Pidilite: Dividend Stock for Long Term Investment
Pidilite Industries Ltd. Limited (Pidilite) is a consumer and specialties chemicals company. Its product range includes adhesives and sealants, construction and paint chemicals, automotive chemicals, art materials, industrial adhesives, industrial and textile resins, and organic pigments. It has several market leading brands that include Fevicol, cyclo, Sargent Art, hobby ideas, Dr. Fixit, ROFF, and m-seal. Two thirds of company’s revenue comes from India’s internal market. Historically, the company has developed most of its product thought a very strong in-house development program. However, in recent years, it has embarked expanding this reach by overseas acquisition and setting up overseas manufacturing units.
Trend Analysis
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years 2000 to 2008.
- Revenue: Increasing trend with average growth of 18% (SDev. 7%).
- Earnings per share: Increasing trend with average growth of 20% (SDev. 18%). This shows very high year-over-year variability.
- Net cash flow from operations: Overall, the net cash flow from operations has an increasing trend. For most part, the net cash flow has been very close to the reported net profit. However, since 2007, it is less than reported net profits. Not a good observation.
- Profit/Loss from operations: Looking at standalone profits only, the corporation is showing consistently increasing profits from its operations. Good observation.
- Reported net profit: Increasing trend. Good observation
- Gross margins: A slow downward trend on gross margins. 2008 gross margins lower than historical average of 16.5% (narrow stdev. of 1.36%). Still not an alarmingly low level. Neutral observation.
- Operating margins: Operating margins in-line with historical average. Neutral observation.
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.
- Dividend per share: Chart 3 shows that consistent dividend payments. Neutral observation.
- Payout factor: This is ratio of dividends per share divided by EPS. It has been maintaining consistently ratio in 20s%. This is an indication that management believe in sharing some percentage of profits with common shareholder. Good observation.
- Dividend growth rate: The rate of dividend growth is highly variable. It has high variability. On an average it is 22% for last 8 years. 2006 through 2008, the as company’s earning grew with general economy, it shared increasing dividends with shareholders. Good observation.
- Ratio of cash from operations to reported net profit: Until 2006, this ratio is has been fluctuating around one. 2008 shows quite a bit of reduction. I would like to understand where are all of profits coming from? Not a good observation.
- Ratio of profits from operations to reported net profit: This ratio is more than one. A silver lining.
- Ratio of Cash from operations to total debt: Significantly less than 1.0 and quite drastic drop from 2.0. The company seems to have taken on debt. It will require cash to service this debt (i.e. less cash for dividends)! Not a good observation.
Trend Analysis - Pidilite Industries
Dividend Cash Flow vs. Risk Free Savings Cash Flow:
Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 1.9% at current price of Rs. 91.20; and (2) savings interest rate is 7%.
- Best case scenario: considering average dividend growth rate of 22% for last eight years, the dividend cash flow will be only 0.88 times the cash flow from savings interest.
- Worst case scenario: considering low end of the dividend growth of 2% for last eight years, the dividend cash follow will be only 0.18 times the cash flow from savings interest.
- In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 2.4% with average dividend growth of 22%. At this yield the buy price is Rs. 74.00.
Projected Beta-based Expected Return:
I measured Beta of Pidilite’s stock risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks eight year Beta value is 0.46. This means Pidilite’s stock is relatively less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 10.9%.
- Now factoring in 10.9% of expected return into the worst case dividend growth of 2% and current yield of 1.9%, the total cash flow is 2.32 times the savings interest rate.
Fair Value Calculation
I am continuing my analysis to estimate the fair value so that we can understand return characteristics for this investment.
- NPV price based on 15 year DCF: Rs. 90.4
- Average high yield price calculated based on past 9 years: Rs. 66.0
- Pricing relative to 9 year average PE ratio: Rs. 93.1
- Pricing based on PE ratio of 12: Rs. 62.7
- Graham number: Rs. 54.5
The range of fair value is calculated as Rs. 64.7 to Rs. 73.4
Qualitative Analysis
Over the years, Pidilite has been a very stable and slow growing corporation. It has had a very favorable dividend strategy in which it consistently shared its profits with shareholders. In addition, historically, it has been a very low debt company, with most of the products being developed in-house. I like this aspect of Pidilite. However, in last two years it has made efforts to grow in international markets like any other Indian corporation. Since 2007 onwards, it has taken on debt to fund its overseas acquisition and international growth. The balance sheet shows that the total debt has increased from Rs. 79 crore (in 2000) to Rs. 502 crore (in 2008). Just in year 2008 alone, the debt level increased to Rs. 502 crore (from 138 crore in 2007).
I took are quick look at company’s December 2008 quarterly investor update. In this update, the company is acknowledging the challenges it is facing in international markets. It mentions that its overseas subsidiaries continue to operate at loss and it is expecting that scenario to continue.
Price Chart : Pidilite Industries
Summary…
I like Pidilite as a company, its brands, and management’s dividend strategy. I also like the fact that it does not have to depend completely on international revenue. Two thirds of its revenues come from India markets. The table below shows the return characteristics of the investment scenario for next 10 years (Note: this return characteristic is relative to savings cash flow and relative to index performance).
Return Characteristics : Pidilite Industries
My concern with Pidilite is about its higher level of debt and continued drag of international operations. Sometime in June 2009, Pidilite is going to declare its annual results for period ending March 2009. I believe these upcoming results will provide a true picture of how Pidilite has been affected by the current global downturn. In my income portfolio, I would continue to hold Pidilite’s stock. I would not be adding any new position, and wait until stock falls within fair value range. I would also wait for declarations of results.
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Full disclosure: I own common stock of Pidilite.
Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my personal risk profile. Please do your own research before making an investment decisions for Pidilite.
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Is your blog monetized. what motivates you publish this analysis here. It is lot of work and i do think you would give this out free. Do you plan on subscription service?
Yes, my blog is monetized. And I do not have any plans on subscription service. But that’s not a bad idea. Would you subscribe to my blog? or any analysis that I do? let me know.
yes, i does take a lot of time. but i think it is worth my time, because i invest for 8+ years.
I have lots of interest on this company than a trader and like a value investor. The very first, their products have monopoly in the adhesive sector and it showing handsome growth.
Sherin’s last blog post..Be a money saving expert by improving your skills
Sherin: always good to see you.
Read your article “It’s a Team Game, Stupid!”
http://www.moneyvidya.com/blog/its-a-team-game-stupid/?dsq=9238543#comment-9238543
“Investing is like a game of cricket. It is team game. You may be leader to run your portfolio, but your portfolio is your team” Dude its the leader who will strategise and decide the portfolio and is responsible for choosing the right mix.
The stocks will work after that.
In trying to make the article interesting, you tried comparing cricket with stocks and I must say, I have never seen such a rubbish comparison.Just to make the article eye catching u wrote 3 paragraphs of absoulte non sense.
And thn when u got on the right track, u wrote common sense.
PS- Do u hav a personal vendetta against Ganguly?
I have seen ur other articles n u sure are good but plz refrain from posting such illogical and useless articles!!
Will surely bring down ur brand value …
Cheers!!
AA
AJM:
At an outset, thank you taking time to comment. I appreciate your viewpoint. It is absolutely not necessary that we have to agree on everything. We can always agree to ‘disagree’.
(1) You taking few seconds to leave a comment tells me this was (perhaps) not a illogical and useless article. If it were, then you may not have commented on it. Unknowingly, you just gave an importance to this useless article. Didn’t you?
(2) Instead, you could have focused on giving any thought provoking comment on any other posts on this blog that you many have liked (if any). You do mention you like other articles. So my interpretation is, you thought this was more important to comment with negativity (rather than positivity).
(3) If you interpreted this article as a vendetta against Ganguly, then my friend you were not able to understand it properly. I would like you to read it one more time. I would like you to “point me specifically” where I have said negative against Ganguly?
(4) The article is not about leadership (i.e. Ganguly), it is about giving importance and valuing the role of each element of the team. I never even questioned the fact that leader will strategize or not. I only mentioned that, in addition to strategy, it also requires focus/attention on the different elements of the team.
(5) You claim I wrote “absolute nonsense”. I did it unknowingly. If I look at your response, you “knowingly” added to this absolute nonsense. So who wrote absolute nonsense ?
(6) You mentioned, i wrote “common sense”. My question to you is what is wrong in mentioning about common sense? Deriding it, saying it is common sense, does not add any value to the discussion. You didn’t add to it nor did you critic it? BTW – if common sense was so common, every investor would be a millionaire. And the concept of brokerage houses, financial advisors, financial planners, etc would not exist.
As a matter of fact, unknowingly, your response solidifies the premise of the article. We focus more on leader and forget about the team.
I usually do not respond to comments which are accusatory in nature with no constructive bias. However, you mentioned “brand value” in the end, which made me respond.
First, I am not here to sell anything (which would affect my brand value). This is an online journey which I am sharing with like minded folks. In the process, I expect to continue my learning process.
Second, brand value is not based one persons opinion. It may act as an influencing seed. However, based on my articles on this blog, or my future intentions, it may go down or go up. Best example is, few years back a particular brand of cola (pepsi of coke, can’t recall) was defiled (true or false is not the point). The point is its intentions were clean and honest, and hence it continues to thrive (after a short blip).
So do we agree to “disagree” now ?
Macha,
My comment was nothing against you but the way the article was presented. It was as they say “global gyaan”. You do have a lot of time free to send such a huge response .I appreciate that.
A sports team works with the balanced mix of a good leader and a great team which can thoroughly implement what the leader strategies. Same goes for stocks though luck plays a little more role here.Right?
Dude,
My way of writing could have been mild, but try focusing on the essence of the same. I don’t find any reason to answer the loads of queries/points u have. Only point is in trying to make the article creative, u messed up.
As for the constructive argument u r talking abt, I m always open to that.
Hope nothing is taken personally.
BTW r u doing MBA or have done one???
AJM:
you showed again, you just can’t make any positive contribution. IF you were really up to constructive argument you would have demonstrated by now !!
you mentioned “…I don’t find any reason to answer the loads of queries/points u have…”. I take it as you just cannot, and are not capable of doing it.
Claiming article being crap without suggestion to improve is BS. You believe something is wrong, show me what is wrong, how I can improve. That’s what I am here for, to learn.
I salute your ignorance. Isn’t the whole internet about “global gyan”. Loads of information? Aren’t all books about “gyan”. You responses suggest you don’t read books (lack of gyan?)
You asking me about MBA? What does it have to do with MBA here? you just gave me a “absolute nonsense” tag. Now what are you doing here by asking this question?
You came to my blog (my home) and left distasteful comments. I am not like our government (if you know what i mean). If one enters my house with distasteful language, you better be ready to take it back in same breath.
you also left your comment on a wrong article? which has no basis.
I do not take comments from my readers personally, as long as they do not make personal attacks. I am always more than happy to take constructive critics and accept mistakes. Alas if only you had spent time here and read my responses. But I guess you are more eager to spread negativity (and sincerely make any contribution)
My Best Wishes to you !
PS: No connection with MBA
“”A sports team works with the balanced mix of a good leader and a great team which can thoroughly implement what the leader strategies. Same goes for stocks though luck plays a little more role here.Right?”"
No response about the above comment?? What happenned? You had an answer for everything else!!
Look for negativity do you!!!
Constructive argument-ny idea wat does tht mean?
I wrote in the last comment dude try to understand the essence. But alas you need brains for that!!!
You need steps for improvement!! I told you exactly what the problem was! As a good writer which u believe ur try focussing on positives.
I can only laugh off!!! hahaha
“I do not take comments from my readers personally, as long as they do not make personal attacks” – Just to clear your doubts and ignorance…Its an attack on ur way of writing …not u ……
Hope the gyaan is enuf for u !!!
best wishes!!!
AJM:
I could certainly present constructive argument on “… leader who will strategise and decide the portfolio and is responsible for choosing the right mix.”
But I think you may not be interested in a constructive discussion, so I will leave that aside.
I have 100 shares of pidilite in my portfolio for long term, good analysis
khalid
asa Khalid ,
You cannot go wrong with Pidilite. If it comes down within my buy range, i will add more. Thanks for stopping by, kh,
asa khalid,
I was disappointed to see one of my dividend article posted on your blog at this link.
http://bellthebull.com/2009/05/15/dividends-should-necessary-to-buy-a-stock/
All articles on my blog is copyright material . I request you to either (i) remove it; or (2) attribute it to this blog.
Please contact me for “format of proper attribution”. I could not contact you from your blog because it asks for login.
Best Wishes,
Hi,
Nice analysis here too but Pidilite is expensive too just like Asian Paints.
Regards,
Dilip Lillaney
Dilip Lillaney’s last blog post..Punj Lloyd Ltd.
Dilip,
Thanks for stopping by and leaving a comment.
Best Wishes,
Hi as usual I like the detailed research and analysis here. I was studying pidilite and its fundamentals I like the company. Waiting for it to come in a buy range. Since most of your articles move around dividend analysis I wanted to know if you have seen royal orchid hotels. They seem to have an impressive dividend, would like to hear your views on that aspect of the company.
sumi’s last blog post..Geodesic- Mundu, Chandamama, Spyder waiting to see what’s next!
Sumi,
Thanks for stopping by and good words. Royal Orchid Hotels is on my list for evaluation. Since you requested (and i already have the data), I will a post my analysis early next week. Stay tuned!!
Best Wishes,
Hey TIP Guy, great work.
Wonderful analysis esp the Dividend Cash Flow vs. Risk Free Savings Cash Flow. Quite an innovative way to analyse.
Could you elaborate on the Graham Number?
Hi
I a admiror of your site and your analysis of shares. I used to take good articles from different sites and sorry that you are disappointed for that. I don’t want to delete it and want to attribute it to your site, plese tell me the proper formate.
Yesterday only I saw your comment, sorry for being late.
Thanks
Regard
Khalid
Khalid,
I sent you an email with my feedback. Thanks for your support.
Best Wishes,
Hi,
i m analysing dividend stock i found that shipping corporation of india have gud track record..but still the price of share is not moving up as compare with other stock which have very bad dividend record…people justify that price by word of growth stock…can u comment on difference between growth stock and dividend stock with reference to shipping corporation………is this stock value buy?
Hello Chetan,
I haven’t looked into Shipping Corp of India. Will do shortly. Generally, shipping companies is capital intensive and have quite a bit of debt in their kitty. Cash flows are closer to debt, AND this makes them out of focus for me. I am not saying they are bad, it just does not fit into what I am looking for (or my scheme of things).
What do you mean by “people justify that price by word of growth stock”? Can you elaborate? I did not understand.
Good question/suggestion about Ship. Corp of India.
Best Wishes,
i found that some stocks running high multiple P/E ratio….and people justify there price with explaination that these stocks are growth stocks…they having multiple growth in future so they running with high P/E ratio..
Hello Chetan,
Got it now. Since they are growth stocks, folks justify it saying it has future “expected” growth built into it.
AND I am assuming you are looking for my thoughts on shipping corp in the context of growth and value stocks. Hmmm… let me think about it. I will get back to you.
Best Wishes,