Pidilite Industries Limited (Pidilite)is the dominant player in the adhesive and sealant business. It has also established a strong presence in the construction paints and chemicals, organic paints & pigments, and industrial & textile resin businesses. The company proposes to focus on expanding its consumer products business and has been scouting for a joint venture partner for the resin and pigment businesses. In an exclusive interview with R Venkataraman and Toral Modi of India Infoline, Mr. M B Parekh Managing Director, shared his views on Pidilite's future plans and business strategies. Mr M B Parekh is a qualified chemical engineer from UDCT. He acquired a Masters in Chemical Engineering from University of Wisconsin, USA in 1969. He worked for a short period at Abbot Laboratories, USA before returning to India. He has been associated with Pidilite since 1972 and has over thirty years experience in the chemical business. He has contributed to and participated in the transition of the company from a small-scale industry to a large public limited company with a strong brand equity.
Q. What according to you is Pidilite's core strength?
We have 30 years of established presence in the business. Over 60% of our sales comes from products and segments we have pioneered in India. We have built a strong image of durability and quality for our products. A strong brand equity, ability to meet the consumers needs by a process of direct and close contact and continuous feedback from users and a wide distribution coverage are our key strengths.
Q. Your company is well known for its flagship brand Fevicol, which contributes to a large part of your turnover today. Which product segment will be the thrust area driving growth in the future?
Our thrust area in future will be the branded consumer and bazaar products which includes adhesives, sealants, art materials, construction chemicals, paint chemicals, maintenance products etc.
Q. Which is your most profitable product?
Branded consumer and bazaar segments are relatively more profitable as compared to the speciality industrial chemical segment
Q. What will be Pidilite's strategy for expanding market share in the core business of adhesive in the light of increasing competition from MNC's like Ciba Speciality and Hindustan Lever?
Pidilite proposes to put more emphasis on improving distribution and customer services. New marketing activities are being undertaken to strengthen the brands. Also new products are being introduced to serve different market segments.
Q. What new products are planned to be launched in the current year?
We plan to introduce several new products in the field of art materials, construction, chemicals and sealants. We are also looking at brand acquisitions that will enable us to leverage on our existing distribution network. We have just finalized the acquisition of the Ranipal brand of optical whitening agent sold in the consumer and retail segment from Indian Dyestuff Industries. The acquisition represents a strategic move towards expanding our branded retail product portfolio.
Q. Is the proposed hive off of your industrial chemical businesses of pigments and resins likely to fructify in the current year? Which are the companies that are being considering for a likely joint venture? Will the joint venture partner mainly provide technology or will also have financial commitment in the new venture?
We have given an assignment to investment bankers for working out the future direction for our Industrial Chemicals business. As part of this assignment, they will also look for potential partners who can provide technology and preferably participate financially. The exercise is likely to be completed by the end of this financial year.
Q. What has been the rationale for the merger of Nebula Chemicals and Pidilite Finance into the company? What was the methodology applied for fixing the merger ratio of 27 shares of Pidilite for 5 shares of Nebula Chemicals?
Nebula Chemicals manufactures certain grade of adhesives under trademark license from Pidilite. The amalgamation of Nebula Chemicals into Pidilite will increase sales volumes and manufacturing capacities of adhesives of Pidilite. The exchange ratio has been calculated by M/s. Bansi Mehta & Co, based on the valuation of Nebula Chemical Ltd. and the market price of the share of Pidilite. Pidilite Finance is being merged as it does not wish to continue its activities in the field of finance.
Q. Will Parekh Marketing also be merged with Pidilite in future?
The role of Parekh Marketing Limited is under review and the new proposal is likely to be finalized in the next six months.
Q. Tell us something about your Software Division - Pidilite Systems and Engineering Services? What are the company's future plans in this area?
Pidilite Systems and Engineering Services is in the area of specialized applications like Batch Control and Automation, Research & Development Software and Laboratory Information Management Software. This division with a team strength of around 15 people was set up mainly for development of internal IT solutions. There has not been any aim to convert into a full-fledged software company. Business plan and the direction for this business will be finalized shortly.
Q. What kind of R&D efforts does Pidilite undertake for new product development and innovation?
Pidilite has strong R&D tradition. Almost all products have been developed in-house through a team of dedicated professionals. Our R&D are continuously working on new product development and improvements. We have consistent track record of introducing several new products even' year based on feedback received from customers in various segments.
Q. With a greater focus on branded and consumer products, is your advertising and promotional expenditure like to go up?
We expect advertising and promotional expenditure to increase by 15-20% in absolute terms. It would also rise as a proportion of sales post hive off of the industrial chemical business.
Q. Post restructure and hive off the industrial division, Pidilite will have a fairly large branded consumer goods portfolio. Do you see sales growth accelerating after the hive off? What is the targeted topline growth for the next two years?
Last 4 years average growth for Pidilite was 14.2%. The targeted top line growth for the next two years is 15 to 20%
Q. What would be the extent of margin improvement post hive off?
Our last year's margin, i.e. profit before tax, which is 13.2% of gross sales, is likely to improve to more than 15% of sales, in case the restructuring process goes through as planned.
Q. How vulnerable are margins to raw material price trends? What is the demand supply scenario and likely price trends in key raw material industries like VAM?
Commodity prices of VAM and other chemicals used as raw material have been rising and are likely to see an upward trend over the medium term. In the case of consumer and bazaar products, we are able to pass on the increase in price of raw material to the customers
Q. What portion of your capital is employed in the industrial chemical business viz a viz in the consumer goods business?
About 55% of our capital is employed in the industrial chemical business.
Q. Most FMCG companies earn a high return on capital. How do you propose to improve return on capital employed. What is Pidilite's target ROCE?
Our return on capital for the last 3 years are as follows :
We aim to increase this through better product mix and better working capital management to approximately 40% in next two years.
Q. What is your outlook on the growth prospects in your key businesses?
We expect Adhesives and Sealant to grow at a rate of about 12-15% per annum & Pigment and Resin at a rate of 10-12?o per annum. Growth rate in art materials, paint chemicals and construction chemicals are likely to be higher than 20% per annum. Additional contribution to growth will be made by introduction of new products.