7 February 2012
3QFY12 Results Update | Sector: Consumer
Pidilite Industries
BSE SENSEX
S&P CNX
17,622
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,335
PIDI IN
506.1
183/123
-11/-20/17
72.4
1.5
CMP: INR143
TP: INR181
Buy
3QFY12 results below expectations:
Pidilite Industries (PDID) 3QFY12 results were disappointing with
adjusted PAT declining 7% YoY to INR790m (vs our estimate of INR920m). Sales grew 16.5% YoY to INR6.9b led
by ~14-15% volume growth in consumer and bazaar product segments.
INR depreciation impacts gross margins:
Gross margins declined 330bp to 43.2% due to steep INR depreciation
and higher VAM (Vinyl Acetate Monomer) prices on a YoY basis. Industrial products segment reported 2%
decline in sales and 43% decline in profits due to poor export demand and inventory de-stocking.
Estimates lowered:
We have lowered our FY12 EPS estimates by 5% and FY13 EPS estimates by 2.6% to factor
in lower margins in the consumer business due to high input costs and declining sales in industrial chemicals.
However, going forward, we believe the company would gain from appreciating INR as VAM prices have
eased to USD1,000/MT.
Positive on volume growth in consumer and Bazaar products:
We remain positive on volume growth in the
consumer and Bazaar segments despite the management's cautious outlook. We also believe margins in the
consumer and Bazaar segments would start expanding from 1QFY13; however, the industrial chemicals
segment's margins would take time to recover.
Valuations and View:
We introduce our FY14 EPS estimate at INR10.1/share and forecast 25% PAT CAGR over
FY12-14. The stock price has reacted from INR190 levels due to concerns over falling margins and growth
outlook. It trades at 17.3xFY13E EPS of INR8.3 and 14.1xFY14E EPS of INR10.1. Maintain
Buy
with target price
of INR181, 27% upside from the current level.
Amnish Aggarwal
(AmnishAggarwal@MotilalOswal.com); Tel:+9122 3982 5404

Pidilite Industries
Key takeaways from the concall
Consumer and Bazaar products has seen 22.6% sales growth in 3Q, growth is
higher in domestic market as the exports have grown at only 14%. Construction
chemicals sales have increased by 30% YoY. Although some headwinds are visible
in volume growth, it is too early to assume any definitive trend emerging.
Industrial chemicals sales have declined due to decline in exports by 15%,
primarily in USA and Europe. Sales have been impacted in industrial resins and
pigments; there has been inventory de-stocking at the customer level in
anticipation of lower prices.
Interest cost in 3Q includes MTM restatement of liability in respect of USD33m
FCCB.
VAM prices have declined to USD1000/MT from USD1100MT in the beginning of
3Q; INR appreciation will reduce the cost of inputs and help increase margins.
PIDI keeps inventory of 40 days of raw material, so 1QFY13 will show gains from
lower input costs for full quarter.
International business has reported strong growth in Middle East and Africa,
and South East Asia, South America has been adversely impacted due to poor
performance in Brazil. PIDI has taken a write off of INR96.9m in its investments
in Brazil.
Synthetic elastomer s project still hangs in balance as the board has directed to
consultant to look into a few more issues. PIDI has so far spent INR3.5b on the
project. Some outcome is likely by the end of March2012.
Standalone sales up 16.5%; Margins decline 260bp on input cost pressure
Pidilite Inds 3QFY12 results are below estimates with Adj PAT declining by 7%
to INR790m (est 920m) as INR depreciation impacted gross margins and industrial
chemicals reported decline in sales led by sluggish exports.
The company has reported sales of INR6.9b (est Rs7.1b), a growth of 16.5% led
by 14-15% volume growth in Consumer and bazaar.
Gross margins declined by 330bp to 43.2% due to steep INR depreciation and
higher VAM prices on a YoY basis. However, VAM prices (currently at USD100/
ton) have steadily declined and are now lower by 25-30% from their peak.
Management expects that with VAM prices remaining at lower levels and INR
appreciating, margins are expected to improve from 4QFY12.
Stable employee costs and 70bp decline in other expenditure restricted EBITDA
margin decline to 260bp at 17.4%. Other income was higher by 120% due to
INR75m onetime gain on relinquishment of tenancy rights. Diminution in value
of investment in the Brazilian subsidiary (INR 96.9m) and forex loss (INR24.9m)
were other exceptional losses, adjusting for these PAT was down by 7% to
INR790m.
PIDI has incurred a capex of INR900m for the year thus far and expects to incur
capes of INR1.25b. We note that this includes INR400m towards the elastomer
project.
7 February 2012
2

Pidilite Industries
Gross margins decline 330bp; EBITDA margins down 260bp
QoQ tax rate remains stable
Source: Company/MOSL
Consumer and Bazaar sales up 22.6%; Industrial sales fall 2% due to decline
in exports
Consumer and Bazaar sales are up 22.6% led by strong momentum in volume
growth which is higher by 14-15% for the quarter. Though margins are lower by
180bp YoY , they are up 70bp QoQ due to QoQ decline in VAM prices; however full
benefit was not visible due to steep INR depreciation making VAM imports costlier.
Appreciation of INR in 4Q is likely to provide support to margins as USD VAM
prices are ruling at USD1000/MT down from a peak of USD1250/ton. We believe
margins for Pidilite have bottomed out; margins improvement will be witnessed
from 1QFY13.
The continued robust growth in consumer and bazaar segment in spite of 5-6%
price hike in Fevicol towards end of 1Q indicates strong consumer demand. Though
management has indicated that operating environment is challenging, momentum
in growth in likely to continue.
Industrial product sales are down 2.1% while EBIT is down 43%, margins have
declined 770bp. The decline in sales is due to a 15% decline in exports (uncertainty
in US and Europe markets) and 5% decline in domestic sales. Domestic sales which
are linked to exports have seen a slowdown. Domestic and overseas customers
Segmental: Industrial segment drags down overall performance
Segmental
Consumer and Bazaar
Sales (INRm)
Sales Growth (%)
EBIT (INRm)
% Contribution
EBIT Growth %
EBIT margin %
Industrial Products
Sales (INRm)
Sales Growth (%)
EBIT (INRm)
% Contribution
EBIT Growth %
EBIT margin %
1QFY11
4,974
21.2
1,505
87.6
23.7
30.2
1,394
21.7
245
14.3
24.3
17.6
2QFY11
4,558
15.9
1,186
86.1
6.4
26.0
1,400
9.8
223
16.2
-16.4
15.9
3QFY11
4,499
26.5
1,144
83.9
28.2
25.4
1,425
33.1
261
19.1
27.8
18.3
4QFY11
4,098
27.1
791
77.1
26.6
19.3
1,575
24.4
272
26.5
10.3
17.3
1QFY12
6,127
22.8
1,586
87.7
5.4
25.9
2QFY12
5,604
23.2
1,281
85.5
9.7
22.9
3QFY12
5,521
22.6
1,303
90.9
15.5
23.6
1,662
1,646
1,400
22.8
17.6
-2.1
259
243
148
14.3
16.2
10.3
5.7
8.4
-43.2
15.6
14.8
10.6
Source: Company/MOSL
3
7 February 2012

Pidilite Industries
are also delaying purchases and not keeping inventory in anticipation of price
decline; however there have not been any significant orders cancelled. We believe
recovery in export market will be gradual.
Brazil performance drags international business; Elastomer project still on
hold, decision expected by March end
International sales increased 15.9% for the quarter at INR862m; however in
constant currency basis sales declined by 0.8%. South America (40% of
international sales) reported a 16.5% revenue decline; steep input cost pressure
resulted in continued losses. Sales in North America improved, with constant
currency growth of 9%; cash profits increased by 30% in the geography. Middle
East and Africa and South Asia performed well with 62% and 17% sales growth
respectively, with margins improving.
Elastomer project continues to be on hold with a decision expected by end of
4QFY12. The company has thus far invested INR3.54b in the project; INR400m has
been invested in the current year. We note that this is the second time that the
project has been stalled which raises doubts on its long term visibility. The selling
price of the product has remained steady at USD5.5-5.4/kg. PIDI has asked for
incremental details on the project by the consultant and is likely to take a final
call on the project in the month of March2012.
Reducing estimates by 3-5%; stock looks attractive post correction
We are cutting FY12 EPS estimates by 5% and FY13 EPS estimates by 2.6% due to lower
margins in the consumer business due to high input costs and sales decline in Industrial
chemicals. We believe that PDID will gain from appreciating INR as VAM (Vinyl Acetate
Monomer) prices have also softened to USD1,000/MT. We believe consumer and Bazaar
margins to start expanding by 1QFY13 while industrial chemicals will take some time
to recover. We remain positive on the volume growth scenario in the consumer and
Bazaar products despite cautious outlook by the management.
PIDI's synthetic elastomer project continues to remains in balance. We believe that
any final decision regarding the project including sale or induction of a partner can be
a big positive for the company. We remain confident of growth momentum in core
business of consumer and Bazaar due to differentiated product offerings and strong
brand strength of the company. We are introducing FY14 EPS at INR10.1/share and
estimate 25% PAT CAGR over FY12-14. PIDI has reacted from INR190 levels due to
concerns on falling margins and growth outlook and trades at 17.3x FY13 EPS of INR8.3
and 14.1xFY14 EPS of INR10.1. Maintain
Buy
with target price of INR181, a 27% upside.
7 February 2012
4

Pidilite Industries
Pidilite Industries: an investment profile
Company description
Pidilite is the largest branded adhesives player in India,
having an iconic brand like Fevicol. Apart from having a
strong presence in adhesives , the company has
expanded its presence in emerging segments like
mechanized joinery, modular furniture, flooring,
automotive care and waterproofing through Dr Fixit and
Roff.
Recent developments
25% decline in VAM prices are likely to provide some
respite to margins in 4QFY12
Valuation and view
We are reducing FY12 and FY13 EPS estimates by 3-
5% and to factor in higher input costs and sales
decline in industrial chemicals.
The stock trades at 22x FY12E EPS of INR6.5 and 17.3x
FY13E EPS of INR8.3. Maintain
Buy
with SOTP-based
target price of INR181.
Key investment arguments
We expect strong consumer driven demand to
continue and drive 15%+ volume growth for the
company in the future.
Strong brand leadership and pricing power will assist
margin expansion in the future.
Successful completion of the synthetic elastomer
project (est. cost Rs5.5m; INR3.4b already spent) can
provide earnings upside post FY12.
Sector view
We have a cautious view on the sector given the
slower income growth in the economy which might
impact volumes as well as profit margins of
companies.
Companies with low competitive pressures and
broad product portfolios will be able to better
withstand any slowdown in a particular segment.
Longer term prospects appear bright, given rising
incomes and low penetration.
Key investment risks
Continued increase in VAM prices which could impact
margins in the near term as price increases will be
with a lag.
Delay in commissioning elastomer project and longer
than expected payback period which could strain
cash flows.
Comparative valuations
P/E (x)
EV/EBITDA (x)
EV/Sales (x)
P/BV (x)
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
FY12E
FY13E
Pidilite
22.0
17.3
15.9
12.2
2.7
2.3
6.0
4.7
Asian Paints
29.8
24.7
19.5
15.7
3.0
2.5
10.5
8.6
EPS: MOST forecast v/s consensus (INR)
MOSL
Forecast
6.5
8.3
FY12
FY13
Consensus
Forecast
6.5
8.1
Variation
(%)
0.3
2.8
Target price and recommendation
Current
Price (INR)
143
Target
Price (INR)
181
Upside
(%)
26.6
Reco.
Buy
Stock performance (1 year)
Pi di l i te Indus tri es
200
175
Sens ex - Rebas ed
Shareholding pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
70.8
6.3
12.4
10.6
Sep-11
70.5
6.8
11.9
10.9
Dec-10
70.6
8.0
10.3
11.2
150
125
100
Feb-11
May-11
Aug-11
Nov-11
Feb-12
7 February 2012
5

Pidilite Industries
Financials and Valuation
7 February 2012
6

Pidilite Industries
N O T E S
7 February 2012
7

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