Pidilite: Buy Recommendation By Edelweiss

Araldite buy: Perfect growth glue

Pidilite (PIDI) has been regular in terms of acquisitions. However, its latest buy of Huntsman Advanced Materials Solutions (HAMSPL) assumes significance given the sharpening focus of paint players on adhesive/sealants. We believe PIDI has huge potential to scale up HAMSPL given its superior distribution (direct as well as indirect).

We expect PIDI to expand the Araldite brand into new products and straddle price points within the same category. This acquisition will help it maintain lead over paint players in adhesives/sealants. The deal is accretive (HAMSPL was acquired at ~5x trailing EV/sales vs PIDI at ~11x) and will add ~6-7% to PIDI’s revenue. Maintain ‘BUY’.

Huge scope to scale up Araldite distribution

HAMSPL sells adhesives, sealants and other products under well-known brands such as Araldite, Araldite Karpenter and Araseal in the Indian sub-continent region. Though Araldite is the market leader in epoxy adhesives, PIDI’s direct distribution is significantly higher than the former’s. Also, Araldite has significant indirect reach, but overall PIDI has a bigger distribution network. We would draw parallels here with how HUL scaled up Indulekha–post acquisition, Indulekha’s sales jumped 4-5x in a few years.

Strong brand pull could lead to new products under brand Araldite

In CY19, HAMSPL’s business revenue was approximately INR4bn with gross & EBITDA margins and ROCE are in line with PIDI’s standalone business. Araldite is a strong brand and has potential for new launches. In our view, PIDI could follow HUL’s strategy of having multiple brands in the same category. Araldite is an iconic brand in epoxy adhesives and the acquisition fits into PIDI’s C&B business. Hence, we envisage revenue and cost synergies over a period of time. According to management, PIDI’s priorities for HAMSPL are: i) Identifying market potential and driving penetration. ii) Leveraging PIDI’s sales & distribution excellence. iii) Evaluating market positioning and strategy. iv) Driving growth.

Outlook and valuation: Structurally strong; maintain ‘BUY’

We like PIDI as it is a high-quality company with a niche consumption play imbued with strong brand equity in under-penetrated and high-growth categories. The company’s dominant position, vast reach (~3.2mn outlets) and strong connect with middlemen as well as consumers act as strong entry barriers.
Demand revival, entry in adjacent categories and demand shift from unorganised to organised players are likely to boost PIDI’s revenue. The HAMSPL acquisition should further bolster revenue. We have built in HAMPL’s revenue partially in our FY21 numbers (adding 3.7% to FY21 revenue) and fully going forward (adding 7% and 7.5% to revenues in FY22 and FY23 respectively). We retain ‘BUY/SN’ with revised TP of INR1,860. The stock is trading at 56.7x FY22E EPS.