Pidilite Industries: Buy

Recommendation: Buy

B. Krishnakumar

WITH no signs of a recovery in economic or industrial output, long-term investors can take exposure in defensive stocks with a relatively stable earnings stream.

Adhesive producer, Pidilite Industries, fits into the slot of a defensive investment candidate.

While the earnings are unlikely to improve significantly on account of the overall sluggish economic and industrial growth, the performance will not see a major deterioration by virtue of presence across business segments. As and when the economic growth gathers momentum, it will translate into a brisker growth rate for Pidilite.

Pidilite Industries' product portfolio includes sealants, construction and paint chemicals, resins and pigments. The company's products can be classified broadly into consumer and bazaar products, industrial and other miscellaneous products.

Of the three segments, the first contributes about 70 per cent to the turnover. This segment consists of the Fevicol range of adhesives and art work, and stationery items. The industrial products division, accounting for about 28 per cent of the total revenue, consists of construction chemicals, industrial adhesives and resins for textile and industrial applications.

The company's financial performance has improved steadily over the past few years. However, in recent quarters, the performance has slowed down because of stalled economic growth, and slowdown in construction and industrial production. These factors, along with a rise in price of the key input, vinyl acetate monomer (VAM), dented profitability the previous fiscal. For the year ended March 2001, the post-tax earnings remained stagnant even as the turnover rose about 13 per cent.

The performance in the first half of this fiscal also reflects a similar trend. Both turnover and post-tax earnings edged up marginally. But the company's performance may not appear all that unimpressive, if seen against the sharp slowdown across all segments of the industry.

The net profit would have been higher by Rs 4.04 crore but for the provision of deferred taxation. The revision in prices of products, coupled with a decline in price of VAM, have helped the company tide over the unfavourable business environment.

From an investment perspective, the company's performance will improve once the construction and industrial activity picks-up. Till such time, the recent flat trend in performance is likely to continue. Meanwhile, the company is concentrating on new product introductions across all business segments. This will result in higher volumes and better profit margins.

Pidilite also plans to hive off its non-consumer-based business in a bid to concentrate on the more lucrative consumer products. Though there has been no decisive development in this front, such a move will have long-term positive implications for the company.

Taking into account the array of strong brands and a relatively stable earnings profile, Pidilite Industries will rank as a relatively defensive portfolio candidate. Risk-averse, long-term investors willing to wait for at least one year are likely to be rewarded by taking exposures to the company.