Pidilite Industries Ltd Management Discussions.

financial review

Consolidated Financials

Consolidated Net Sales grew by

3.1%

"EBITDA” (earnings before Interest, Taxes, Depreciation, Exceptional items and foreign exchange differences) before non-operating income, increased by

14.8%

Profit Before Tax (PBT) grew by

9.5%

PBT - excluding exceptional items* grew by

12.2%

Profit After Tax (PAT) grew by

20.8%

PAT - excluding exceptional items* grew by

24.4%

* Exceptional item represents impairment loss on plant and machinery at Dahej Elastomer Project amounting to Rs 55 crores in current period and impairment in value of investments amounting to Rs 18 crores in previous period.

On a constant currency basis, the overseas subsidiaries reported sales growth of

9.6%

EBITDA grew by

107.9%

due to higher sales and better gross margin due to softer input cost.

Domestic subsidiaries sales declined by

8.2%

EBITDA de-grew by

8.3%

on account of lower sales and hence higher absorption of fixed cost.

financial review

Standalone Financials

As a result of the nation-wide lockdown declared in March 2020, the standalone net sales in the last ten days of the quarter, and of the year, were lower than the same period last year by around Rs 150 crores. This is equivalent to around 11 % of Q4 net sales last year.

Lower sales in the last ten days of the quarter and the year resulted in last quarters standalone net sales growth reducing from around 9.6% as on 21st March 2020 to (4.3%)* as on quarter end.

The years standalone net sales growth reduced from around 7.1% as on 21st March 2020 to 4.0%* as on year end.

The consequent impact on standalone EBITDA growth is estimated at a reduction of 29.0% for last quarter and 6.0% for the year.

* Audited numbers, all other numbers are not reviewed/ audited by auditors.

For the year, sales volume and mix grew by

1.7%

and EBITDA, excluding non-operating income improved by Profit Before Tax (PBT) and exceptional items grew by

8.7%

Excluding exceptional items+ in current year and income from inter-company transfer of intangible assets and dividend income from subsidiaries, in last year, PBT grew by

Profit After Tax (PAT) grew by

12.5%

Excluding exceptional items+ in current year and income from inter-company transfer of intangible assets and dividend income from subsidiaries and effect of tax thereon, in last year, PAT grew by

23.3%

+ Exceptional item represents impairment loss on plant and machinery at Dahej Elastomer Project amounting to Rs 55 crores and impairment in value of investments of a subsidiary amounting to Rs 4 crores.

performance by industry segment (standalone)

The Company operates under two major business segments i.e. Branded Consumer & Bazaar and Business to Business.

Products, such as Adhesives, Sealants, Art & Craft Materials and Others, Construction and Paint Chemicals are covered under Branded Consumer & Bazaar segment. These products are widely used by carpenters, painters, plumbers, mechanics, households, students, offices etc.

Business to Business segment covers products, such as Industrial Adhesives, Industrial Resins, Construction Chemicals (Projects), Organic Pigments, Pigment Preparations, etc. and caters to various industries like packaging, joineries, textiles, paints, printing inks, paper, leather, etc.

In both the above business segments, there are a few medium to large companies with national presence and a large number of small companies which are active regionally. Multinational companies are also present in many of the product categories in which the Company operates.

consumer & bazaar

Branded Consumer & Bazaar segment contributed

79.9%

of the sales of the Company and grew by

5.4%

with volume and mix growing by

1.9%

Adhesives & Sealants category includes adhesives, sealants and tapes. This category contributed

52.6%

of the sales of the Company and grew by

4.1%

Construction and Paint Chemicals contributed

19.2%

of the sales of the Company and grew by

12.1%

Art & Craft Materials etc. contributed

8.1%

of the sales of the Company and declined by

1.%

business to business

Business to Business segment contributed

18.7%

of the sales of the Company and grew by

4.9%

with volume and mix growing by

3.9%

Industrial Adhesives includes adhesives used in packaging, footwear, cigarette, automotive industry and joinery. This category contributed

6.1%

of sales of the Company and grew by

0.5%

Industrial Resins, Construction Chemicals (Projects) etc. contributed

6.4%

of the sales of the Company and grew by

0.2%

Pigments and Preparations contributed

6.2%

of the sales of the Company and grew by

15.6%

others

The Others segment largely comprises of manufacture and sale of Speciality Acetates, raw materials etc.

human resources

The year under review witnessed significant progress in people practices, policies and processes, enabling the Company on its journey of Growing to Greatness.

The Companys Happy and Healthy (HAH) movement saw unique participation levels of 65%, a rise of more than 20% over the last year. New categories were introduced to engage employees more inclined towards mental or indoor activities like carrom, quiz and badminton.

To further strengthen the Learning and Development programmes, PACE, the signature programme for R&D managers was added to the existing bouquet of signature programmes for Sales and Marketing. Capstone, our programme for middle management saw its second batch successfully complete the course.

To strengthen the assessment process, the Company introduced a multi-rater stakeholder feedback process with the intention to bring in greater transparency and accountability in our managers.

The Human Resource Management System Workline has been strengthened with the implementation of multiple paperless processes across employee, self service areas of communication and relocation reimbursements, manage personal compensation and tax and personal profile updates. Additionally, to help digitise our hiring process, the integration of the Application Tracking System (ATS) has been a key step in garnering pre- and post-hiring intelligence.

Safety of our employees is of paramount importance and this was reflected both during the onset and living through the COVID-19 pandemic.

The Company has reset the ways of working keeping a long-term view in mind and is moving swiftly to a digitally enabled workforce which has learning, safety and agility as the cornerstones of recasting the way we work.

The total number of employees as on 31st March 2020 is 6,064.

outlook

Current Year Outlook

During the first half of FY 2020-21, economic activity may remain subdued due to a number of factors, such as social distancing, subdued demand and labour shortage. Recovery in economic activity is expected to begin in second half of FY 2020-21 depending on how effectively the country is able to contain the virus. Overall there remains significant uncertainty about the duration of the pandemic and the consequent downside risks to domestic growth.

Continued slowdown in the construction industry and economic growth can negatively impact sales growth for current year.

While major subsidiaries in India are taking initiatives to improve margins and achieve consistent sales growth in their respective businesses, the impact of the economic growth environment does pose a risk to these plans.

The Companys major international subsidiaries are in Bangladesh, Sri Lanka, USA, Brazil, Thailand, Egypt and Dubai. Various initiatives are being taken to increase sales and market share in Bangladesh and Sri Lanka.

The US subsidiary plans to maintain its focus on Retail and E-Commerce. The Brazil subsidiary is taking initiatives for continued growth in sales and margins. The business environment in these countries remain subdued as they all face the ongoing impact of the pandemic and consequent lockdown.

Outlook on Opportunities, Threats, Risks and Concerns

The Indian economy provides a large opportunity to the Company to market its differentiated products.

Slower growth of the Indian economy and stress in sectors, such as construction could impact the performance of the Company.

Overseas subsidiaries, by virtue of their relatively smaller size, remain vulnerable to the political and economic uncertainties of their respective countries.

COVID-19 related slowdown may impact the performance of the Company and its subsidiaries.

miscellaneous

The Companys Net Worth (Equity capital + Reserves) has grown from Rs 2,650 crores as on 31st March 2016 to Rs 4,465 crores as on 31st March 2020, giving a Compounded Annual Growth Rate (CAGR) of 13.93%.

The market capitalisation of the Company on 31st March 2020 was Rs 68,935 crores and has grown at a CAGR of 30.36 % since the IPO in 1993.

other matters

The following matters are elaborated in the Directors Report

• Risks and concerns

• Internal control systems and their adequacy

cautionary statement

Statements in this Management Discussion and Analysis Report describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ.

economic value added (EVA)

computation of eva

EVA = Net Operating Profit After Tax (NOPAT) - Weighted average cost of capital employed.
NOPAT = Net profit after tax + post tax interest cost at actual.
Weighted average cost of capital employed = (Cost of equity x average shareholder funds) + (cost of debt x average debt).
Cost of equity = Risk-free return equivalent to yield on long term Government of India (GOI) securities (taken @ 7.54%) + market risk premium (assumed @ 6.01%) x beta variant for the Company (taken at 0.75), where the beta is a relative measure of risk associated with the Companys shares as against the stock market as a whole.
Cost of debt = Effective interest applicable to Pidilite based on an appropriate mix of short, medium and long term debt, net of taxes.

 

Item 2015-16 2016-17 2017-18 2018-19 2019-20
1. Risk Free Return on Long Term GOI Securities 75% 6.5% 7.2% 7.3% 7.5%
2. Cost of Equity 12.9% 9.2% 11.4% 13.1% 12.0%
3. Cost of Debt (Post Tax) 0.0% 0.0% 0.0% 0.0% 0.0%
4. Effective Weighted Average Cost of Capital 12.8% 9.2% 11.4% 13.1% 12.0%
Economic Value Added (Rs in crores)
5. Average Debt 3 1 0 0 0
6. Average Equity (Shareholder Funds) 2,500 3,025 3,482 3,875 4,326
7. Average Capital Employed (Debt + Equity) 2,503 3,026 3,482 3,875 4,326
8. Profit After Tax (as per P&L account) 774 #$ 868 #$ 955 $ 979 $ 1161 #$
9. Interest (as per P&L account, net of Income Tax) 4 4 4 5 10
10. Net Operating Profit After Tax (NOPAT) 778 872 959 984 1171
11. Weighted Average Cost of Capital (4x7) 322 278 397 509 521
12. Economic Value Added (10-11) 456 594 563 475 650
13. EVA as a % of Average Capital Employed (12 e 7) 18.2% 19.6% 16.2% 12.3% 15.0%

# Profit After Tax excludes exceptional items.

$ Profit is after tax but before Other Comprehensive Income.

10 years5 financial performance

I GAAP

IND AS

Highlights 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 CAGR %
Operating Results
Sales and Other Income 2,530 3,017 3,615 4,169 4,724 5,134 5,409 5,627 6,285*** 6,484 11.0%
Manufacturing & Other Expenses 2,036 2,483 2,939 3,448 3,918 3,942 4,070 4,197 4,796 4,847 10.1%
Operating Profit 494 534 676 721 806 1,192 1,339 1,430 1,490 1,637 14.2%
Interest (Net) 27 21 8 10 10 6 6 6 7 13 (7.4%)
Depreciation 44 48 53 69 108 88 90 91 100 126 12.3%
Profit from Ordinary Activities 423 465 615 642 688 1,098 1,243 1,333 1,383 1,498 15.1%
Exceptional Item 25 13 (6) 6 18 27 94 - - 59 10.1%
Foreign Exchange Difference - Expense/(Income) 1 8 1 5 2 1 4 2 6 2 9.3%
Profit-Before Tax 397 444 620 631 668 1,070 1,145 1,331 1,376 1,437 15.4%
Current Tax 94 105 156 160 156 299 363 403 438 369 16.4%
Deferred Tax (1) 4 3 2 11 24 8 19 11 (33) 57.2%
Profit-After Tax for the year 304 335 461 469 501 747 774 909 927 1102 15.4%
Add: Prior Years Tax Provision written back - - - - - - - 46 53 - -
Profit-After Tax 304 335 461 469 501 747$ 774 $ 955$ 979$ 1,102$ 15.4%
Dividend on Equity Shares 103 * 112 * 156 * 162 * 179 * 404 *** 31 *** 293**** 364**** 827**** 26.1%
Retained Earning 201 223 305 307 322 343 743 662 615 275 3.5%
Financial Position
Capital-Equity 51 51 51 51 51 51 51 51 51 51 0.0%
Reserve (Less Revaluation Reserve & Misc. Expenditure) 1,088 1,327 1,682 1,988 2,298 2,599 3,348 3,513 4,136 4,414 16.8%
Net Wor th 1,139 1,378 1,733 2,039 2,349 2,650 3,399 3,564 4,187 4,465 16.4%
Borrowings 287 264 60 8 6 1 - - - - -
Deferred Tax Liability (Net) 41 45 48 51 55 75 84 103 113 76 7.1%
Funds Employed 1,467 1,687 1,841 2,098 2,410 2,726 3,483 3,667 4,300 4,541 13.4%
Fixed Assets **
Gross Block 1,205 1,343 1,469 1,637 2,005 1,775 1,856 1,975 2,110 2,538 8.6%
Depreciation 431 476 527 594 716 707 790 871 930 1041 10.3%
Net Block 774 867 942 1,043 1,288 1,068 1,066 1,104 1,180 1,497 7.6%
Investments in - Overseas Subsidiaries 233# 239 # 260 # 315# 341 # 355 # 270# 303# 330# 327# 3.9%
- Others 167 94 287 259 360 *** 748 1,523 1,483 1,860 1,496 27.6%
Net Current Assets 293 487 352 481 421 *** 555 624 777 930 1,220 17.2%
Total Assets 1,467# 1,687 1,841 2,098 2,410 2,726 3,483 3,667 4,300 4,541 13.4%

 

The Company transitioned into Ind AS from 1st April 2015 ~ Less than 1 crore
* Includes Tax on Dividend *** Previous years figures regrouped
** Including Capital Work-In-Progress and excluding Revalued Assets **** Paid dividend (including tax) as per IND AS
and Depreciation thereon $ Profit is after tax but before Other Comprehensive Income
# After deducting provision for diminution.

 

I GAAP

IND AS

Highlights 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
Funds Flow
Sources
Internal Generation 373 400 < 511 < 546 638 886 967 1,066 1,091 1,259
Increase in Capital & Reserve on conversion of FCCB - 15 50 - - - - - - -
Increase in Equity Share Capital - - - - - -~ -~ -~ -~ -~
Increase in Loans - - - 8 - - - - - -
Decrease in Investment-Others 99 73 - 35 - - - 283 - 102
Decrease in Working Capital - - 141 - 23 *** 329 - - - -
Total 472 488 702 589 661 *** 1,215 967 1,349 1,091 1,361
Applications
Repayment of Loans 135 23 204 60 2 5 1 - - -
Capital Expenditure (Net) > 124 141 128 169 353 134 88 125 159 393
Investments in - Overseas Subsidiaries 13 19 26 55 26 14 10 34 26 19
- Domestic Subsidiaries - - - 7 68 80 117 35 127
- Others - - 188 - 101 *** 590 695 - 255 -
Buyback of Equity Shares - - - - - - - 500 - -
Dividend 103 * 112 * 156 * 162 * 179 * 404 **** 31 **** 293 **** 364 **** 827 ****
Increase in Working Capital 97 193 - 136 - - 62 280 252 (5)
Total 472 488 702 589 661 *** 1,215 967 1,349 1,091 1,361
Ratios
Return on Average Net Worth % (RONW) (PAT divided by Average Net Worth) ## 31.7 27.6 29.3 25.2 23.7 31.0 28.7 27.4 25.3 26.8 @
Return on Average Capital Employed % (ROCE) (PBIT divided by Average Funds Employed**)## 32.3 31.2 36.2 33.7 31.6 44.0 41.1 37.4 34.7 34.2
Long-term Debt/Cash Flow 0.8 0.6 0.1 - - - - - - -
Gross Gearing % (Debt as a percentage of Debt plus Equity) 20.1 16.1 3.4 0.4 0.2 - - - - -
Current Ratio 1.6 1.8 1.6 1.8 1.7 2.5 3.4 3.0 3.0 2.6
Assets Turnover (times) (Gross Sales divided by Total Assets) 1.7 1.8 1.9 2.0 1.9 1.8 1.5 1.5 1.4 1.4
Debtors Turnover (Gross Sales divided by Debtors) 9.5 9.7 10.2 10.0 9.6 9.5 9.1 8.4 8.3 8.0
Inventory Turnover (Cost of Goods Sold divided by Inventories) 4.1 4.2 4.3 4.5 4.7 4.4 4.3 4.3 4.5 4.0
Operating Profit Margin (%) ## 19.9 19.2 20.5 18.7 18.4 25.3 27.7 26.9 24.6 26.0
Net Profit Margin (%) ## 16.9 16.3 18.5 16.5 15.7 23.3 25.6 25.1 22.8 23.8

 

The Company transitioned into Ind AS from 1st April 2015 ~ Less than 1 crore
> Includes Cost of Brands, Patents Trademarks and Businesses Acquired *** Previous years figures regrouped
* Includes Tax on Dividend. **** Paid dividend (including tax) as per IND AS
** Excluding Deferred Tax Liability (Net) @ As compared to FY 2018-19, FY 2019-20 RONW is higher by
< Includes security premium received on FCCB conversion by 6.2% mainly due to 11.6% growth in average net worth
## PAT, PBT and PBIT are excluding exceptional items against 18.5% growth in PAT