October 27, 2005

Pidilite industries - results and a change of opinion

Pidilite industries is one of the leading companies involved in adhesives, sealants and construction chemicals business. It has several top brands like fevicol, Fixit, M-seal etc.

I had looked at this company in 2001 and had made a small investment based on the following points
  • Good ROC of 20 % +

  • Sustaniable competitive advantage due to strong brands, extensive distribution network and high market share/ mindshare

  • Consistent revenue and profit growth for last 10 years

What stopped me from committing myself more was the tendency of the management to do strange, under-related commitment of capital to businesses like windmills !. In addition they had some IT disputes. All this made me uncomfortable.

A few weeks back I looked at their latest annual report and liked what I saw. A few notable point

  • Capital allocation has been rational and has added to the core business. Management has acquired brands like Mr Fixit, M-seal etc and have grown these brands after acquiring them

  • No funny diversifications into stuff like windmills !!

  • An increasing dividend flow indicating a willingness to return excess capital back to shareholders

  • Focus on EVA / Return on capital ( The management discussion talks about these points which kind of indicates the managements commitment to it)

  • Impressive growth in the core business of adhesives, sealants, construction chemicals

  • Growth of the business to international markets

All in all, I am ready to re-think on the capital allocation attitude of management, which I feel is fairly pro-shareholder and rational. But the price is a bit higher than what I would like. So I guess, I would wait and watch for the price to be in happy zone before I take a swing


Anonymous said...

just talking about EVA in a MD&A hardly says anything about a mgmt's intentions. It could be been written by a MBA intern.

Rohit said...

yes , you are right ...but it has to be seen in the context of the decisions made over the last few years, sucess of these capital allocation decisions and the current focus of the management.
Refering to EVA in MD&A is definitely not an indicator of the management by itself , but i would say that atleast the management is thinking on those line.
A lot of other companies dont even bother to focus on how much they are earning over their cost of capital

ValueArchitects said...

Dont go on RoC RoNW figures, they are based on book value - u need to see your RoI, ie return on your investments (based upon the present economic value) of the co. For ex- infosys attained a RoC (letsay i define it as pat/cap for sake of simplicity - although you may have your own n number of definations) - 1800c/5200c =34%, which is excellent.

Now for me, my RoI is (pat/economic value of the company or pat/marketcap of the co , as I am buying the entire company)=1800c/67000=2%) which is pathetic - Now would you like to buy this co?

A great business might not be a great investment oppurtunity - price changes everything.