pidilite industries limited final

8/2/2019 Pidilite Industries Limited Final

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Managerial Economics Prof

John

PIDILITE INDUSTRIES LIMITED

Since its inception in 1959, Pidilite Industries Limited

has been a pioneer in consumer and specialties

chemicals in India. Over two-third of the company’s

sales come from products and segments it has

pioneered in India. Their product range includes

Adhesives and Sealants, Construction and Paint

Chemicals, Automotive Chemicals, Art Materials, Industrial Adhesives,

Industrial and Textile Resins and Organic Pigments and Preparations. Most of

the products have been developed through strong in-house R&D. Pidilite

Industries is the market leader in adhesives and sealants, construction

chemicals, hobby colours and polymer emulsions in India. Pidilite ranks 131st

amongst the top 500 listed companies in India.

Their brand name Fevicol has become synonymous with adhesives to millions

in India and is ranked amongst the most trusted brands in India. Pidilite is also

growing its International presence through acquisitions and setting up

manufacturing facilities and sales offices in important regions around theworld.

The Company has 13 Overseas subsidiaries (4 direct and 9 step-down)

including those having significant manufacturing and selling operations in

USA, Brazil, Thailand, Dubai, Egypt and Bangladesh.

Values & Vision:

1. Be a business leader by promoting innovation and achieving Global

Standards.

2. Delight customers by offering quality products and services

3. Install a 'Can Do' attitude, nurture team spirit, learn continuously and

achieve a high

level of employee satisfaction.



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4. Adopt ethical, safe and environment-friendly practices.



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MAJOR BRANDS

Fevicol is synonymous with adhesives in India. Excellent

quality, extensive product range, close relations withcustomers and award winning advertisement have madeFevicol one of the most trusted brands in India and the largestselling adhesives brand in Asia.

Pidilite wholly owned subsidiary of Pidilite, acquired Cyclobrand in June 2006. The product range includes maintenance,performance and appearance products for DIY (Do-it-Yourself)

and professional car care segment.

Pidilite wholly owned subsidiary of Pidilite, acquired Sargent Art

brand in June2006. The products range includes crayons,tempera colours acrylic colours, markers, modelling clay andmany other products.

Pidilite offers a range of hobby & craft products under theHobby Ideas brand name. The products are complementedwith book, videos and training workshops to make hobby funand easy for hobby enthusiasts.

Pidilite offers a wide range of constructions chemicals underthe Dr. Fixit brand name. Dr. Fixit is market leader in retailmarket of construction chemicals and the products areavailable in all leading cement, hardware, and tile and paintshops.

Pidilite acquired Roff brand in 2004. Roff is a pioneer inconstruction chemicals in India and is well known for moderntile fixing solutions.

M-Seal is India's leading sealant brand. Pidilite offers a range of sealants forsealing, joining & repairing applications for both consumer & craftsmen marketunder M-Seal brand name. M-Seal is also gaining acceptance in internationalmarket.



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FINANCIAL OVERVIEW

(DOMESTIC-2009-10) The profitability of the Company significantly improved in the current

year(2009-2010) due to lower material costs, strengthening of Indian Rupee,

lower duties and control on costs. Sales growth picked up in the second half of

the year, due to improvement in economic conditions.

The Operating Profit and Net Profit, for the year at Rs 4132 million and Rs

2891 million increased by 60% and 97% respectively.

Income Tax for the current year at Rs 423 million is higher than Rs 150 million

(including Rs 28 million for Fringe Benefit Tax) in the previous year. In the last

year’s report, the Company had highlighted the impact of the economic

slowdown in India and abroad and its impact on the overall economic growth

rate and on particular segments in which the Company operates. The difficult

economic conditions continued in the first six months of current year and

improvement in growth rates was witnessed in the second half of the year.

However, there was substantial reduction in the input costs due to softening of

prices of commodity

chemicals and this together

with the strengthening of

the Indian Rupee, lower

duties and cost control

measures taken by the

Company have helped inimproving the year’s

performance.



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FINANCIAL OVERVIEW

(FOREIGN -2009-10)

The Brazilian subsidiary reported impressive results with 28% growth in

sales. This, together with lower material costs and control on costshelped the Company post cash profits for the year.

Operations in USA significantly reduced costs and improved margins.While overall sales remained flat, losses reduced by 38%.

The operations in Thailand posted cash profits on the back of 26%growth in sales.

During the year, Pidilite Industries Egypt, SAE and Pidilite SpecialtyChemicals Bangladesh Pvt Ltd commenced manufacturing operations in

Egypt and Bangladesh, respectively.

PIL Trading Egypt (LLC), a subsidiary of the Company’s step downsubsidiary (namely Pidilite Industries Egypt SAE), was incorporatedduring the year for the purpose of carrying on trading activities in Egypt,North Africa and COMESA countries.

The subsidiary in Bangladesh recorded profits in its first year of operations on the back of robust sales and good margins.

Performance of the subsidiary in Dubai was impacted by poor trading

conditions, resulting in losses.

In February 2010, Chemson Asia Pte Ltd merged with Pidilite InnovationCentre Pte. Ltd. (both wholly owned subsidiaries of PIPL).



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There was significant improvement in the performance of the overseas

subsidiaries with substantial reduction in losses due to measures taken to

improve sales and reduce costs.



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SOURCES OF FUNDS

VALUE ADDITION

The Company’s net worth

(Equity Capital + Reserves) has

grown from Rs 4118 million in

2005-06 to Rs 9386 million at

the end of 2009-10, giving a

Compounded Annual Growth

Rate (CAGR) of 22.87%.

As the definition goes, Reserves

is the amount appropriated out

of earned surplus (retained earnings) for future planned or unforeseen

expenditure.

The company can use these reserves for the purpose of issue of BONUS

SHARES, Mergers and Acquisitions, expansion and diversification, etc. Sudden

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currency or interest rate changes can also be handled, as Pidilite has a good

amount of reserves locked up. Also the net sales, and hence the profits, of the

company has been going high, year after year. As a result, the retained

earnings with the company have accelerated too.

They can use the reserves for fulfilling their expansion and takeover plans,

which will need huge sums of money. Expansion plans of the company range

from opening up 50 additional “Dr.Fixit Service Centre”’ to meet the evolving

needs of contractors, builders and end-consumers with regard to providing

services such as waterproof treatment, ceramic tile fixing, sealing gaps, etc, to

opening up subsidiaries in many foreign countries, taking over their

international competitors,

investing in Research &

Development which has been,

over the years, responsible to

help Pidilite launch products

that are now market leaders in

their own fields.

The share prices of the

company also have been

soaring during the last five

years and will go on

increasing, considering their profits, market leadership in their area of

expertise, excess reserves, timely dividend payments, expansion plans,

corporate social responsibility, significant contribution to energy conservation,

etc.



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The company’s goodwill is increasing, by every passing year.

MONTH SHARE PRICE(Rs) HIGH SHARE PRICE(Rs) LOW

April, , 2009 101.00 83.70

May, 2009 132.60 89.50

June, 2009 141.00 109.25

July, 2009 158.85 101.30

August, 2009 157.40 131.00

September, 2009 157.45 142.20

October, 2009 175.00 144.20

November, 2009 209.40 155.65

December, 2009 201.50 183.00

January, 2010 228.70 191.50

February, 2010 210.80 186.20

March, 2010 245.00 106.30

The share capital on the other hand has not increased significantly as the

owners need not pool in more funds, owing to the reserves which act as

general reserves, special reserves, cash subsidy reserves as well as capital

redemption reserves.

The market capitalization of the Company on 31st March 2010 was Rs 57876

million



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DEBT EQUITY

REASONS FOR INCREASE INDEBT IN 2007-2008

The company raised funds through FCCBs

in December 2007, so as to acquire a

Brazilian Company “Pulvitec do Brazil

Industria e comercio de colas e adesivos

Limitada” and M/S Hardcastle & Waud

Manufacturing Co. LTD. They also had a

Synthetic Elastomer Project in hand for

which they required Plant & Machinery,

Technology, Patents and Trademarks, etc. The finance for this project was also

made available through FCCBs.

FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB)

In December 2007, the Company raised US $ 40 million through zero coupon

Foreign Currency Convertible Bonds. The Bonds have a yield to maturity of

6.75% per annum (calculated on a semiannual Basis), and are redeemable in

2012 i.e after 5 years and 1 day from closing date. The Bonds are convertible

into equity shares of the Company at any time after 9 January, 2008 until 23

November, 2012 at a price of Rs. 256.035 per share which represents a

premium of 30% to the closing price of the equity shares of Pidilite Industries

Limited on the Bombay Stock Exchange Limited (“BSE”) as of 2nd November,

2007. The Bonds have been issued at par and will be redeemed, if not

converted into shares, at 139.37% of par on maturity. The Bonds are listed on

the Singapore Exchange Securities Trading Limited and the shares to be

issued upon conversion of the Bonds will be listed on the NSE and BSE.



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ACQUISITION IN BRAZIL

Pidilite Industries Ltd’s wholly owned subsidiary (WOS) in Brazil acquired in June 2007 entire share capital of “Pulvitec do Brazil Industria e comercio de

colas e adesivos Limitada” engaged in the business of adhesives, sealants and

construction chemicals. This Company and its manufacturing plant are located

in Sau Paulo, Brazil and the business has annual sales of approximately Rs.75

crores. This acquisition will help Pidilite enter high potential Latin American

market of adhesives and sealants.

M/S. HARDCASTLE & WAUD MANUFACTURING CO. LTD.

Pidilite Industries Ltd. acquired assets and business of branded sealants andadhesives from M/S. Hardcastle & Waud Manufacturing Co. Ltd., and

associates. The acquired assets include brands like Holdtite, Rustolene and

Leakgaurd, which have healthy market share in their respective segments.

The total annual sale of this business is Rs.15 crores.

SYNTHETIC ELASTOMER PROJECT

The Company entered into an agreement in June 2007 for acquisition of plant,

machinery, technology, patent & trademark of an international speciality

chemical company. The plant will manufacture synthetic elastomers. The plant

was located in Champaigner, France and was owned by Polymeri Europa

Elastomers, France.The company is in process of dismantling and shipping the

plant. The plant will be set up in a Special Economic Zone (SEZ) in Dahej in the

State of Gujarat in India. The plant is expected to commence commercial

production March 2010 and will have an initial capacity of 25,000

tons per annum. The capacity can be increased to 35,000 tons per annum by

debottlenecking. The total capital investment in the plant excluding

debottlenecking is estimated to be Rs. 5.3 Billion. The Company is likely to

incur total capital expenditure of Rs. 4.5 billion on this project over a period of next 18 months. The plant will have a capacity of 25,000 tons per annum. The

product has significant demand in international market and over 80% of

production will be sold in overseas market.

The company is also considering putting up Caustic Chlorine plant at an

additional investment of Rs. 0.9 Billion at the same location. Both Caustic and



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Chlorine are important inputs for the manufacture of Polychloroprene.

Polychloroprene Rubber is a specialty synthetic rubber featuring superior

mechanical strength load bearing capacity, adhesion to metal and weather, oil

and chemical resistant as compared to other synthetic rubbers. Over 80% of

the production is expected to be sold in overseas markets.

BUSINESS SEGMENTS

Pidilite Industries Limited (PIL) operates under three major business segments:

A] Branded consumer and bazaar/craftsmen products: This segment is a

major contributor to PIL’s revenue, which accounts for 73% to its total

turnover (standalone). The segment broadly constitutes Adhesives & Sealants,

Construction & Paint Chemicals and Art Material.

B] Industrial Specialty: This segment accounts for 21% of total sales. The

segment constitutes Industrial Adhesives, Industrial Resins & Organic

Pigments & Preparations, which largely cater to various industries such as

textiles, chemicals, FMCG, rubber, automobiles etc.

C] Others: Others segment constitutes VAM (Vinyl Acetate Monomer)

manufacturing unit, which was demerged into PIL w.e.f 1st April 2007. VAM is

a key raw material used by PIL (accounts for 20% of the total raw material

costs) for a wide range of adhesive products. VAM-based polymers are

commonly used in the production of plastics, films, laminating adhesives,

elastomers, inks, water-based emulsion paints, adhesives, acrylic fibers, glue,

cosmetics and personal care products, floor tiling, safety glass, building

construction, coatings. Recently the company has shut down its VAM plant,

since it became cheaper to import VAM rather than manufacturing.



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The company has built a strong image of durability and quality for its

products. Almost all the products enjoy a near monopoly in their segments and

have a very large market share (approximately 60%). PIL has an extensive

distribution network of dealers, sales representatives, offices & retail outlets

spread throughout the country. The initial strategy of was to make carpenters

realise that only 1-2 % of cost of furniture goes for adhesive. They approached

carpenters directly and this direct marketing was one of the most successful

strategies employed. It also has a wide range of products which find

applications in number of areas.

Range of Products Applications

Adhesive and Sealants, Construction &

Paints, Automative chemicals, Art materials,

Industrial adhesive, Industrial and textile

resins

Construction, plastic, textiles, paper, leather,

paints & engg. Industries.

“Fevicol” is the largest selling adhesive brand in India. Dr.Fixit is the leading

brand in construction segment. Strong brand image, client relationship,

research and development and extensive distribution network are the key

drivers of company’s sales.



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RESEARCH & DEVELOPMENT (R&D)

SPECIFIC AREAS IN WHICH R&D IS CARRIED OUT BY THE COMPANY:

R&D activities are carried out for development of new products, improvement

of existing products in the category of Synthetic Resins, Adhesives, Sealants,

Pigments and Pigment Dispersions, Intermediates, Surfactants, Art Materials,

Coatings, Fabric Care Products, Construction Chemicals, Maintenance

Chemicals, Emulsion Polymers, Vinyl Acetate Monomer etc.

BENEFITS DERIVED AS A RESULT OF THE ABOVE R&D:

Increase in sales due to product improvements and introduction of new

products; reduction in cost due to formulation

optimization, process improvements and cycle time reduction.

FUTURE PLAN OF ACTION:

Future R&D efforts will continue along present lines.

Year ended 31st March 2010 Year ended 31st March 2009

Capital 5.35 5.23

Recurring 87.60 77.81

TOTAL 92.95 83.04



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NET SALES

During 2005-06, PIL invested over $4

mn for establishing and expanding its

subsidiaries abroad. PIL acquired

Chemson Asia Pte Ltd, a Singapore-

based company engaged in the

business of manufacturing waterproof

coating and emulsion paints, thereby

adding to its existing, and rapidly-growing construction chemicals and

paints range.

The company also took over two other

construction chemical companies viz Jupiter Chemicals, a Dubai based

company & Pidilite Bamco (Thailand) to get entry in their markets and to

acquire technology with potential in India. Also acquired the Fine Art brand of

canvas & student art colours. This move helped PIL to strengthen its position

in the art materials market and helped it in boosting its sales in the school &

artist segments. PIL acquired Sargent Art, an education art materials company

(USA) & Cyclo, a car-care products manufacturer to get entry in high potential

USA market. PIL acquired assets and business of brands like Holdtite,

Rustolene and Leakgaurd, which have a very healthy market share in their

respective segments.

In FY08, Pidilite do Brasil, wholly-owned subsidiary of PIL in Brazil, acquired the

entire share capital of Pulvitec do Brasil Industrie e Commercio de Colas e

Adesivos Limitada, engaged in the business of adhesives, sealants and

construction chemicals. This acquisition has helped Pidilite enter high potential

Latin American market of adhesives and sealants.



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In FY09, operations of subsidiaries in UAE, Indonesia & South East Asia were

curtailed vying the environmental conditions. Subsidiaries showed good

revenues but disappointed on profitability front, reporting losses due to steep

input costs. Brazilian subsidiary had been impacted due to slowdown in Brazil.

The automotive chemical business and education art material company in USA

got affected due to issues of US slowdown. In 2009, PIL established adhesives

manufacturing facility in Bangladesh and Egypt to cater to growing volumes.

In FY10, Brazilian subsidiary showed good improvement on Q1 & Q2 as

compared to FY09. The subsidiary currently sells adhesive under local brands.

Company plans to market the products under ‘Fevicol’ brand name which willhelp in boosting sales.

Conclusion and Recommendations:

1. PIL net sales have grown at CAGR 24.8% over FY06-FY10.

2. Major factors for growth are growing demand in economy and user

industries.

3. Expected growth rate in following years less compared to previous

years. One of the reasons is shut down of VAM plant.

4. Also, consumer & bazaar and industrial products performed well.

Consumer & Bazaar will remain the main contributors.

5. Industry specialty segment expected to do well considering increase in

demand for industrial adhesives, industrial resins and organic pigments.

6. Also as and when VAM & Synthetic polymer operations resume, the

sales growth would be much higher going forward.

7. Improvement being witnessed in PIL’s subsidiaries especially US and

Brazil which contribute 85% of total subsidiaries turnover.

EXPECTED SALES:



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DIVIDENDPAYOUT

The year 2009-10 is the Golden Jubilee

year of the Company and recognizing

its significance, the Company has

issued bonus equity shares in the ratio of 1:1 in March 2010. The Board has

also recommended a Golden Jubilee Special Dividend of Re 0.50 per equity

share on the enhanced share capital after bonus Issue. The Company has

reached its present position with the support of its valued customers and all

stakeholders. The Company places on record its deep appreciation for their

support.

Term Finances



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The Company had borrowed US $ 17 million through an ECB Term loan

amounting to Rs 796.2 million, repayable in 3 annual installments. During the

year the Company has repaid the 1st of the 3 annual installments amounting

to US $ 5.67 million equivalent to Rs 262.9 million.

The Dividend paid for the year 2005-06 was Rs. 360 million including tax on

dividend; this is approximately 39.7% of the earnings of the year. The dividend

declared was Rs. 1.25 per share & the company has earned 2.5 times dividend

cover in this year.


dividend; this is approximately 36.9% of the earnings of the year. The dividenddeclared was Rs. 1.50 per share & the company has earned 2.7 times dividend

cover in this year.



declared was Rs. 1.75 per share & the company has earned 3.6 times dividend

cover in this year.



declared was Rs. 1.75 per share which is the same as the previous year & the

company has earned 2.8 times dividend cover in this year.

The Dividend paid for the year 2009-10 was Rs. 885 million; this is on the

enhanced capital base on account of bonus equity shares issued during the

year, in the ratio of 1:1. The dividend payout is approximately 39.7% of the

earnings of the year. The dividend declared was Rs. 1.50 per equity share

including Golden Jubilee Special Dividend of Re 0.50 per share & the company

has earned 3.3 times dividend cover in this year.



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Out of the current year’s profit, on 506.1 million equity shares of Re 1 each

(enhanced on account of bonus equity shares issued during the year)

(previous year @ Rs 1.75 per equity share on 253.1 million equity shares of Re

1 each), amounting to Rs 759.2 million (previous year Rs 442.9 million). The

dividend for the current year will be free of tax in the hands of shareholders.

The dividend payout amount has grown at a CAGR of 24.7% during

the last 5 years.



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CURRENT RATIO

The current ratio is a ratio of current

assets to current liabilities. It describes

the liquidity position of the company.

In the year 2005-06, the current assets

are 3059 million and current liabilities

are 1384 million which gives us a

current ratio of 2.2 approximately. This

ratio increases to 2.3 in the financial

year 2006-07 due to increase in

current assets. It should be noted that

the current liabilities have also

increased but the current assets have grown by a larger margin. The current

ratio for the year is 2.3

2007-08 saw a major increase in current assets which pushed the Current

Ratio from 2.3 to 3.1, inspite of the small increase in current liabilities. Theyear 2008-09 witnessed a minor drop in current assets, but a drastic increase

in current liabilities. Thus making the current ratio fall from 3.1 to 2.5

In the financial year ended March 2010, the annual report declared a drop in

the current ratio from 2.5 to 1.5, this is due to the fall in current assets & the

major rise in the current liabilities.



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As can be seen from above, the reduction in Debtors from the previous year,

suggest a comparative fair retutn on investments and hence a less risk of bad

dabts. Also the increase in loans given by the company from 868 million to

962 million, shows not only a positive CSR as well as responsible side of the

company, but it also shows that the company will be earning a good andsizeable interest on loans.



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SCOPE OF THE COMPANY

NEW PRODUCTS

In the adhesives category the Company has started expanding its range of

products by introducing new products for the joinery segment. These products

are used in mechanized joinery and modular furniture units. During the year

the Company acquired the retail wood working brand of Henkel, i.e. Woodlok.

Products under this brand were relaunched in select markets in the second

half of the year.

The Company has started expanding its range of Dr. Fixit Flooring Solutions for

use in industrial and commercial flooring. Superior grades of Tile Fixing

Products were introduced under Roff brand during the year. The Company has

introduced the SMARTCARE range of products for healthcare & hospitality

segments.

M Seal Super, a versatile epoxy putty meant for DIY applications which can be

used in both wet and dry conditions, was introduced during the year.

In the Arts & Stationary range several innovative products/modifications were

introduced to serve consumers better. Fevistik Blue and Fevistik Purple are

new introductions. Unlike regular white glue, these colored sticks, when

applied, appear colored but the colour disappears after a few seconds

enabling young children to see and control the application of glue.

New products launched during 2009-10 in the Industrial Products segment

range include Binders for water based links and overprint varnishes. A high

performance binder was introduced for decorative texture paints. In the

leather product range an important addition was made in the form of highperformance up gradation



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CONCLUSION

Pidilite Industries Limited on a stand-alone basis achieved 10% growth in net

sales.

However, excluding the sales from the “Others” segment, net sales growth

was 15%. Earnings

before depreciation,

interest, tax and

foreign exchange loss

increased by 60%,

profit before tax (PBT)

increased by 102% and

profit after tax (PAT)

increased by 97% on a

stand-alone basis.

The Company’s sales have grown at a CAGR of 18% over the last five years.

On a consolidated basis, Pidilite net sales grew by 10%, PBT increased by

144% and PAT increased by 144%. Overseas Subsidiaries reduced losses inthe current year due to reduction in costsand improved economic conditions.

EARNING PER SHARE-



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Book value per share & earning per share for the years 2005-06 to 2008-09

have been restated for the 1:1 bonus issue made in 2009-10.



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RETURN ON CAPITAL EMPLOYED= PBIT / Avg. Capital

Employed

DIVIDEND PAY OUT= Dividend/PAT




John

KEY INITIATIVES TAKEN BY THECOMPANY TO MAITNAIN THEIR

GOODWILL

SALES AND MARKETING:

Building network and product range for growth in semi urban and rural

markets –economy range, small packs and new products.

Back end operations strengthened through centralization

Focus on value added services to WSS

SUPPLY CHAIN:

Professionalizing CFA operations

Close monitoring and control on working capital

HUMAN RESOURCES:

Quality manpower recruited at senior levels to build long term capability

Renewed focus on Learning and Development

Non family professionals now occupying many key senior positions in the

company and their number and role is likely to increase.

pidilite industries limited final

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