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Add Pidlite Industries – Re-Rating Game with Asian Paints

December 26, 2009

HDFC Securities, first initiated coverage on Pidlite Industries 2 years ago. The performance of the stock has been in-line with second rung stocks in the FMCG counter since then. However, HDFC Securities is pitching it differently now – Product company and lower valuations compared to Asian Paints – a peer company catering to almost similar line of businesses.

PIL operates under three major business segments viz branded consumer and bazaar/ craftsmen products, speciality chemical business & others. It is the brand leader in every segment it operates. Some of its well known and most re-callable brands are Fevicol, M-Seal, Fevigum, Fevistik,Fine Art, Colstar, Sargent Arts, Dr. Fixit & Roff, Pidivyl, Pidisar, Pidicryl, etc.

There is Gradual improvement being witnessed in subsidiaries’ performance and it is looking out for growth opportunities through acquisitions. New manufacturing facility of synthetic elastomer – A major catalyst for future growth.

Pidilite Vs Asian Paints:
While PIL & Asian Paints are both broadly similar in terms of brand play & dependence on construction / real estate sector, the difference in valuation in terms of PE and Market-Cap to sales is relatively wider. PIL is trading at a P/E of 15.8 while asian Paints is trading at a P/E of 20. There is significant discount of 35% in terms of PE despite its large size, good brand image & consistency in growth. Hence, the probability of this discount narrowing down is high.

PIL is expected to report an EPS of Rs 11.8 and Rs 13.4 for FY10 and FY11 respectively. Existing investors can HOLD and ADD in the price band of Rs. 166-175 for a target price of Rs 240.

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