL stance on the stock with a target price of Rs227, an implied P/E multiple of 23.4x for FY14 and 20.3x for FY15. Margin contraction (due to INR depreciation) and muted sales growth (as the construction industry and discretionary spending remain weak) are likely to be negative catalysts going forward. We do not expect any material changes to our forecasts for Pidilite following the results announcement.

Analysts Rakshit Ranjan, CFA [email protected] Tel: +91 3043 3201 Shariq Merchant [email protected] Tel: +91 3043 3246

Ambit Capital Pvt Ltd

14 August 2013

AMBIT INSIGHTS

Quarterly snapshot (Rs mn) 1QFY14

4QFY13

1QFY13

1QFY14E

YoY

QoQ

Deviation from Ambit Estimates

Net Sales

11,237

8,390

10,026

11,645

12%

34%

-4%

Total revenues

11,237

8,390

10,026

11,645

12%

34%

-4%

Raw materials

6,067

4,380

5,551

6,347

9%

39%

-4%

Gross Profit

5,170

4,010

4,475

5,298

16%

29%

-2%

Gross Margin

46.0%

47.8%

44.6%

45.5%

137

(179)

51

Employee cost

1,113

944

967

1,153

15%

18%

-3%

Other expenditure

1,695

1,903

1,616

1,921

5%

-11%

-12% -9%

Total expenditure

2,808

2,847

2,583

3,074

9%

-1%

EBITDA

2,362

1,163

1,892

2,224

25%

103%

6%

EBITDA margin

21.0%

13.9%

18.9%

19.1%

215

716

192

Other income Depreciation PBIT Interest PBT Tax

97

217

159

228

-39%

-55%

-58%

192

174

161

181

19%

10%

6%

2,267

1,206

1,890

2,271

20%

88%

0%

55

61

111

18

-51%

-10%

203%

2,213

1,145

1,779

2,253

24%

93%

-2%

600

358

499

631

20%

67%

-5%

PAT before MI

1,613

787

1,280

1,622

26%

105%

-1%

Minority Interest

4

(26)

-

-

NA

-115%

NA

PAT before MI

1,609

813

1,280

1,622

26%

98%

-1%

3.1

1.6

2.5

3.1

27%

101%

1%

EPS Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

14 August 2013

AMBIT INSIGHTS Balance sheet Year to March (` mn)

FY12

FY13

FY14E

FY15E

Net Worth

13,261

16,515

19,761

23,482

Total Debt

1,484

510

500

-

473

508

508

508

Others

8,481

8,219

9,636

11,204

Total Liabilities

Current Liabilities

23,699

25,752

30,405

35,195

Fixed Assets

10,116

10,747

11,493

12,163

983

2,931

2,931

2,931

Current Assets

12,601

12,074

15,981

20,101

Total Assets Source: Company, Ambit Capital research

23,699

25,752

30,405

35,195

Investments

Income statement Year to March (` mn) Net Income

FY12

FY13

FY14E

FY15E

31,097

36,579

42,813

49,926

% Growth

18%

18%

17%

17%

13,694

16,498

19,694

22,966

EBITDA

4,668

5,788

6,740

7,860

PBIT

4,634

6,009

7,073

8,335

PBT

4,327

5,795

7,013

8,335

PAT

3,244

4,222

5,049

5,835

EPS

6.4

8.1

9.7

11.2

EPS Growth

5%

30%

20%

16%

FY12

FY13

FY14E

FY15E

4,634

6,009

7,073

8,335

Gross Profit

Source: Company, Ambit Capital research

Cash flow statement Year to March ( mn) EBIT Depreciation Others

637

686

755

830

(906)

(1,396)

(2,024)

(2,501)

716

(961)

143

(224)

Change in working capital

5,081

4,338

5,947

6,440

Cash flow from investments

(2,318)

(3,266)

(1,500)

(1,500)

Cash flow from financing

(2,828)

(2,539)

(1,814)

(2,614)

(65)

(1,467)

2,634

2,327

2,763

1,072

4,447

4,940

FY12

FY13

FY14E

FY15E

Gross margin (%)

44.0%

45.1%

46.0%

46.0%

EBITDA margin (%)

15.0%

15.8%

15.7%

15.7%

Net profit margin (%)

10.4%

11.5%

11.8%

11.7%

(0.1)

(0.1)

(0.2)

(0.3)

RoCE* (%)

32.0%

37.8%

37.9%

38.1%

RoE (%)

26.9%

28.4%

27.8%

27.0%

39.4

31.1

26.0

22.5

4.8

4.1

3.5

3.0

31.8

25.7

21.7

18.2

Cash flow from operations

Change in cash Free cash flow Source: Company, Ambit Capital research

Ratio analysis / Valuation parameters Year to March (` mn)

Net debt: equity (x)

P/E (x) Price/Sales (x) EV/EBITDA (x) Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

14 August 2013