Pidilite Industries rating: neutral; past record on wealth creation should be sustained

As a part of our Wealth Creation Study released recently, Bharat Puri, MD of Pidilite (PIDI), highlighted certain factors he attributes to PIDI being ranked (i) second among all-round wealth creators over 1995–2020; (ii) fourth among the most consistent wealth creators over 1995–2020; (iii) among the biggest wealth creators over 1995–2020. Moreover, the company has been ranked the most consistent wealth creator of the recent decade (2010–20).

While near-term valuations at 68.2xFY22 EPS appear challenging, two main factors have led to robust topline and earnings growth for PIDI in the past; these are likely to help sustain strong growth in the future as well. (i) PIDI has a remarkable longer term track record of innovation, aimed at meeting unmet consumer needs. (ii) Innovation is supported by outstanding sales and distribution as well as a ‘pro-neurial’ culture, which has the best of professional efficiency and entrepreneurial spirit. In recent years, the company is increasingly focusing on the ‘Growth’ and ‘Pioneer’ categories to boost overall topline growth.

Spotting and fulfilling underserved opportunities with a solution/brand
PIDI has been committed to servicing customers in areas under-served in the country. With its consumer-centric approach, the company has been pioneering solutions for big and small applications for home and industrial use. Its largest brand Fevicol has over 200 SKUs for various end user requirements. PIDI has been the market leader in the Adhesives space with over 70% market share. Its products meet stringent regulatory and compliance norms, which have helped strengthen the consumer base not only in the subcontinent but also in other emerging markets.

Outstanding sales and distribution
Rapid expansion in the Growth business is attributable to significant efforts on category creation in recent years. The expansion of brands such as Fevikwik to nearly 4m outlets is testimony to the company’s out-of-the-box thinking on distribution expansion. Today, PIDI’s distribution reach is able to serve all villages with over 5,000 people directly. It has been making significant investments in Pioneer brands recently. The company has thus been able to synergise these businesses with existing ones in terms of distribution and end customers, i.e. contractors.

Offering a superior proposition, supported by solid R&D
The success PIDI has achieved in developing new categories and consistently improving legacy brands is possible only with a relentless focus on R&D. The company has doubled its R&D spend in the last four years. With over 150 professionals employed in (i) three fully equipped in-house R&D centres in India and (ii) five state-of-the-art technical research and innovation centres in Singapore, Thailand, Brazil, Dubai, and the US, PIDI has demonstrated its commitment to the customer-focused innovation process. While maintaining capex at 4–6% of sales, the company is setting up 11 new plants to meet the growing requirements of its core Growth and Pioneer categories.

Nurturing the strong culture
Apart from hiring the right people, PIDI emphasises sustaining its strong culture of innovation – showcasing a high tolerance for failure – thereby encouraging initiative. Furthermore, it stresses sustaining the ‘pro-neurial’ culture of the company, which assigns importance to professional efficiency while encouraging the innate entrepreneurial culture.

Valuation and view
We maintain Neutral from a one-year perspective on account of expensive valuations (68x FY22 EPS) and uncertain near-term recovery, especially in the B2B part of the business (~15% of sales). However, initiatives to expand the Growth and Pioneer categories could go a long way in revitalising medium-term sales and earnings growth, which have dropped significantly in the past four years. We maintain Neutral with TP of Rs 1,605 (55x Dec’22e EPS).