Our recent interaction with Pidilite’s (PIDI) top management reaffirms our confidence in its ability to gain market share and create future growth drivers. The company expects the core portfolio (two-thirds) to grow 1–2x GDP, growth portfolio at 2–4x GDP, and pioneer portfolio to touch Rs 1 billion in three years (implying 13–15% growth). Waterproofing segment has huge opportunity landscape (paint-to-waterproofing ratio at 1:15 vis-à-vis 1:6 globally). We value other market leaders such as HUL and Britannia at 55x FY20E EPS each. Given strong demand recovery, PIDI’s market leadership and NPDs we are raising the target multiple to 50x (45x earlier) that yields a revised TP of `1,334 (`1200 earlier). We will however closely watch the VAM price trajectory. Maintain ‘Buy’.
In spite of signs of intensifying competition, PIDI management remains confident of maintaining its turf comfortably aided by brand equity and strong distribution reach – Fevikwik sells at 4 million outlets. PIDI also has the second-deepest distribution reach (40,000 outlets out of the 60,000 universe) after Asian Paints. Adhesives are likely to sustain a strong run with new applications (globally, EVs need huge amount of adhesives; latest aeroplane wings too do not use nut-bolts but adhesives!). Management’s focus on volume growth over margin expansion will further erect a big barrier for new entrants. Recent floods in Kerala provide an opportunity to PIDI to push its waterproofing range of products PIDI is smoothly filling gaps in its portfolio through either acquisition/JV or license agreement. India has been the fastest growing geography for WD40 since its acquistion by PIDI. PIDI also acquired CIPY, the largest player in floor coatings (target markets: car parking decks, doctor clinics, food factories, etc); it has a JV with Jowat, a leading manufacturer of hot adhesives.
Demand revival, entry in new markets/adjacent categories and anticipated demand shift from unorganised to organised players are likely to drive PIDI’s revenue and earnings. We ascribe 50x FY20E EPS to arrive at a target price of `1,334. At CMP, the stock is trading at 43.8x FY20E EPS. We maintain ‘Buy/SP’.