MOSL: PIDILITE INDUSTRIES (Buy)-ANNUAL REPORT: GST and rational pricing spurring growth

Pidilite Industries | Annual Report: GST and rational pricing spurring growth; Wider incentive system, improved asset turns key highlights from annual report

(PIDI IN, Mkt Cap USD8.3b, CMP INR1146, TP INR1325, 16% Upside, Buy)

We delved into Pidilite Industries' (PIDI) FY18 annual report. Key highlights:

• Management explicitly mentioned in its annual report that the Goods & Services Tax (GST) regime is stabilizing. With the new tax structure now becoming the order of the day, organized names like PIDI stand to benefit from a longer-term perspective.
• The two acquisitions/ tie-ups during the year - Jowat and CIPY - hold immense long-term promise.
• PIDI invested INR1.5b in its subsidiaries in FY18. Of this, it infused INR339m in overseas subsidiaries, INR210m in domestic subsidiaries and INR963m for the acquisition of a 70% equity stake in CIPY Poly Urethanes.
• Notably, PIDI continued performing extremely well on the conversion cycle (down 2 days in FY18 to 35 days) and fixed asset turns (net fixed asset turnover was at 5.2x in FY18, up from 4.9x in FY17) fronts.
• Stock options were made more widespread, taking the idea of 'skin in the game' further ahead. Even at the promoter level, PIDI has among the highest promoter shareholding (increased marginally in FY18) in the consumer space.
• Strong volumes-led sales growth is also likely to drive healthy operating leverage, partly offsetting the impact of higher VAM costs. Nevertheless, the pricing discipline that enables faster conversion from ~30% unorganized trade in adhesives will have near-term margin implications. EPS growth in FY19, thus, is likely to be in single-digits before likely reviving FY20 onward. Apart from Titan (TTAN), PIDI is the only player to have already witnessed and likely to continue witnessing even more gains over the next few years as a result of the shift from unorganized to organized trade. Given the tremendous structural opportunity that is likely to lead to elevated earnings growth beyond FY19, we continue maintaining our Buy rating with a target price of INR1,325 (50x September'20 EPS, ~20% premium to three-year average).