Can Pidilite keep blowing its trumpet?

Walk into any hardware store on Mumbai’s crowded Andheri-Kurla Road and you will be greeted by huge cans of Fevicol adhesive, smaller packs of M-Seal precariously perched on top of each other and rolls of Steelgrip insulated tape usually lying stacked in a corner. Hansraj Gupta’s Satyam Plywood & Veneer is no different, except that he has a larger store than most and an unusually extensive basket of Pidilite products to offer — apart from various size packs of the original synthetic resin adhesive, the white-painted shelves prominently display other products such as Fevicol SpeedX, SR 998, Terminator and Woodgrip. “We sell close to 1 tonne of Pidilite products every month, which is about a third of our monthly sales. If I had more space, I would stock all of its products,” says Gupta. Stroll a little further down the road and Sankalp Stationers is equally happy with Pidilite products. Store owner Pravin Kumar says customers don’t want other brands even if they are priced lower. “They ask for Fevistick glue and Rangeela paints by name,” he points out.

A finger in each pie - Graphic

Since its inception over 50 years ago, Pidilite’s Fevicol has become synonymous with glue: Fevicol for all-purpose adhesive, Fevistick for paper glue and Fevikwik for instant, one-drop adhesive (see: A finger in each pie). So much so, that the brand even made it to the lyrics of a Bollywood ‘item’ song last year. But then, Pidilite has worked hard at becoming ubiquitous. Its brand is available at over 1 million retail outlets across the country, serviced by one of the most extensive distribution networks — 4,000 dealers, 26 depots and 20 manufacturing plants. That ubiquity reflects in the numbers as well. In the past decade, Pidilite’s revenue has climbed from Rs 765 crore in FY04 to Rs 3,615 crore in FY13, a compound annual growth rate (CAGR) of 19%. Net profit over the same period has grown at 25%, from Rs 61 crore in FY04 to Rs 461 crore last year. And investors clearly approve: the stock price, too, has gone up more than 28% in the past five years. 

It’s not all good news, though. Pidilite’s ambitious overseas moves haven’t worked out quite as it planned nor has the industrial products business expanded as fast as the company would have liked. The result is that the Mumbai-based company is bonded more firmly to its consumer bazaar business than ever before. How will this play out for Asia’s largest selling adhesive brand? 

Sticky business

Pidilite was started in 1954 by Balvantray Kalyanji Parekh to manufacture specialty chemicals and pigment emulsions for the textile industry. The entry into synthetic glue manufacture began five years later and right from the start, Parekh did things differently from his competition (one foreign brand and several local, no-name variants). Rather than simply sell the glue to dealers, his team would reach out directly to carpenters and furniture makers, explaining why its product was superior and could be used for various purposes. Sales picked up and before long, Parekh made adhesives the main line of business. The flagship synthetic resin glue aside, over the years, the company launched several different types of adhesive, but the practice of first sharing the product with the people who actually use it — carpenters, plumbers and craftsmen — remains. Starting in the 1990s, Pidilite has also introduced a series of Fevicol Furniture books, showcasing samples of Indian design — some 31 volumes have been released so far, which have collectively sold over 10 million copies. “Such on-ground activities have given us medium to long-term benefits for over 50 years now,” says Madhukar Balvantray Parekh, the founder’s son and Pidilite’s current managing director. 

Consumer products, which include adhesives and sealants, construction and paint chemicals and art materials, continue to be Pidilite’s mainstay — the segment’s contribution to total revenue has increased from 73% in FY05 to 81% in FY13 and registered a growth of 20.5% last year (see: On popular demand). The rest of Pidilite’s income comes from industrial resins, adhesives and pigments, which grew about half as fast as the consumer business last year.

On popular demand - Graphic

You don’t have to look for reasons why the consumer business is doing well. The direct connect with users, including workshops to explain new products and teach new techniques at the in-house Dr Fixit Institute, has helped Pidilite build immense brand loyalty. Analysts and industry observers believe the ‘prescription’ route adopted by the company — influencing the intermediary user, who can recommend its products — has been particularly successful. Where M-Seal and Dr Fixit are promoted through plumbers, carpenters recommend Fevicol. “The kind of understanding Pidilite has of the Indian market is commendable. It has followed the right process in knowing the customer, and that has worked to its advantage,” says Abraham Koshy, professor of marketing at the Indian Institute of Management, Ahmedabad. 

Combine that with strong distribution, very effective advertising and sound acquisitions, and it is a powerful recipe for success. “We keep our eyes and ears open to what customers want, while our strong R&D gets us exactly the right products,” Parekh explains Pidilite’s growth. He points to a to-be-launched product under the M-Seal umbrella as a case in point. “Masons traditionally use white cement to fill gaps in grouting etc. But we have seen that these develop cracks after a while, so we have come up with a better and longer-lasting alternative,” he says. 

"We keep our eyes and ears open to what customers want, while our strong R&D gets us exactly the right products" - MB Parekh, managing director, Pidilite

Pidilite has also spent very judiciously on advertising. For the past 15 years, Ogilvy & Mather has held the Pidilite account and created several memorable campaigns for its various products, including an unbreakable egg, people clinging to the sides of a bus, a shadow that refuses to budge and a joint family that sticks together. Piyush Pandey, executive chairman and national creative director, O&M, recalls a multinational executive asking him several years ago how Pidilite could afford to spend Rs 20 crore on advertising. “Actually, Pidilite’s budget was only Rs 3 crore, but the [Fevicol] ads were effective and had a huge impact,” he says. Now, of course, the company spends much more — in FY13, Pidilite saw a 37% increase in advertising and promotional expenditure, spending close to Rs 132 crore compared with Rs 96 crore the previous year. “If possible, we plan to increase the expenditure on ad and promotions this year,” says Parekh. 

"Early on, Pidilite's budget was only Rs 3 crore, but the [Fevicol] ads were effective and had a huge impact" - Piyush Pandey, executive chairman and NCD, O&M

Importantly, Pidilite consciously sought opportunities to enter new niche strategies in the adhesive and sealant space, primarily through a string of acquisitions. It made its first buy in 1999, paying Rs 4 crore for the Ranipal brand from Indian Dyestuff Industries. The next year, it bought M-Seal and Dr Fixit from Mahindra Engineering & Chemical Products. Two years later, it bought Steelgrip from Bhor Steelgrip Tapes, followed by a construction chemical brand, Roff, in 2006. The trend has continued with the company buying the adhesives business (Falcofix brand) of Suparshva Adhesives in August. “Though the company’s [Suparshava] turnover is less than 1% of the Pidilite’s turnover, it [Falcofix] is a good brand with decent market share in parts of Maharashtra other than Mumbai,” Sandeep Batra, Pidilite’s director of finance, told analysts in a post Q1FY14 call.

The buyouts are also a conscious attempt by the company to curb competition at all price points. As Batra pointed out to analysts, “Fevicol as the market leader cannot compete with all brands pan-India, which are priced at many different price points. So, we always have the need to have other brands in the overall portfolio.”

But then, the inorganic route has not been confined to the sealant and adhesive space; Pidilite has effectively used it to venture into allied businesses as well. In 2004, it forayed into the art and craft space, launching the Hobby Ideas chain of stores. To cater to this venture, in 2006, Pidilite acquired Tristar Colman for art canvases and colours. In-house product innovations plus the acquisitions mean Pidilite now has a 64 product-strong portfolio focused on retail consumers, as well as 20 Hobby Ideas stores across eight cities. In FY13, the art material business grew by 35% against the company’s historical average of 10-15%. Not surprisingly, in the coming years, the company plans to invest Rs 120 crore every year in the consumer and bazaar segment. 

From Rs 1,512 crore five years ago, the segment accounted for Rs 2,674 crore of revenue last year. Parekh expects some pressure on margins owing to rising input costs but considers that a passing phase. “We will bring in innovations in products and new launches, for which customers won’t mind paying,” he says optimistically.

Feeling the blues

The industrial segment hasn’t been as fortunate. Supplies to industries such as packaging, textile, paint and footwear have been hit by slowing economic growth in India as well as decreasing demand from Europe and the US. With the result that, from a high of 24.4% in FY11, growth in this segment crashed to 9.5% the following year and marginally improved to 10.6% last year. “A fair amount of our industrial products is exported and those economies aren’t in the best health either,” Batra said in the analyst call. Analysts, too, don’t hold out much hope for this business to improve any time soon, given the poor external environment. “This segment is a play on the Indian GDP and IIP as, here, Pidilite’s products are more a commodity than a brand. If industrial growth is at a 10-year low, Pidilite really cannot do much. Passing on rising costs is also a tough call in this segment, so margins will go for a toss,” points out Abneesh Roy, associate director, institutional equities, Edelweiss.

"A fair amount of our industrial products is exported and those economies aren't in the best health either" - Sandeep Batra, director, finance, Pidilite

And costs have certainly been rising. In 2007, Pidilite merged the manufacturing asset of a group company, Vinyl Chemicals India, with itself to bring in economies of scale in procurement of vinyl acetate monomer (VAM), a major input for adhesives and industrial resins. A couple of years ago, though, it stopped making VAM and currently imports all its requirement of the input. Sharp increases in VAM prices has meant that expenditure on imports has risen from Rs 178.62 crore in FY12 to Rs 210.67 crore last year, which has been passed on to consumers through price increases. Now, a depreciating rupee will only make matters worse. 

Moreover, exports aren’t doing as well as earlier. Currently, the company exports to some 80 countries. But the share of exports in total revenue has dropped from 9% in FY12 to 8% in FY13 — exports of specialty industrial chemicals were affected by the weak global economic situation and grew only 8.2% in FY12, compared with the previous five years’ growth of 19.8%. Then, a new 20,000 TPA synthetic elastomer plant was to come up at Dahej at a capex of Rs 500 crore. It was to go onstream by FY10 and manufacture polychloroprene elastomer used in automotive and industrial components and adhesives, and give a boost to exports to Europe and North America. After repeated delays, the project was finally put on hold in 2012; the company has spent over Rs 360 crore already on the stalled project. “The Dahej plant was to help expand capacity. As the investment in the project must have already washed away, Pidilite needs to take strong steps to make its balance sheet lighter,” says Amnish Agarwal, senior vice-president, research, Prabhudas Lilladher.

Overseas ahoy

Similarly, Pidilite hasn’t been able to cover enough ground in its overseas forays, either. It has 14 subsidiaries with manufacturing facilities and selling operations around the world. But, barring five ventures, the rest have been loss-making for several years. There was some improvement in FY13, barring Brazil and Egypt. Sales grew 10.2% in the US, 22% in Thailand and 34% in Bangladesh, but at Rs 44 crore, full-year losses incurred by overseas subsidiaries in FY13 were still much higher than the previous year’s Rs 25.4 crore. Pidilite’s overseas subsidiaries have been loss-making for the past eight years, dragging down the overall profitability and return ratios of the group. Rishikesha T Krishnan, professor of entrepreneurship at the Indian Institute of Management, Bangalore, says, “Indian firms still need to look at overseas investments on a more long-term basis and should think twice before entering and exiting a new market. Currently, Indian companies need to stick to diversifying more on the domestic front than going abroad as the latter is too challenging for them to handle.” 

"Indian firms need to look at overseas investments in the long term and think twice before entering  new markets" - Rishikesha Krishnan, professor, IIM-Bangalore

Last year, Pidilite invested Rs 26 crore in overseas ventures, taking total investment till date to Rs 303 crore. “We have not made any acquisition outside India [since 2007] largely because of the realisation that the company needed to first integrate the acquisitions that have been made and make sure they perform to the standards expected from a Pidilite entity,” conceded Batra in the concall.

Failure to launch - Graphic

The last acquisition was of Pulvitec in Brazil, the worst-performer in the Pidilite stable. External factors such as weak infrastructural investment, a falling GDP and difficult political system have given Brazil the reputation of being a graveyard for Indian companies — certainly, biggies such as Godrej Consumer and Asian Paints have burnt their fingers badly in this market. Pidilite is no exception. In FY13, the South American subsidiary made a loss of Rs 41.5 crore. And even as the company talks of “structural intervention” to ensure the business starts making cash profits at the earliest, analysts think hiving off Pulvitec may be a better bet. “The challenge for Pidilite will be to find a suitable buyer. With a loss-making subsidiary, it will be tougher to find a buyer offering a decent price. To begin with, it was a mistake taking over a loss-making entity. If Pidilite is able to dilute it, investors will rejoice,” says Roy. 

With overseas and industrial segments not doing as well as expected, Pidilite’s only recourse for growth is its consumer and bazaar products segments. Thankfully, the company doesn’t have to try very hard in this category — it has a proven track record when it comes to connecting with customers and launching innovative products in niche segments. But it is not giving up on its inorganic growth strategy either, considering that for the first time since 2006, the company has managed a cash-pile of over Rs 300 crore. “If we have an opportunity, we would certainly put money behind that,” mentions Batra. Now, whether that is something to cheer or worry about, only time will tell.