Bountiful margin expansion in a tepid demand scenario February 03, 2016 Amnish Aggarwal amnishaggarwal@plindia.com +91 22 66322233 Gaurav Jogani gauravjogani@plindia.com +91 22 66322238 Rating Accumulate Price Rs567 Target Price Rs585 Implied Upside 3.2% Sensex 24,223 Nifty 7,362 (Prices as on February 03, 2016) Trading data Market Cap. (Rs bn) 290.6 Shares o/s (m) 512.6 3M Avg. Daily value (Rs m) 221.1 Major shareholders Promoters 69.73% Foreign 14.48% Domestic Inst. 5.20% Public & Other 10.59% Stock Performance (%) 1M 6M 12M Absolute 2.1 2.4 4.8 Relative 9.5 16.5 21.3 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 15.7 15.8 0.6 2018 17.9 17.3 3.4 Price Performance (RIC: PIDI.BO, BB: PIDI IN) (Rs) 640 620 600 580 560 540 520 500 480 460 Feb 15 Apr 15 Source: Bloomberg Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 PIDI reported 50.2% Adj. PAT growth on 700bps expansion in EBITDA, volume growth improved to 10% (1% in Q2) as impact of late Diwali, festival and marriage season and impact of tactical pricing boosted volumes. Gross margins expanded by 780bps due to gains from decline in prices of VAM and other crude linked inputs. Near term margin outlook looks strong, given further softening of crude prices. However, nearterm demand outlook is uncertain, given the impact of slowdown in housing/commercial segments and erratic monsoons. We estimate 39% PAT growth in FY16 and 21.5% PAT CAGR over FY15 18. We value the stock on SOTP (32xDec17 Standalone EPS) and arrive at price target of Rs585. We expect premium valuations to sustain, given strong brands and long term growth potential. Retain Accumulate. Standalone Q3 Sales up 8.8% on 10% volume growth: PIDI s volumes grew ~10% led by 11.5% volume growth in Consumer & Bazaar products and recovery in Industrial chemicals sales. Gross margins at 52.3% increased 780bps YoY (up 80bps QoQ) aided by benign input costs. EBITDA increased 52.4% to Rs2.8bn as margins expanded 700bps to 24.4%. 101% higher other income and 61% lower interest cost enabled 64.7% growth in PBT. 680bps higher tax rate curtailed PAT growth to 50.2%. Concall Takeaways: 1) Demand conditions have seen some improvement; however, the current trend cannot be extrapolated due to shift of festive season to Q3FY16 2) VAM prices declined to US$900/ton in Q3 v/s 950US$/ton Q2, current prices are ~900US$/ton 3) Input costs continue to remain soft YoY and margins will continue to remain robust in the short term. However, in the long term, such high margins are not sustainable 4) PIDI had undertaken trade initiatives like rebates and higher trade margins in a few products, which boosted Q3 volumes 5) Q3 ad spends were higher than H1FY16 and are expected to rise, going ahead 6) Product rationalisation activity taken in H1FY16 has impacted sales to some extent in Q3 7) Industrial sales recovery was more a function of recovery in domestic industrial markets as exports continue to remain impacted. Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues (Rs m) 43,981 46,582 53,619 62,836 Growth (%) 13.4 5.9 15.1 17.2 EBITDA (Rs m) 7,606 10,980 12,061 13,533 PAT (Rs m) 5,195 7,242 8,065 9,175 EPS (Rs) 10.1 14.1 15.7 17.9 Growth (%) 9.6 39.4 11.4 13.8 Net DPS (Rs) 2.9 3.5 4.3 5.0 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 17.3 23.6 22.5 21.5 RoE (%) 23.7 27.8 25.8 24.8 RoCE (%) 23.9 27.9 25.8 24.7 EV / sales (x) 6.5 6.1 5.2 4.4 EV / EBITDA (x) 37.7 25.8 23.2 20.3 PE (x) 56.0 40.1 36.0 31.7 P / BV (x) 12.4 10.2 8.5 7.2 Net dividend yield (%) 0.5 0.6 0.7 0.9 Source: Company Data; PL Research Q3FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Standalone: Q3FY16 Volumes up 10%, 780bps gross margin expansion enabled 50.2% Adj. PAT growth Particulars Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Revenue 11,767 10,816 8.8 11,652 36,476 34,299 6.3 Gross Profit 6,150 4,814 27.8 5,996 18,588 15,085 23.2 Margin (%) 52.3 44.5 7.8 51.5 51.0 44.0 Other Expenditure 3,282 2,932 12.0 3,191 9,636 8,847 8.9 EBITDA 2,868 1,882 52.4 2,806 8,952 6,238 43.5 Margin (%) 24.4 17.4 24.1 24.5 18.2 Depreciation 285 278 2.8 287 853 794 7.4 Interest 14 35 (61.0) 15 43 62 (30.1) Other Income 82 41 101.0 120 296 350 (15.3) PBT 2,651 1,610 64.7 2,623 8,352 5,732 45.7 Tax 788 370 113.1 792 2,466 1,452 69.8 Tax rate (%) 29.7 22.9 30.2 29.5 25.3 Adj. PAT 1,864 1,241 50.2 1,831 5,886 4,280 37.5 Exhibit 2: Gross margins expands 790bps on benign raw materials Exhibit 3: Adj. PAT up 50.2%, sales up 8.8% Gross Margins % EBIDTA Margins % Sales Growth (%) PAT Growth (%) 60.0 50.0 40.0 30.0 20.0 10.0 0.0 45.2 42.6 43.9 43.6 44.5 16.0 19.2 17.8 17.4 12.9 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 47.7 49.3 51.5 52.3 25.1 24.1 24.4 14.4 Q4FY15 Q1FY16 Q2FY16 Q3FY16 60.0 50.0 40.0 30.0 20.0 10.0 0.0 10.0 15.2 6.3 Q3FY14 19.3 19.5 14.6 5.4 8.2 8.7 15.4 12.1 3.4 6.7 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 31.1 Q1FY16 7.6 50.2 33.9 2.6 8.8 Q2FY16 Q3FY16 Exhibit 4: Consumer & Bazaar Volumes up ~11.5% YoY 25.0 20.0 15.0 10.0 5.0 0.0 Sales Gr. Volume Gr. 20.8 18.6 19.1 15.1 15.9 14.0 12.5 15.0 11.0 13.0 10.0 9.7 7.4 5.5 5.2 7.8 8.0 3.5 3.6 4.1 5.1 5.9 5.0 4.5 4.2 2.4 1.7 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 Exhibit 5: Q3FY16; VAM prices down 31.5% YoY and 5.7% QoQ 1600 1516 1500 1400 1447 1300 1200 1228 1160 1100 1000 1062 900 882 800 USD/MT Mar 13 May 13 Jul 13 Sep 13 Dec 13 Feb 14 Apr 14 Jun 14 Aug 14 Nov 14 Jan 15 Mar 15 May 15 Aug 15 Oct 15 Dec 15 Source: Bloomberg, PL Research February 03, 2016 2
Consumer and Bazaar Products 11.5% Volume growth Consumer and Bazaar products sales grew by 10.8% led by 11.5% volume growth as PIDI resorted to tactical trade discounting to prop up volumes. Sales growth was aided partially due to shift of festival and marriage season in Q3. EBIT was up 49.2% largely contributed by 750bps expansion in margins led by lower VAM prices, packaging and other inputs and improved sales mix. PIDI also took some price adjustments in few products in Q2FY16 which required intervention. Industrial Products: Sales increases 3.1%, EBIT up 46.5% Industrial product sales grew 3.1% (9.1% decline in Q2) as sales to domestic industrial consumers improved, while B2B customers who cater to the export markets continued to remain impacted. We note that 25 30% of Industrial chemical sales are linked to export of finished products which are reeling under global slowdown. EBIT has increased by 46.5% as margins increased to 17.5% due to benign costs (flat QoQ), we estimate 10% volume growth and ~6 7% price decline, given that industrial clients usually have an upper hand when it comes to pricing decisions. Exhibit 6: Sales rebound on festival and marriage season, margins expands as low crude oil prices enable lower RM costs Segmental Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY13 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Consumer and Bazaar Sales (Rs m) 7,822 6,988 10,169 9,135 8,803 7,668 10,921 9,612 9,751 Growth (%) 15.1 19.1 20.8 15.9 12.5 9.7 7.4 5.2 10.8 EBIT (Rs m) 1,559 1,228 2,413 1,997 1,893 1,373 3,270 2,756 2,825 % Contribution 91.6 70.3 95.0 52.0 87.2 84.4 91.7 87.9 88.8 EBIT Growth % (1.8) (10.0) (0.1) 3.4 21.4 11.8 35.5 38.0 49.2 EBIT margin % 19.9 17.6 23.7 21.9 21.5 17.9 29.9 28.7 29.0 Industrial Products Sales (Rs m) 1,939 2,193 2,169 2,327 2,039 2,157 2,185 2,116 2,102 Growth (%) 17.0 17.2 16.4 7.7 5.2 (1.6) 0.7 (9.1) 3.1 EBIT (Rs m) 181 184 161 267 251 288 335 370 367 % Contribution 10.6 10.5 6.3 7.0 11.5 17.7 9.4 11.8 11.5 EBIT Growth % (1.2) (21.0) (16.0) 8.2 38.8 56.9 108.4 38.6 46.5 EBIT margin % 9.3 8.4 7.4 11.5 12.3 13.4 15.3 17.5 17.5 Others Sales (Rs m) 69 105 111 119 123 98 138 100 90 Growth (%) 12.6 60.0 64.0 19.3 79.7 (6.8) 24.6 (16.0) (27.1) EBIT (Rs m) (37) (31) (33) (12) (28) (35) (39) 10 (11) % Contribution (2.2) (1.8) (1.3) (0.3) (1.3) (2.1) (1.1) 0.3 (0.4) EBIT margin % (54.1) (29.2) (29.5) (10.0) (22.5) (35.5) (28.1) 10.1 (12.6) February 03, 2016 3
International Business Q3FY16 Sales up 26.3%, EBITDA up 133% International business sales are up 26.3% in constant currency terms. EBITDA increased by 133% to Rs79.2m aided mainly due to good performance in North America and South East Asia. South America: Constant currency sales declined 16.7%. EBITDA loss, however, declined to Rs2.5m due to lower input prices and cost control initiatives. North America reported 22% increase in revenues and EBITDA of Rs51.9m due to 450bps margins expansion due to benign input costs. South East Asia sales increased 60.6%. EBITDA was up 70.7% aided by distribution expansion and new launches in Bangladesh, project segment in Thailand and acquisition and beginning of distribution business in Srilanka. Middle East sales are up 116.4% due to takeover of distribution of Pidilite Inds products, adjusted for this, sales would have declined YoY. EBITDA loss increased to Rs37.1m due to higher selling and advertising expenses. Exhibit 7: Constant currency sales growth at 26.3% for Q3, EBITDA at Rs79.2m, Brazil and Middle east continues to drag profitability International Subsidiaries FY14 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Sales (Rs m) 4,251 1,119 1,179 1,149 4,895 1,435 1,343 1,489 North America 1,854 540 510 397 2,061 634 578 623 South America 1,236 243 275 313 1,275 243 239 229 Middle East & Africa 346 114 160 223 627 217 247 261 South & South East Asia 816 222 234 217 933 341 280 375 Sales growth (YoY) 10.8 (0.9) 9.4 9.4 9.4 7.0 20.0 26.3 North America 9.8 12.8 13.5 2.7 11.2 (6.8) 6.9 22.2 South America 1.6 (33.2) (30.6) 26.9 3.1 (6.8) (1.8) (16.7) Middle East & Africa 13.9 56.6 76.8 109.0 81.3 64.6 116.4 63.2 South & South East Asia 29.7 3.5 9.7 9.0 14.4 27.4 26.2 60.6 EBITDA (Rs m) 44.2 64.9 34.0 (36.4) 127.8 137.4 85.2 79.2 North America 99.4 43.1 19.3 (11.2) 99.4 75.5 68.1 51.9 South America (140.7) (13.1) (11.2) (23.0) (86.1) (10.7) (8.4) (2.5) Middle East & Africa (51.4) (5.5) (13.3) (27.6) (48.5) (18.9) (29.6) (37.1) South & South East Asia 136.9 40.4 39.2 25.4 163.0 91.5 55.1 66.9 EBITDA (margin %) 1.0 5.8 2.9 (3.2) 2.6 9.6 6.3 5.3 North America 5.4 8.0 3.8 (2.8) 4.8 11.9 11.8 8.3 South America (11.4) (5.4) (4.1) (7.4) (6.8) (4.4) (3.5) (1.1) Middle East & Africa (14.9) (4.8) (8.3) (12.4) (7.7) (8.7) (12.0) (14.2) South & South East Asia 16.8 18.2 16.8 11.7 17.5 26.8 19.7 17.8 February 03, 2016 4
Income Statement (Rs m) Net Revenue 43,981 46,582 53,619 62,836 Raw Material Expenses 24,281 22,773 27,246 32,844 Gross Profit 19,699 23,808 26,373 29,992 Employee Cost 4,094 4,402 4,908 5,628 Other Expenses 7,999 8,426 9,404 10,831 EBITDA 7,606 10,980 12,061 13,533 Depr. & Amortization 1,077 1,224 1,364 1,524 Net Interest 95 53 53 53 Other Income 428 532 837 1,150 Profit before Tax 6,861 10,236 11,481 13,107 Total Tax 1,667 2,994 3,416 3,932 Profit after Tax 5,195 7,242 8,065 9,175 Ex Od items / Min. Int. (352) Adj. PAT 5,195 7,242 8,065 9,175 Avg. Shares O/S (m) 512.7 512.6 512.6 512.6 EPS (Rs.) 10.1 14.1 15.7 17.9 Cash Flow Abstract (Rs m) C/F from Operations 5,827 7,625 9,094 10,016 C/F from Investing (4,268) (5,294) (6,353) (6,997) C/F from Financing (1,997) (2,080) (2,563) (2,991) Inc. / Dec. in Cash (438) 251 179 27 Opening Cash 895 458 709 887 Closing Cash 458 709 887 914 FCFF 2,532 5,822 7,042 7,713 FCFE 2,513 5,885 7,072 7,763 Key Financial Metrics Growth Revenue (%) 13.4 5.9 15.1 17.2 EBITDA (%) 13.0 44.4 9.8 12.2 PAT (%) 9.7 39.4 11.4 13.8 EPS (%) 9.6 39.4 11.4 13.8 Profitability EBITDA Margin (%) 17.3 23.6 22.5 21.5 PAT Margin (%) 11.8 15.5 15.0 14.6 RoCE (%) 23.9 27.9 25.8 24.7 RoE (%) 23.7 27.8 25.8 24.8 Balance Sheet Net Debt : Equity (0.2) (0.3) (0.3) (0.4) Net Wrkng Cap. (days) Valuation PER (x) 56.0 40.1 36.0 31.7 P / B (x) 12.4 10.2 8.5 7.2 EV / EBITDA (x) 37.7 25.8 23.2 20.3 EV / Sales (x) 6.5 6.1 5.2 4.4 Earnings Quality Eff. Tax Rate 24.3 29.3 29.8 30.0 Other Inc / PBT 6.2 5.2 7.3 8.8 Eff. Depr. Rate (%) 7.0 7.1 7.1 7.1 FCFE / PAT 48.4 81.3 87.7 84.6. Balance Sheet Abstract (Rs m) Shareholder's Funds 23,495 28,572 34,012 40,098 Total Debt 58 120 150 200 Other Liabilities 545 620 705 805 Total Liabilities 24,097 29,311 34,867 41,103 Net Fixed Assets 12,881 13,608 14,444 15,370 Goodwill 68 68 68 68 Investments 3,504 3,684 3,864 4,044 Net Current Assets 7,644 11,952 16,491 21,621 Cash & Equivalents 3,982 7,397 11,548 15,943 Other Current Assets 12,236 13,310 15,230 17,752 Current Liabilities 8,573 8,755 10,287 12,074 Other Assets Total Assets 24,097 29,312 34,867 41,103 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 9,681 13,057 11,652 11,767 EBITDA 1,393 3,278 2,806 2,868 % of revenue 14.4 25.1 24.1 24.4 Depr. & Amortization 283 280 287 285 Net Interest 57 14 15 14 Other Income 78 94 120 82 Profit before Tax 1,130 3,078 2,623 2,651 Total Tax 273 886 792 788 Profit after Tax 772 2,195 1,828 1,857 Adj. PAT 857 2,192 1,831 1,864 Key Operating Metrics Y/e March Conusmer Bazaar Sales Gr.(%) 2015 2016E 2017E 2018E Adhesives and Sealants 14.1 7.0 15.0 Construction chemicals 17.1 8.0 17.0 Arts and others 14.2 14.0 17.0 Industrial & Speciality Chemicals Sales Gr.(%) Industrial resins 6.1 (7.0) 10.0 Industrial Adhesives 6.2 (6.0) 10.0 Organic Pigments 6.3 (6.0) 10.0. February 03, 2016 5
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