outperform initiation a near-monopoly with a 'sticky

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

5 June 2017 Asia Pacific/India Equity Research

Household Durables

Pidilite Industries (PIDI.NS / PIDI IN) Rating OUTPERFORM Price (02-Jun-17, Rs) 791.55 Target price (Rs) 920.00 Upside/downside (%) 16.2 Mkt cap (Rs/US$ mn) 405,814 / 6,300 Enterprise value (Rs mn) 395,307 Number of shares (mn) 512.68 Free float (%) 35.1 52-wk price range (Rs) 792-575 ADTO-6M (US$ mn) 5.5 Target price is for 12 months.

Research Analysts

Rohit Kadam, CFA

91 22 6777 3824

[email protected]

Arnab Mitra

91 22 6777 3806

[email protected]

INITIATION

A near-monopoly with a 'sticky' business moat

■ Initiate with OUTPERFORM. We initiate coverage on Pidilite with a DCF-

based target price of Rs920 (16% upside) and an OUTPERFORM rating.

Pidilite is a virtual monopoly in its core adhesive market and owns some of

the strongest adhesive and construction chemical brands. A recovery in

volumes and pricing should restore revenue and profit growth to the mid to

high teens—in line with the past 15-year averages. We like Pidilite’s ability to

continuously innovate and grow its core portfolio while building new

categories like water-proofing.

■ An FMCG-like player in adhesives and construction chemicals. Pidilite

owns India's largest and most widely used adhesive portfolio under the

'Fevicol' brand. The core adhesive product today contributes less than 30%

of sales and over time the company has built strong brands in the water-

proofing, instant adhesives and sealant categories. To its credit, most of the

products create, market and develop categories rather than following existing

competition, giving it a massive advantage of being first to market.

■ A near-monopoly due to its high-quality business moat. Consistent and

effective advertising (with international recognition), strong engagement with

the user segment in terms of training, education and persistent product and

packaging innovation mean that both local and MNC competition has found it

tough to break into its shares meaningfully. Incentives for users to switch are

few as adhesives account for ~2% of overall furniture making cost.

■ Long runway for growth; expect water-proofing to be the fastest

growing over 5-10 years. India is among the lowest producers of furniture in

the world but among the fastest growing, with very low penetration levels of

quality furniture. Water-proofing (where Pidilite leads as well) remains a

small market today (<10% penetration) but is likely to be a high-growth

market as construction quality improves and consumers look at more reliable

solutions rather than temporary fixes. Key risks: A delayed recovery in the

broader economy and sharp rise in crude prices.

Share price performance

The price relative chart measures performance against the

S&P BSE SENSEX IDX which closed at 31,273.29 on

02/06/17. On 02/06/17 the spot exchange rate was

Rs64.42/US$1

Performance 1M 3M 12M Absolute (%) 8.4 17.2 10.5 Relative (%) 3.7 8.7 -6.0

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 53,694.5 56,295.1 64,254.5 74,263.5 EBITDA (Rs mn) 11,739.0 12,626.4 14,638.7 17,273.9 EBIT (Rs mn) 10,407.7 11,177.1 13,069.1 15,579.4 Net profit (Rs mn) 7,555.5 8,059.6 9,397.1 11,176.4 EPS (CS adj.) (Rs) 14.73 15.72 18.33 21.80 Change from previous EPS (%) n.a. - - - Consensus EPS (Rs) n.a. 16.77 18.73 21.60 EPS growth (%) 46.5 6.7 16.6 18.9 P/E (x) 53.7 50.4 43.2 36.3 Dividend yield (%) 0.5 0.5 0.8 1.0 EV/EBITDA (x) 34.1 31.4 26.8 22.6 P/B (x) 14.59 12.18 10.40 8.96 ROE (%) 29.9 26.4 26.0 26.5 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

5 June 2017

Pidilite Industries (PIDI.NS / PIDI IN) 2

Focus charts

Figure 1: Consumer products account for ~85% of

the portfolio …

Figure 2: … and have grown faster than the

industrial side

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 3: India’s adhesive consumption very low … Figure 4: ... but has a fast growing furniture market

Source: Astral Poly Technik Investor presentation, Credit Suisse research Source: Euromonitor

Figure 5: Pidilite has had a 20% earnings CAGR Figure 6: Strong FCF generation with a ~2% yield

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Adhesives & Sealants

53%

Construction Chemicals

20%

Art Material & others11%

Industrial products

16% Branded consumer

Industrial

29.122.2

18.9 17.513.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Art Material &others

ConstructionChemicals

Adhesives &Sealants

OrgniacPigments &

Prep.

IndustrialResins/

adhesives

10 yr cagr (%)

Consumer & Bazaar Industrial

9.4 9.1

6.4

1.5

0.2

0

2

4

6

8

10

12

Germany US Japan China India

Per capita adhesive consumption (kg)

China 7.5x India

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

India China Russia UK USA Japan France

10 yr CAGR in furniture production sales

0%

5%

10%

15%

20%

25%

Revenue EBITDA PAT

15 year cagr

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY10 FY12 FY14 FY16

FCF (Rs mn) FCF/ PAT (RHS) (RHS)

5 June 2017


A near-monopoly with a 'sticky' business moat

Pidilite Industries owns India's largest wood working adhesive brand, 'Fevicol', which has

an estimated 70% plus market share on the back of enviable brand equity, consumer trust

and a large distribution reach. Without being a one trick pony, Pidilite has created strong

market-leading products and brands in the categories of sealants, water-proofing, instant

glues and art materials. We initiate coverage with an OUTPERFORM rating, as the

company is well placed to benefit from a revival in Indian macro and the overall market

opportunity remains very large. We do not see a major impact on Pidilite from Asian

Paints' recent entry into the adhesive and water-proofing segments except that it should

help expand the latter.

An FMCG-like player in adhesives and construction chemicals

A combination of being first to market with new product innovations, consistent engaging

advertising and leadership in distribution has meant that several of the categories in India

are known by the names of company's products. Most of Pidilite’s products have dominant

market shares in the categories they operate in and quite a few of their innovations have

actually created the category/market themselves. Like the leading paints company Asian

Paints, Pidilite's is a unique case—i.e., successfully turning primarily commoditised

product offerings, such as adhesives and sealants, into enviable consumer franchises.

Near-monopoly due to a high-quality business moat

Pidilite has managed to create a strong business moat on the back of effective, consistent

and award-winning advertising content, backed up by strong product innovation and high

engagement levels, with end-users including retail consumers and influencers such as

carpenters, masons, plumbers and architects. While competition from local and

international brands has been present for many years, none has been able to dent

Pidilite's market shares and consumer connections. Some investors have raised questions

over this dominance with the entry of Asian Paints into adhesives, but we see a

monumental task ahead for it to match Pidilite. In the core adhesive segment, the incentive

for carpenters (users) to switch to another brand is less, as adhesives make up only 1-2%

of the total cost of making furniture, but the cost of failure can be high.

Delving into long-term potential suggests a long growth runway

Predictably, like most segments in India, the potential business opportunity remains very

large. India has amongst the lowest per-capita furniture production and trends such as

urbanisation, the boost to housing (a massive government push) and rising incomes

should drive furniture growth (and demand for adhesives in turn). Preventive and curative

water-proofing as a concept is still at a nascent stage in India. Pidilite is way ahead in

helping develop this market with a strong head start through its products (and brand called

Dr Fixit). Moreover, it has recently forayed into water-proofing services as well.

Initiate with OUTPERFORM

After subdued growth over the past two years, due to sluggish economic conditions, we

expect Pidilite to resume its long-term growth trends (~1.3x GDP multiplier) over the next

few years. It vastly helps that in almost all of its segments there is no respectable number

2 player (unlike in Paints or most other home improvement categories) as yet and we do

not see Asian Paints’ recent entry into adhesives as too challenging. We value Pidilite at

Rs920 using a discounted cash flow (DCF) methodology. Key risks: A delayed recovery

in the broader economy and sharp rise in crude prices.

A near-monopoly thus far; will Asian Paints’ entry change that?

5 June 2017


Pidilite Industries (PIDI.NS / PIDI IN)

Price (02 Jun 2017): Rs791.55; Rating: OUTPERFORM; Target Price: Rs920.00; Analyst: Rohit Kadam

Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E

Sales revenue 53,695 56,295 64,255 74,264 Cost of goods sold 25,863 26,424 30,364 35,067 EBITDA 11,739 12,626 14,639 17,274 EBIT 10,408 11,177 13,069 15,579 Net interest expense/(inc.) 24 (12) (49) (79) Recurring PBT 10,785 11,835 13,810 16,421 Profit after tax 7,564 8,060 9,397 11,176 Reported net profit 7,556 8,060 9,397 11,176 Net profit (Credit Suisse) 7,556 8,060 9,397 11,176

Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E

Cash & cash equivalents 6,631 10,816 13,907 16,850 Current receivables 7,294 7,782 8,867 10,214 Inventories 6,290 6,692 7,603 8,736 Other current assets 1,267 1,322 1,469 1,653 Current assets 21,482 26,612 31,845 37,453 Property, plant & equip. 11,795 12,786 13,953 15,343 Investments 0 0 0 0 Intangibles 3,519 3,643 4,159 4,801 Other non-current assets 2,286 2,081 2,474 3,095 Total assets 39,082 45,123 52,432 60,692 Current liabilities 9,614 10,094 11,523 13,319 Total liabilities 10,826 11,331 12,880 14,828 Shareholders' equity 27,829 33,325 39,040 45,301 Minority interests 427 467 512 564 Total liabilities & equity 39,082 45,123 52,432 60,692

Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E

EBIT 10,408 11,177 13,069 15,579 Net interest 0 0 0 0 Tax paid (3,221) (3,776) (4,413) (5,245) Working capital (1,842) (465) (713) (869) Other cash & non-cash items 1,898 2,110 2,320 2,548 Operating cash flow 7,243 9,046 10,263 12,014 Capex (2,085) (2,441) (2,736) (3,085) Free cash flow to the firm 5,024 6,481 7,011 8,287 Investing cash flow (2,489) (2,337) (3,535) (4,207) Equity raised 434 31 35 40 Dividends paid (2,490) (2,555) (3,672) (4,904) Financing cash flow (1,797) (2,524) (3,637) (4,864) Total cash flow 2,957 4,185 3,091 2,943 Adjustments 0 0 0 0 Net change in cash 2,957 4,185 3,091 2,943

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 513 513 513 513 EPS (Credit Suisse) (Rs) 14.73 15.72 18.33 21.80 DPS (Rs) 4.15 4.26 6.12 8.17 Operating CFPS (Rs) 14.12 17.64 20.01 23.43

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue 10.8 4.8 14.1 15.6 EBIT 59.4 7.4 16.9 19.2 EPS 46.5 6.7 16.6 18.9 Margins (%) EBITDA 21.9 22.4 22.8 23.3 EBIT 19.4 19.9 20.3 21.0

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E 53.7 50.4 43.2 36.3 P/B 14.59 12.18 10.40 8.96 Dividend yield (%) 0.5 0.5 0.8 1.0 EV/sales 7.5 7.0 6.1 5.2 EV/EBITDA 34.1 31.4 26.8 22.6 EV/EBIT 38.4 35.4 30.1 25.0

ROE analysis (%) 03/16A 03/17E 03/18E 03/19E

ROE 29.9 26.4 26.0 26.5 ROIC 34.5 32.9 35.4 37.6

Credit ratios 03/16A 03/17E 03/18E 03/19E

Net debt/equity (%) (20.5) (29.5) (33.0) (34.9) Net debt/EBITDA (x) (0.49) (0.79) (0.89) (0.93)

Company Background

Pidilite Industries is the largest branded adhesives company in India. The company's product portfolio also includes water-proofing products, sealants and art materials with market leadership across all segments.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rs) 1,050

In the case of a faster-than-expected macro recovery, revenue growth can accelerate faster than what we have modelled into our numbers leading to our blue sky scenario.

Our Grey Sky Scenario (Rs) 700.00

A couple of factors lead to our grey sky scenario. Higher-than-expected disruption in the supply chain from the impending GST and higher-than-expected inflation in VAM (key input raw material) hurting gross margins.

Share price performance

The price relative chart measures performance against the S&P BSE SENSEX

IDX which closed at 31,273.29 on 02-Jun-2017

On 02-Jun-2017 the spot exchange rate was Rs64.42/US$1

Source: Company data, Thomson Reuters, Credit Suisse estimates

5 June 2017


An FMCG-like player in adhesives and construction chemicals Transitioned from an industrial adhesives manufacturer to a strong consumer branded

company, Pidilite Industries Limited (PIDI IN) started as an industrial adhesives

manufacturer in the 1950s but later went on to create a number of iconic brands in

categories such as adhesives, sealants, water-proofing, etc. A combination of being first to

market with new product innovations and consistent engaging advertising and leadership

in distribution have meant that several of the categories in India are known by the names

of company's products. Most of Pidilite products have dominant shares in the categories

they operate in and quite a few of their innovations have actually created the category/

market themselves. Like Asian Paints, Pidilite's is a unique case—i.e., successfully turning

primarily commoditised product offerings such as adhesives and sealants into enviable

consumer franchises.

Proven track record for building successful brands An entrepreneurial start…

Pidilite's flagship's product—a woodworking adhesive branded as 'Fevicol'—was born in

the late 1950s when founder Balvant Parekh marketed it as an alternative to animal fat

which had been used until then. Within a few years of its launch, the product became the

default choice for carpenters, on the back of its ease of use, storage and effectiveness of

application. Given the success of Fevicol in furniture-making applications, Pidilite forayed

into smaller packs of Fevicol marketed at retail consumers for use in art and craft work for

artists, school work, etc. This was backed by a consistent and effective advertising

strategy which continued to increase brand equity for Fevicol over the years. The result is

that today most consumers use the word 'Fevicol' more than 'adhesive' when referring to

adhesives in general. It is similar to what Xerox did to photocopying globally.

….but stopped short of becoming a one-trick pony

What is indeed impressive about Pidilite is that it did not remain a one-trick pony but was

able to successfully create brands in new categories. Among a series of successful new

products were 'Fevikwik' (an instant all-purpose household adhesive in 1985), 'M-Seal' (an

all-purpose sealant introduced in 2000) and ‘Dr Fixit' (a range of water-proofing products

introduced in the early 2000s). Notably, each of Pidilite's brands is known and marketed

on its own and there is no mother brand. This is similar to the strategy adopted by leading

FMCG companies in India and globally. In fact, in the case of Pidilite, most consumers

would not know that Fevicol, M-Seal, Dr Fixit come from the same company.

First taste of success came with establishing strong adhesive brand

with an FMCG-like recall

More categories followed and with a lot

of success

5 June 2017


Figure 7: Consumer products are ~85% of sales… Figure 8: …growing ahead of industrial business

Source: Company data, Credit Suisse research Note: FY06-16 Source: Company data, Credit Suisse

Figure 9: Product portfolio for Pidilite Industries with the some key (but not

exhaustive) brands

Source: Credit Suisse research


53%


20%

Art Material & others11%

Industrial products

16% Branded consumer

Industrial

29.122.2

18.9 17.513.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0



Adhesives &Sealants

OrgniacPigments &

Prep.

IndustrialResins/

adhesives

10 yr cagr (%)


5 June 2017


Figure 10: How multiple categories and brands were added over time


Credited with running among the best advertising campaigns ever in India

The company hired the advertising agency, Ogilvy & Mather, which went on to create

several award-winning ad campaigns for Pidilite brands. The ads were differentiated from

the times, simply communicated and aimed at identifying the product offering as well as

the category itself. The below chart compares the ad spend of Pidilite with Asian Paints

and Havells, the other two consumer peers which have managed to create strong brand

equity over the years. Notably, in the first half the past decade, Pidilite was spending way

more as a percentage of sales than the other two, which may have played a role in the

brands being completely entrenched in consumer minds. In the Economic Times Brand

Equity Survey, the Fevicol brand has consistently ranked around the 50th mark among a

list of most trusted Indian consumer brands, including several global marquee names.

Figure 11: Sustained high ad spend in the early years helped create brand

equity

Source: Company data, Credit Suisse research

To add to the above, these ads were mighty effective with mass appeal. Below is a

snapshot of the several awards won by Ogilvy & Mather for campaigns for Pidilite brands.

1960s:

‘Fevicol’ established as the most selling adhesives for furniture making

2000:

Enters the sealant segment through the M-Seal range

2001:

Dr. Fixit range of Construction Chemicals launched (water proofing foray). Acquired ‘Roff’ (a tile in 2004

2006:

Art & Craft:

Acquired Sargent Art in the US and Tristart Colman in India. Both in the art and craft segment for school students

2015:

JV with Nina Waterproofing for entering the projects business

JV with ICA Italy for wood finishes

Adhesives

Sealants

Water proofing &

construction

chemicals

Art and craft

materials

Water proofing

service for large

projects

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Ad spends % sales

Pidilite Asian Paints Havells

Pidilite has delivered some of the most

impactful advertising with recognition at

Cannes

5 June 2017


Figure 12: Some of the early award winning ad campaigns by Pidilite

Year Occasion Region Award won for Position

FY99 Asia Pac Advertising Festival Asia Fevicol 'Egg' TV commercial Silver

FY99 London International Advert awards World Fevikwik 'Fish' TV commercial Finalist

FY99 ABBY awards India Fevikwik 'Fish' TV commercial Gold

FY02 Cannes Awards World Fevicol 'Bus' TV commercial Silver

FY02 Asia Pac Advertising Festival Asia M-Seal 'Will' TV commercial Bronze

FY02 ABBY awards India Fevicol 'Bus' TV commercial Gold

FY03 ABBY awards India Fevicol 'Rail' TV commercial Gold

FY04 ABBY awards India Fevicol 'Pretender' TV commercial Gold

FY05 ABBY awards India Best long running campaign Gold

FY06 ABBY awards India Fevicol Radio commercial Gold


Timely pickings of brands/products with potential Strategy of making small acquisitions over time

All along the way, Pidilite has made small acquisitions of products/brands with potential.

Almost all of these brands have grown substantially since acquisitions on the back of

increased investments in advertising and distribution reach. Most have been in the core

adhesive space while some have been extensions to the core adhesive category.

Pidilite acquired the insulation tape brand 'Steel Grip' in 2002 which had high loyalty

among electricians, but Pidilite vastly improved distribution and invested more in brand

building. The acquisition of the tile adhesives brand, 'Roff', in 2005 was also a very

successful one with the brand being a leading player today. More recently, the company

entered water-proofing services for projects by acquiring 'Nina Waterproofing' and the

wood finish segment by entering into a JV with ICA of Italy.

Below is the list of acquisitions made by Pidilite. Most of these were fairly small at the time

of acquisition relative to the size of the company. Thus, we would like to dismiss the notion

that this company was built just out of acquisitions. We like this strategy of not going after

anything large which potentially endangers the existing healthy return ratios, but targeting

small pickings as and when necessary and then building them.

Pidilite has delivered some of the most

impactful advertising with recognition even

at Cannes

5 June 2017


Figure 13: Pidilite has made a series of small acquisitions over the years

Year Brand Country Stake acquired Type Nature/ rationale

FY02 Steelgrip India 100% Tape Adhesive Market leader in electrical tapes

FY03 Bullbond India 100% Adhesives Adhesives/ Resins

FY03 Kalvyl, Tracol India 100% Adhesives Adhesives/ Resins

FY05 Roff India 100% Construction Chemicals Leading player Construction Chemicals

FY05 Chemson Asia Singapore 75% Waterproofing SE Asia presence

FY06 Bamco Thailand 75% Construction Chemicals SE Asia presence

FY06 Jupiter Chemicals Dubai 49% Reflective coatings Middle East market

FY06 Fine Art India 100% Paint brushes Market leader in paint brushes

FY06 Tristar Colman India 100% Canvas & art colours Well-known brand in student colours

FY07 Sargent Art USA 100% Art materials Art materials in educational market in US for 50 years

FY07 Cyclo USA 100% Automotive chemicals Selling auto chemicals in US and abroad for 50 years

FY07 Pagel Concrete Tech. India Controlling Industrial grouts & mortars Technical collaboration with Pagel Spezial-Benton

FY08 Pulvetic Brazil Controlling Adhesives Entry into the Latin American market

FY08 Hardcastle & Waud Manf. India 100% Adhesives Adhesives/ Sealants

FY10 Woodlok India 100% Adhesives A wood working brand bought from Henkel

FY11 Metaplast India 100% Polyester putty Used to repair car dents

FY14 Bluecoat India 100% Adhesives Strong adhesives brand in western India

FY16 Chemifix Sri-Lanka 100% Adhesives Leading player in adhesives

FY16 Nina Waterproofing India 70% Water-proofing services India's largest turnkey waterproofing services provider

FY16 ICA (Italy based) India 50:50 JV Wood finishes Distribute wood finishes in India and select other markets for ICA


Strong engagement levels; the user segment

includes masons, carpenters, even school children Strong, consistent and highly effective advertising does not tell the entire story of Pidilite's

success. Its key was to build continuous engagement with end-users in the case of

adhesives which would include consumers using adhesives for household applications,

kids for art and craft work, and carpenters/ masons for woodwork and furniture making. On

the water-proofing side, the decision makers are masons or the contractors taking up such

projects. The company had to work towards keeping this segment well engaged and

trained so it would recommend Dr Fixit (water-proofing brand) to customers. Below are

some of the initiatives and programmes Pidilite has run to engage with users/influencers.

(1) Fevicol Championship's club: Started in 2002 by Pidilite and the only one of its

kind in India, the club today has over 1,000 chapters in 600 towns and over 100,000

members who are wood workers or carpenters. The club regularly carries out training

programmes, social initiatives, free medical checkups for families and cultural events.

(2) Fevicol Furniture books: These books were given out free to carpenters initially

starting in the 1980s and outlined the latest furniture designs and recent trends in

wood working. Over 10 million copies have been printed and circulated till date with

even a digital version available now. These books are also used by architects,

contractors to keep updated with latest trends in furniture making and designs.

(3) Dr Fixit Institute: Dr Fixit is the brand under which Pidilite sells all its water-proofing

products. The institute offers a series of training programmes to engineers,

contractors and masons on the latest water-proofing techniques. The institute has,

over the years, successfully engaged with leading academic institutions, published

cases of water-proofing projects and offers certified training programmes for

contractors. As a result, water-proofing as a segment is identified with Dr Fixit and

this has built strong brand loyalty among users over the years.

(4) Hobby Ideas’ initiative: The Hobby Ideas’ platform is used to showcase the latest

products in the art and craft material segments. Pidilite owns and operates seven

Constantly engaging end-users and

intermediaries has been a key aspect of

strategy

5 June 2017


Hobby Ideas stores, of which three are in Mumbai. These allow prospective users to

come and experience various offerings and the product range. Besides, the hobby

ideas website offers online sales of craft materials, discussion forums and also lists

art and craft workshops which are being conducted independently.

(5) School level art & craft competitions: From time to time, the company organises

various art and craft competitions across schools in India which have wide

participation from students, with participation of close to a million students in the past.

Figure 14: A Champion's Club activity in process Figure 15: One of the Hobby Ideas stores in Mumbai

Source: Fevicol Champions' Club (FCC) Source: Credit Suisse research

Successfully straddling the price pyramid Starting out as a pure wood-working adhesive, Fevicol today has a multitude of variants

available to the end-user depending upon the requirement. For example, there is Fevicol

Marine which can be used to bind surfaces which will be exposed to water, Fevicol SR998

for the high-speed bonding of laminates or the Fevicol HeatX which can be used to bond

laminates exposed to high temperatures. While the base Fevicol product (called 'Fevicol

SH') can also probably be used in all these applications, the variants are specially

formulated to suit the need and thus offer specific value to the customer. Price points are

higher for the variants compared to the base brand. Pidilite's extensive distribution network

and initiatives like the 'Champions Club' make it possible to spread awareness and

educate users of such product innovation and their case uses. This was clearly visible

from our channel checks with carpenters and contractors who seem to be very updated on

all the different product extensions and their applications.

Figure 16: Straddling the price pyramid for Fevicol

Product Variant Description Price

Fevicol Basic Basic Fevicol - Standard wood working adhesive 1.0x

Fevicol Extra Stronger bonding and ease of application 1.1x

Fevicol SpeedX Dries within 2-3 hours versus having to be left overnight especially in the case of laminates 1.2x

Fevicol Heat X High Heat resistance capacity up to 170 degrees; fast bonding, grip & no spring back action 1.7x

Fevicol Marine For bonding surfaces prone to high water exposure; 5 days normal waterproof 2.5x

Fevicol Probond For bonding of Acrylic and PVC sheets which are otherwise difficult to bond with wood 2.3x

Fevicol SR998 For fast bonding of surfaces where it is difficult to apply direct pressure 1.5x


This is similar to what FMCG companies do with their portfolios. The key here is in

identifying a customer need (which is sometimes from customer feedback) and then being

the first to market with a product offering to meet that need.

Has successfully premiumised its

portfolio to meet end- user needs

5 June 2017


Figure 17: Premiumisation at play at Fevicol—a comparison with HUL’s Surf Excel


x

1.2x

2x

2.5x

2.8x

Detergent bar

Detergent bar

Price

premiumness

Quick wash powder

Matic front

load powder

Matic front

load liquid

x

1.2x

1.7x

Fevicol SH - Basic

variant

Speedx – faster

drying

Price

premiumness

HeatX – higher

heat resistance

1.5x

Faster bonding for

specific applications

2.5x

Marine – highly

water proof

5 June 2017


Near-monopoly due to a high-quality business moat The obvious question which comes to mind is why no other company, either home grown

or international, has been able to pose credible competition to Pidilite in almost all of its

categories.

Existing competition not able to make a dent

In the adhesive segment, Pidilite has managed to maintain dominant market shares (70%

plus today) for a long time. While there have been competing products from some regional

and localised small players, larger national players and a few foreign players none has

made a major dent in Fevicol's strong market position. We explore why below.

Inability to create a brand over the years through advertising: Fevicol's initial success

came from moving end-users from animal-based products to chemical-based ones with a

much superior user experience. However, this was backed up with effective and consistent

advertising targeted at the end-user which helped generate immediate recall. We have not

yet seen much advertising effort by any of the Indian or international players. A part of the

reason could be that even in developed markets, an adhesive is not something which is

heavily advertised.

No serious efforts at mass engagement with contractors or carpenters: There is no

parallel for the Championship Club run by Pidilite. This means that even if someone has a

strong product offering, they may not have the platform to showcase it and spread

awareness of its usage. Another simple example is that Pidilite has a Youtube Channel

which has rich content of educative videos using different product types in various

situations. Something like this is again missing for any of the competition.

Low cost of usage, but high cost of failure does not incentivise experimenting: The

cost of adhesive typically makes up ~2-3% of the total cost of making a piece of furniture.

The cost of usage is thus low but were any of the bonds to break during service, the cost

of failure can be high in terms of warranty costs, reputational damage and lack of repeat

business. Most carpenters thus do not bother with switching to another adhesive even

when pressed hard.

Pidilite miles ahead in distribution and product innovation: Our channel checks

suggest why it has been difficult for competition to get a leg up on distribution. Lots of

dealers refuse to stock any other adhesive but Fevicol since the latter is fast moving. This

is despite in some cases being offered better margins by the competition. Pidilite has also

been one step ahead of competition by being close to consumer needs on the ground and

coming out with innovative product variants to suit specific applications.

Figure 18: Competition to Pidilite in the adhesives segment

Company – Country Product/ brand Description

Huntsman - US Araldite, Karpenter All purpose, tile and wood bonding adhesives. Their main competing brand against Fevicol is 'Karpenter'.

3M - US Adhesives, sealants, tapes Larger presence and usage in manufacturing processes used in different industries.

Henkel – Germany Loctite, Teroson, Bonderite Until the recent distribution arrangement with Asian Paints, Henkel had a largely B2B presence

Astral Poly Technik - Indian Bondtite, Resinova Large players in epoxy adhesives for CPVC pipes and fittings. Pidilite has never been a dominant player there.

Jubilant Industries - Indian Adhesives, sealants 'Jivanjor' is its main wood working adhesive brand which competes with Fevicol


Competition has always been there but

has not been able to make a meaningful

impact

5 June 2017


Figure 19: Pillars supporting Pidilite's business moat


Henkel and Asian Paints joining forces to crack the

adhesive market but tough work likes ahead

Henkel is a leading player globally in the adhesive segment with 50% of its total sales of

€19 bn coming from adhesives. It has a strong portfolio of products globally in both

industrial and retail markets. Henkel has been present in India in the B2B segment for

quite some time supplying adhesives for industrial use. However, the company has not

been able to make an impact on the consumer-branded adhesive side due to: (1) a lack of

strong brand equity in India; (2) the inability to scale up distribution in India which is largely

wholesale/ dealer dependent unlike modern format dependent in the developed world.

To address these above two issues, Henkel has entered into a distribution tie-up with

Asian Paints which is India's largest paint company with a wide distribution network and

which commands enviable brand equity. Asian Paints rivals Pidilite in brand equity and

awareness among consumers and has a total dealer network of 33,500 dealers. Below is

the list of products launched thus far under this arrangement.

Figure 20: Asian Paints' recent foray into adhesives via the Henkel tie-up

Type Product Application Pidilite product

Instant adhesive Loctite quick Available for quick bonding of surfaces like glass, wood, stone etc. Fevikwik, M-Seal

Two part epoxy adhesive Loctite rapid For bonding of larger surfaces of different material Fevicol range


Apart from the 'Loctite' brand, Henkel’s global portfolio has other strong products such as

Pattex (a wood-working adhesive) and Pritt (art and craft glue range) which can be rolled

out using the Asian Paints distribution network.

We see a limited impact on Pidilite from this arrangement due to the following reasons:

(1) Asian Paints’ distribution reach extends only to paint dealers, but unlike Pidilite does

not include the cement dealers, hardware stores or even small 'kirana' (grocery)

stores where small SKUs of Pidilite products reach.

• Pidilite miles ahead in distribution and product innovation

• Low cost of usage but high cost of failure does not incentivize experimenting

• Initiatives like the ‘Championship Club’, ‘Furniture books’ have meant strong customer engagement

• Ability to create and nurture brand over the years through advertising

Strong brand equity

Consistent user

engagement

Major distribution advantage

Low cost but highly reliable product need

We do not expect Pidilite’s dominance to

change post Asian Paints’ entry

5 June 2017


(2) The arrangement so far is a distribution arrangement but either of the two still needs

to make extensive advertising and branding investments to generate brand recall.

Anecdotally, no major efforts on this front are visible thus far.

Extensive distribution reach and across multiple

channels gives Pidilite a unique advantage Unlike paint companies which primarily sell their products through paint dealers which are

supplied by the companies directly, Pidilite sells its products via multiple channels

including cement stores, plywood stores, paint dealers as well as general grocery and

modern retail catering to the retail end-consumer segment. The company has 7,000 plus

distributors who in turn supply to over 400,000 dealers/retailers that sell to the end

consumer. For the retail consumer segment, the company has gone the FMCG way by

introducing small packs for its products priced at Rs5/Rs10 price points and distributed

widely across general trade. The total direct + indirect reach here is ~3.5 mn outlets.

Figure 21: Pidilite's several distribution channels Figure 22: Far and wide distribution reach

Source: Credit Suisse research Source: Company data, Credit Suisse estimates

Our channel checks for the core product (the wood working adhesive ‘Fevicol’) suggest

that plywood dealers are the most common type of dealers stocking Fevicol. They typically

make a small 1.5-2% margin by selling Pidilite products and make most of the monies by

selling plywood instead. However, the dealers stock Pidilite products as they are fast

moving and high in demand. These stores have a Pidilite person visiting them every week

and taking orders from them. The company person then passes this information to the

distributors which then supply the dealers. Checks also suggest a general sense of

anathema to stocking competing products due to extremely low turnover and lack of brand

recall.

Water-proofing: Entry of paint companies not a

worry; market development more important

On the water-proofing side, Dr Fixit has, over the years, become a household name just

like Fevicol has become one in the adhesive category. Leading paint companies such as

Asian Paints and Berger have in recent years started offering water-proofing products

along with paints.

Admittedly, paint companies have a few inherent synergies

The advantage paint companies have is that they have their own loyal and established

dealer base which can be used to sell their water-proofing products along with paint

products. Likewise strong relationships with the painter community can be used to educate

and spread awareness about common water-proofing problems and how to treat them.

-

100,000

200,000

300,000

400,000

500,000

Pidilite Havells Asian Paints Berger Paints

Total distribution reach for all products

# outlets/ dealers (FY16)

5 June 2017


What also works to the advantage of the paint companies is that water-proofing is typically

accompanied by paint jobs. It could be the case that someone repainting a house would

also want some preventative type of water-proofing to be carried out. So, there are some

obvious synergies between painting and waterproofing.

But we don’t think they will hurt Pidilite due to the below:

1. Dr Fixit brand equity much stronger: The Dr Fixit range of construction chemicals

was launched in 2001 and since then, the brand has come to identify with all water

proofing-related problems. A large number of contractors, masons and even architects

have been trained at and interacted with the Dr Fixit institute and have used its

product range in their work.

2. Addressing severe water-proofing needs is a specialist's job: While basic

preventative waterproofing can be addressed with a simple coating of a water-proofing

material before a paint job, severe leaks and high level of wall dampness need more

specialised attention and solutions. A painter may be ill-equipped to identify the

problem and recommend a solution, and a specialist may be needed. Such masons or

contractors have mostly worked with Dr Fixit products in the past.

3. Distribution channel not restricted to only paint dealers: Water-proofing products

are distributed not just by paint dealers but also other hardware stores (selling tiles,

bathroom fittings and electrical hardware) and cement stores. Paint companies as of

now have limited reach in the latter two types of stores and gaining a strong foothold

will not be as easy as store owners only want to stock what sells the most.

4. Strong product portfolio and ahead of the curve innovation: Pidilite has been

ahead of the curve in terms of identifying different types of water-proofing problems

and launching new products. The company has engaged with academia and industry

participants actively over the years. Anecdotal evidence suggests that even

contractors working with paint companies tend to recommend a Dr. Fixit product to

address a water-proofing problem. The subsequent painting of course uses the paint

company’s product!

In fact, they will do more good than harm by expanding the category

Besides, the water-proofing segment in India is so underpenetrated that is not a question

of increasing competition but of market development. Entry of more players only helps

create and uplift the category. Patanjali, for example, with its herbal range of products has

expanded the Ayurveda FMCG market which is now benefiting other FMCG companies as

well as they launch their own herbal range. See the next section for our detailed analysis

on the potential opportunity in water-proofing.

Water-proofing treatment is a

niche area and needs expertise

Water-proofing products

distributed through multiple

channels

5 June 2017


Delving into long-term potential suggests a long growth runway Pidilite has grown its revenues at a 17% CAGR for the last 15 years. The question to

answer is what is the further headroom for growth, and are we potentially looking at growth

for several more years . We reckon ‘yes’ as India has several macro as well as micro

levers which will continue to drive this long-term growth. Some of these are: (1) continued

urbanisation trend, (2) rising furniture penetration and spends as incomes rise, ( 3) only

75% of India still lives in 'pucca' (solid and permanent) houses, and (4) low penetration,

less awareness and low usage of water-proofing products.

A vast majority of India yet to produce good quality

furniture; will drive demand for adhesives

We focus on the furniture market as that is the largest driver for Pidilite's adhesives

portfolio. As per Euromonitor, India produced US$16 bn worth of furniture in 2016. This

figure takes into account the manufacturers’ selling price, so the value of end furniture

sales could be around ~US$20 bn. As can be seen from Figure 23-Figure 25, on a per

capita basis, as well as on an absolute production basis, India’s furniture production ranks

amongst the lowest in the world. India’s furniture production, however, has grown at a

faster clip with an 18% CAGR between 2006 and 2016 (Figure 26).

Figure 23: Adhesive consumption across countries Figure 24: China’s adhesives market 15x India's

Source: Astral Poly Technik Investor presentation, Credit Suisse estimates Source: Astral Poly Technik Investor presentation, Credit Suisse estimates

Figure 25: India ranks low in furniture production… Figure 26: …but is the fastest growing market

Note: We have adjusted for exports from China to other large importing countries. Source: Euromonitor data, Credit Suisse research

Source: Euromonitor data, Credit Suisse research.

9.4 9.1

6.4

1.5

0.2

0

2

4

6

8

10

12

Germany US Japan China India

Per capita adhesive consumption (kg)

China 7.5x India

750

50

0

250

500

750

China India

Per capita adhesive consumption (Rs)

China 15x India

0

20

40

60

80

100

120

140

160

0

50

100

150

200

250

300

350

400

UK

US

A

Japa

n

Fran

ce

Chi

na

Rus

sia

Indi

a

Production value (US$bn) (LHS) Per capita (US$) (RHS)

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

India China Russia UK USA Japan France

10 yr CAGR in furniture production sales

India’s per capita adhesive

consumption amongst the lowest in the

world

5 June 2017


The NSSO (National Sample Survey office) in its 2011-12 survey (68th round) gives an

estimate of the number of Indian households possessing any kind of furniture. Figure 27

and Figure 28 below are based on the NSSO survey results which divided the sample into

12 fractiles on the basis of their monthly consumption expenditure (from low income to

higher income). The survey then estimated furniture ownership amongst households and

gave estimates of ownership. The upwards sloping curves drive home the point that

affordability is a constraint when it comes to owning furniture items.

Figure 27: Furniture ownership in rural India is low Figure 28: Urban fares better but not by much

Source: NSSO Source: NSSO

The above results, however, do not tell the entire story of the potential headroom for

furniture building in India. The reasons are listed below:

(1) The Survey does not capture the quality of furniture. For example, a vast majority

of households falling in the lower fractiles are likely to have very low quality furniture.

'Bedstead' (meaning bed) for example shows a fairly high ownership across both rural

and urban households but some could be very basic, made by weaving jute or fabric

across a basic support structure.

(2) Captures very basic items: The Survey does not attempt to include items such as

kitchen furniture and cabinets, sofas, dining tables and the like—understandably so,

as the ownership of such items is very low at a pan-India level.

Thus, the opportunity is larger than what the NSSO data suggests. Additionally, there are

two more broad trends which will drive growth of the furniture market in India.

Continuing urbanisation trend: India is about 30% urbanised versus a 50% world

average, and is expected to gain 20 pp over the next three decades as per the United

Nations. To put it simply, as people urbanise, the demand for furniture will increase. As per

the latest 71st NSSO survey titled ' Key Indicators of Household Expenditure on Services

and Durable Goods', the urban average MPCE (monthly per capita expenditure) for

durables is Rs110 versus Rs56 for rural. Thus, spends on furniture double as people

urbanise.

Increase in 'pucca' houses: 'Pucca' refers to a solid and permanent construction and

includes houses made of concrete, bricks or any other structurally reliable martial. Even

today, ~35% of rural India lives in non-pucca houses (weaker constructions made of mud,

thatch, or other low-quality materials). As incomes rise and the standard of living improves,

people move to pucca houses and then the need for furniture arises. It is important to note

that even amongst pucca households which feature in the lower fractiles in Figure 27and

Figure 28, penetration of ‘quality’ furniture would be minimal.

0

20

40

60

80

100

0-5 10-20 30-40 50-60 70-80 90-95

% of HH in MPCE fractile classes possessing furniture items - Rural India

bedstead almirah, dressing table chair, stool, bench, table

0

20

40

60

80

100

0-5 10-20 30-40 50-60 70-80 90-95

% of HH in MPCE fractile classes possessing furniture items - Urban India

bedstead almirah, dressing table chair, stool, bench, table

India has low furniture

ownership

5 June 2017


Figure 29: India amongst the fastest in urbanising Figure 30: Continued move towards 'pucca' houses

Source: United Nations Population report Source: NSSO, Credit Suisse estimates

Government initiatives to boost new housing will only help: Under the central housing

scheme called the 'Pradhan Mantri Awas Yojana' (PMGAY), the Modi government targets

to provide housing for all by 2022. The scheme envisages 20 mn new urban homes by

March 2022 and 10 mn new rural houses (under phase 1) by 2019. This will be achieved

through a combination of initiatives such as: (1) slum rehabilitation by tying up with private

developers, (2) credit linked subsidy for affordable housing, (3) subsidies for individual

housing construction, and (4) incentives for developers via tax concessions for building

affordable housing. Although this is an ambitious programme, even partial success here

will help accelerate growth in housing.

Water-proofing business: Challenge here seems to

be market development and not the size of the pie

The macro view

FICCI (Federation of Indian Chambers of Commerce and Industry) forecasted the size of

the Indian construction chemicals industry to be around Rs36 bn in 2013, growing at a

five-year CAGR of ~17%. This market would have likely reached around the Rs50 bn mark

in 2016, assuming 12% growth p.a. since then. As per FICCI, water-proofing made up

around 15% of this pie in 2013 but was growing faster than other segments, given its

under-penetration. Assuming water-proofing makes up for ~20% of the pie today, the total

market would be worth Rs10 bn. This figure would capture the aggregate value of sales of

all water-proofing products as of today but does not tell us much about the opportunity.

20

25

30

35

40

45

50

55

1985-90 1995-00 2005-10 2015-20 2025-30 2035-40 2045-50

% urban popuation

32%

48%55%

66%74%

88%92% 94%

43%

60%66%

74%

10%

30%

50%

70%

90%

1993 2002 2009 2012Rural Urban India

% households with permanent structures

There is a major push towards

affordable housing form

the government

5 June 2017


Figure 31: Construction chemicals a growth market Figure 32: …with a low share of water-proofing

Note: 2016E is Credit Suisse estimate Source: FICCI, Credit Suisse estimates

Note: From FICCI report as of May 2014. Source: FICCI

As a comparison, the construction chemicals market in China is ~US$5 bn—i.e., 6.5-7x

that of India. India makes up about 4% of the global market of construction chemicals. It is

a well-known and widely acknowledged fact that the quality of construction in India is

below global standards though it is improving now. India is also a very price sensitive

market which is explained by the fact that the share of admixtures used in India is much

higher than that used globally. Admixtures are concrete strengthening agents which also

reduce the cost of concrete construction and also reduce the amount of water needed in

concrete mixing. Overusing admixtures may bring in some short-term tangible benefits

which is why they seem to be having a higher share in the Indian market. On the flipside,

water-proofing agents and bonding materials and other protective mixtures are used

relatively wisely globally than in India. These tend to take up the overall cost of

construction or repair but provide more reliable and longer-term protection.

Figure 33: India is only 4% of the global market Figure 34: Globally water-proofing has a higher share



14

36

50

70

0

10

20

30

40

50

60

70

80

2007 2013 2016E 2018E

Construction chemicals (Rs bn)

17%

12%

18%

cagr

Bonding materials

18%

Waterproofing15%

Others26%

Admixtures41%

Share of the construction chemical market in India (2013)

China26%

India4%

North America

14%Western Europe

22%

Japam12%

ROW23%

Construction chemicals consumption by region

Bonding materials

28%

Waterproofing40%

Others6%

Admixtures26%

Share of the construction chemical market in the global market

China’s construction

chemicals market is ~7x of

India

5 June 2017


The micro view

Household water-proofing problems have been hitherto largely addressed by using white

cement and local grout materials. These provide temporary short-term relief and people

just keep repeating the same treatments, and over time they learn to make do and live

with the leakage issues. Indians generally tend to take extra care to point out any potential

leakage issues while buying a new house as these issues are generally perceived as

almost untreatable, which is not true. A part of the problem also lies in the fact that there is

a major lack of trained and skilled personnel in the area of water-proofing which needs

specialised expertise. One needs to identify the severity of the leakage, source of the

water flow and propose the best possible treatment, which could be applying some

material internally or treating the wall externally. In recent years, Pidilite has managed to

spread awareness around treating the problem. More recently, paint companies have also

joined in which is good as it helps grow the market.

We attempt a simple analysis below where we try to find the potential addressable market

size that exists out there if people got serious about treating their water-proofing problems.

We make the following simple assumptions to estimate the potential size of the pie in the

house water-proofing market.

■ We only look at the urban pucca house structures which are ~50% of the total houses

in India. We completely exclude houses in rural India.

■ Of the above, we assume that potentially 50% of the houses have a minor water-

proofing problem in one of the walls. This number is 98 mn houses and 98 mn walls to

treat. For context, Pidilite's management had earlier shared that in Mumbai city, eight

out of ten houses have some water-proofing issue but only two get it suitably treated

(implies a 25% penetration).

■ We assume that these are treated with a Pidilite product called Dr. Fixit Dampguard

which is used to treat minor dampness in walls. Note that there are different products

(much higher priced) to treat severe leakages. We assume that a similar problem

treated using a product from either Pidilite or any other organised player such as one of

the paint companies costs the same.

■ We have got a sense of the quantity of the product needed and its price from dealer

checks as well as have got it verified from a Dr Fixit personnel.

We attempt to calculate the

potential water-proofing

opportunity in India

5 June 2017


Figure 35: Estimating size of the internal wall water-proofing market in India

Source: Credit Suisse estimates

The above analysis would still underestimate the size of the market opportunity as we

have excluded the following:

■ External wall treatments for repair as well as during new constructions.

■ Preventive water-proofing treatment before painting a house.

■ Severe water-proofing products that need higher quality products. For example, if we

assume that ~5% of urban pucca houses treat the walls for severe dampness using Dr

Fixit's Pidifin 2K, the total addressable market estimate above expands by another

Rs7,600 mn or by 10%.

The challenge and the opportunity here for a leading player like Pidilite is to develop the

market through awareness, advertising, marketing initiatives and educating/ training more

personnel in the use of and application of such products. As discussed earlier in the

report, Pidilite is already taking the right steps in the right direction.

Recent entry into water-proofing services the right move

A natural extension to its water-proofing products range is an entry into the water-proofing

services space. In CY15, Pidilite bought a 70% stake in Nina Waterproofing systems with

a total planned investment of ~Rs1 bn. Nina Waterproofing offers end-to-end water-

proofing solutions in the residential, commercial and infrastructure segments. It is in fact

India's largest turnkey specialist water-proofing solutions provider. Back in CY2013, Pidilite

had acquired another small water-proofing business—Percept Waterproofing services for

Rs48 mn.

2011A 2016E

Number of houses in India (from NSSO data) (mn) 331 378

% pucca houses 74% 80%

# of pucca houses (mn) 245 302

% urban pucca 62% 65%

# of urban pucca houses (mn) 152 197

% houses w ith w aterproofing issue 50%

# of urban pucca houses with waterproofing issue (mn) 98

Per house calculation

Numer of w alls w ith leakage issue One

Assumed w all dimension (sq ft) 8x9=72 sq ft

Assumed w all dimension (sq m) 6.7sq m

Option 1 - In case of mild dampness in wall

Pidilite product used Dr. Fixit Dampguard

Dr Fixit Dampguard coverage area per coat 6.5sq m per kg

Number or product coats recommended 2

Dr Fixit Dampguard product quantity needed 2.06 kg

Dr Fixit Dampguard price Rs405 per kg

Cost of product to treat leakage in 1 house in 1 w all Rs834

Potential market size estimation

Cost of product to treat leakage in one wall in 98mn houses ~Rs82000mn

Water-proofing potentially a very large

market and is underpenetrated

5 June 2017


While as of FY16, these businesses contributed less than 5% to the consolidated sales

and profits, for reasons argued above, the water-proofing services business remains a

very large opportunity in the future as the construction quality in India improves in the

coming years.

Art & Craft Materials: Another compelling long-term

opportunity

As a refresher, this has been the fastest growing segment for the company. It has grown

its share of revenues from 5% to about 12% over the last ten years. This segment includes

several SKUs of craft related glues like Fevistick, small Fevicol packs, paper and fabric

colours (under the ‘Fevicryl’ brand) and allied materials. Pidilite’s brands are already the

market leaders in most segments here and growth would come from an increased usage

frequency with a tendency to use more varied and premium products as incomes rise.

Disrupting the way ‘Zardozi’ work was done in India

One example worth highlighting here is the launch of the ‘Fevicryl no stich fabric glue’

product which is the first of its kind in the market. India has a very large market of

embroidery on fabric (saris, dresses etc.) which is called as ‘Zardozi’ art. Conventionally,

this was done by stitching decorative metals, beads, stones on to the fabric. This process

needed highly skilled workmen and was time consuming.

Pidilite’s R&D and marketing team identified this need and then worked closely with a

number of Zardozi ‘karigars’ (workmen) to develop fabric glue which can be used to

directly stick decorative prices to the fabric instead of having to stich them. Product

innovation was such that the end product could be washed just as any other normal

clothing and the work would retain its quality. The Fevicryl range of Fabri glue became a

huge success and now it is the most commonly used product for this kind of work. It is also

exported to several countries.

Figure 36: Fevicryl no stich fabric glue Figure 37: Use of no stich glue in ‘zardozi’ work

Source: Company data, Credit Suisse Source: Company data, , Credit Suisse

Product innovation has driven a major part of

the growth for this business

5 June 2017


Initiate with OUTPERFORM Business model tuned to deliver long-term growth

with stable margins and a strong cash flow profile

A growth company…

Pidilite has grown its revenues at a ~17% CAGR over the last 15 years. Over the same

period, the average nominal GDP multiple for revenue growth has been ~1.3x. Over the

same period, EBITDA has compounded at a 19% CAGR and pre-exceptional earnings at

a 20% CAGR. While growth has slowed down over the last two years (FY16 and FY17)

due to a macro slowdown as well price deflation, we expect a trend reversal to mid-double

digit growth rates from FY18. This will come on the back of a recovery in volume growth

(linked to a macro recovery + multiplier effect kicking as consumption recovers) and a

resumption of pricing into positive territory after two years of negative-to-flat pricing growth

versus a historical average of 3-4% pricing growth. We would like to point out here that the

slowdown in volumes has largely been category led (as with so many other categories in

the consumption space) and not due to any loss of market shares.

Figure 38: A classic growth company… Figure 39: ...with ~1.3x nominal GDP multiplier

Note: Standalone numbers. Period between FY02-17 Source: Company data, Credit Suisse.

Note: Calculated as revenue growth/ nominal GDP growth. Source: Company data, Credit Suisse.

Figure 40: Expect growth to recover from FY18 Figure 41: Slowdown has been across sectors

Source: Company data, Credit Suisse Note: Dec-2016 growth was affected due to demonetisation. Source: Company data, Credit Suisse.

15%

16%

17%

18%

19%

20%

21%

Revenue EBITDA PAT

15 year cagr

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16

Ratio of Pidilite's revenue growth to Nominal GDP growth

GDP multiplier Average

-5.0

0.0

5.0

10.0

15.0

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

Pricing growth (%) Volume growth (%)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

Mar

-16

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Quarterly growth (% YoY)

Pidilite Asian Paints Kajaria

Has delivered steady long-term growth

5 June 2017


…with stable margins

Historically (FY02-15), Pidilite has been a ~45% gross margin and a ~17% EBITDA

margins business. These margins have been surprisingly steady over the years despite

crude inflation. This suggests a strong pricing power and discipline. However, a sharp fall

in crude prices has meant the margins at the gross and EBITDA level have expanded by

~800 bp over FY15-17.

Figure 42: Historically steady margins steady Figure 43: Gross margins have likely peaked

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates

Major raw materials which go into the adhesive and construction chemicals manufacturing

are crude linked derivatives and VAM (vinyl acetate monomer). VAM is a key ingredient in

the manufacturing of adhesives and is 13-15% of the total raw material costs. VAM prices

historically have been less volatile than crude in either direction and tend to follow crude

typically with a one quarter lag. Pidilite buys VAM from a group company called 'Vinyl

Chemicals' which imports VAM from international markets.

We expect a 30 bp gross margin decline in FY18, given the recent comeback of crude

from its lows in early 2016. VAM prices have been fairly stable over the last two years.

Figure 44: VAM is ~15% of total raw material costs Figure 45: VAM mostly moves in line with crude

Note: As of FY16. Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17E

EBITDA margin (%) Gross margin (RHS) (%)

margins have moved in a fixed band expect in recent

years due to crude correction

40.0

42.0

44.0

46.0

48.0

50.0

52.0

54.0

56.0

Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16

Gross margin (RHS) (%)

VAM15%

Other RM (major part

crude linked)62%

Packing23%

(800)

(600)

(400)

(200)

0

200

400

600

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

0.0

10.0

20.0

30.0

40.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

bps%

Curde Oil (US$/bbl) (YoY)

VAM (US$/ton) (YoY)

RM % sales (YoY bps) (RHS)

5 June 2017


Figure 46: One-year trend in crude prices Figure 47: One-year trend for VAM prices

Source: Bloomberg Source: Bloomberg

Pidilite’s product portfolio has decent pricing power; demand quite inelastic

A majority share of Pidilite' s portfolio (>80% of the business) has a decent pricing power

due to the strong brand equity, low cost of usage and near foolproof application needs.

Marking down adhesive prices aggressively does not generate incrementally stronger

demand in same measure (management also concurs with this view). Likewise, taking

reasonable price hikes is not an issue in this category as adhesives are less than 2% of

the cost of making furniture. A 20% increase in adhesive cost leads to ~1% increase in the

furniture cost. For that much a carpenter or a contractor is unlikely to risk his reputation by

going with a cheaper product or for that matter a different product.

Strong return and cash flow metrics

The business has delivered long-term ROE of ~25% with strong and consistent free cash

flow generation. Since FY10, FCF/PAT have averaged above 70% and FCF yield is close

to 2% levels.

Figure 48: Healthy dividend payout trends Figure 49: Strong FCF generation

Source: Company data Source: Company data

Professional management now at the helm Like most home grown companies in India, Pidilite traces its original roots to a strong

entrepreneurial start by its late founder, Balvant Parekh. The subsequent two generations

from the Parekh family have successfully led and directed the journey of the company to

where it stands today. The founding family has recently decided to leave the day-to-day

40

42

44

46

48

50

52

54

56

58

60

May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

Curde Oil (US$/bbl)

750

775

800

825

850

875

900

925

950

May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

VAM (US$/ ton)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY06 FY08 FY10 FY12 FY14 FY16

Dividend payout (%)

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY10 FY12 FY14 FY16

FCF (Rs mn) FCF/ PAT (RHS) (RHS)

Majority of the portfolio has a strong pricing

power

Professional management taking

over the reins

5 June 2017


workings of the company to industry professionals and focus only on the strategic direction

as and when needed. In April 2015, Bharat Puri became the first non-family CEO to take

charge of Pidilite industries as the CEO and MD. He has already been on the board of

Pidilite since 2008, and hence, was fairly well versed with the business. Moreover, Bharat

comes with very strong experience with two leading names, Mondelez and Asian Paints.

Two family members, Apurva Parekh and Ajay Parekh, are still actively involved in the

operations and focus on further building and taking forward the franchise. However, they

may take a call in the future to completely hand over the reins to a professional

management. In some sense, this is the way in which Asian Paints has been run for many

years with the promoter families’ only assisting in the strategic direction while leaving day-

to-day operations to professional management. Pidilite has a number of strong

professional (non-family) people in its middle level management ranks.

Figure 50: Key senior management personnel at Pidilite

Name Family or non-

family Designation

With Pidilite

since Previous Position(s) Experience

MB Parekh

Son of the

founder Balvant

Parekh

Executive Chairman

Built Pidilite's

consumer

business

- Credited with the major branding initiatives

for Fevicol

Bharat Puri Professional Managing Director -

Pidilite April 2015

President, Global Chocolates

division at Mondelez

International

16 year stint with Asian Paints between

1982 and 1998

17 years with Cadbury (later Mondelez):

1998-2015

Independent director on Pidilite's board

since 2008

Apurva

Parekh Promoter family Executive Director 1996 -

21 years with the company; manages the

consumer business

Ajay Parekh Promoter family Executive Director 1982 - Over 30 years with the company

Sanjay

Bahadur Professional

CEO - Construction

Chemicals Feb 2010

MD of Unitech Prefab Ltd; also

worked at L&T

7 years with Pidilite; overall 27 years in the

industry

Prabhakar

Jain Professional

CEO - International

Business May 2009

MD of Goodyear India

MD of Akzo Nobel, Thailand

Over 7 years with Pidilite

~10 years of paints industry experience with

Asian Paints and Akzo Nobel


A comparison with Asian Paints

We believe it is only fair that Pidilite's business be compared with the business of Asian

Paints in India. Like Pidilite, Asian Paints has managed and grown its brand equity over

the years in the minds of consumers, forged and nurtured strong relationships with

influencers (painters, contractors, masons etc.) and has maintained its market leading

shares.

Top-line growth for both the companies has been very similar with Pidilite delivering

slightly faster earnings growth over the longer term. When it comes to return metrics,

Asian Paints comes out ahead but not by a far measure.

Further investigation (by running a Du Pont) on both companies reveals that Asian Paint's

slightly higher return rations compared to Pidilite can be attributed to (1) higher asset

turnover which is due to relatively lower inventory at Asian Paints, (2) better margins

(basis ten-year averages), and (3) higher financial leverage.

On ROIC, the comparison is much closer as this excludes cash on the books. This could

be a reflection of the fact that Pidilite has had lower dividend payouts than Asian Paints.

5 June 2017


Figure 51: Pidilite has grown ahead of Asian Paints Figure 52: Comparison of key financial metrics

Note: Sales, EBITDA, PAT are ten-year growth CAGRs while return ratios are basis ten-year averages. Source: Company data, Credit Suisse research

Source: Credit Suisse estimates

We arrive at a Rs920 TP using a DCF methodology

Valuing Pidilite using DCF methodology, we arrive at a fair value of Rs920. We use a

three-stage DCF with our sales and FCFF assumptions for the three stages presented

below. FCFF grows ahead of sales in both stages due to scale benefits and operating

efficiencies which we build in over time. We use WACC of 10.6% with a 5% terminal

growth rate.

Figure 53: DCF assumptions Figure 54: DCF value sensitivity

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 55: Assumptions used for WACC calculation Figure 56: Calculation of value per share

Source: Credit Suisse estimates Source: Credit Suisse estimates

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Sales EBITDA PAT ROE ROIC

10 year growth cagr/ average

Asian Pidilite

Metric (10 year average) Asian Paints Pidilite

EBIT/ Sales (%) 16.1 15.6

Asset turnover (Sales/ Total assets) 1.8x 1.4x

Interest burden (PBT/EBIT) 1.0x 0.9x

Tax efficiency 0.7x 0.8x

Financial leverage (assets/ equity) 2.0x 1.8x

ROE (%) 37.9 27.2

Growth stage

(FY17-27)

Fade stage

(FY27-40)

Terminal

growth

Sales cagr 15.2% 10.5% -

FCFF cagr 16.3% 10.9% 5%

920 4.0% 4.5% 5.0% 5.5% 6.0%

10.2% 928 966 1,011 1,065 1,133

10.4% 889 923 964 1,012 1,071

10.6% 853 884 920 963 1,016

10.8% 819 847 880 918 965

11.0% 788 813 842 877 919

Terminal growth rate

WA

CC

Risk free rate 7.0%

Adjusted beta 0.76

Equity Risk Premium 5.0%

Cost of Equity 10.8%

Debt % 2

Equity % 98

Cost of Debt 8%

WACC 10.6%

Terminal growth rate 5.0%

Valuation (Rs mn)

PV of FCFF (EV) 458,115

Cash 16,850

Debt 843

Minority Interest 512

Net DTL 844

Equity Value 472,767

# of shares 513

Per share value (Rs) 920

5 June 2017


Figure 57: At median valuations on P/E… Figure 58: …as well as on PEG

Note: Updated as of 1 June 2017. Source: Credit Suisse estimates Source: Credit Suisse estimates. Updated as of June 1st 2017

Risks to our estimates

■ A sluggish India macro-economy: A slower-than-expected recovery in economic

growth, and thus consumption, can mean another year or two of lacklustre growth for

Pidilite. This will pose a risk to our growth estimates. We have assumed a moderate

recovery in volume growth over the next two years which may not play out if rural

demand remains weak as has been the case over the last two years. The company

has some exposure to the construction/housing market which has been weak over the

last two years. We have assumed some recovery in the same given the government’s

focus on affordable housing and a recovery in the housing market post demonetisation.

If that does not play out, there would be downside risk to our growth estimates.

■ Sharp increase crude oil prices: Most of the company’s input costs are crude linked.

While the company has a strong pricing power, a sharp increase in crude prices can

hurt near-term gross margins, and thus, earnings estimates can be hit.

■ Aggressive competition: If Asian Paints manages to make some strong inroads in

the adhesive segment after its recent distribution tie-up with Henkel, it may give rise to

some competitive pressures for Pidilite. Likewise, a very successful and aggressive

implementation by paint companies on the water-proofing side may also impact

Pidilite's growth and profitability. We have built in stable business margins and healthy

growth on the back of the assumption that competitive intensity remains benign and

ineffective. However, a strong business strategy and effective advertising aggression

by a player like Asian Paints can hurt Pidilite’s market shares. This can be a key

medium-to long-term risk to the stock.

■ Ready-made furniture: Pick-up in ready-made furniture, which is largely factory made

using particle board or MDF (medium-density fireboard), is another risk. This kind of

furniture is bonded using specialised bonding/ screwing techniques and is sold either

online or through organised retail; the penetration of both is very small in India

currently. But a sharp pick-up in this segment can be a potential risk to growth. Ready-

made furniture has a much higher salience in developed markets as labour costs are

prohibitively high to custom-made home furniture in the way it is done in India.

■ Slowdown in the innovation engine: Pidilite has kept the innovation engine firing,

launching both premium products within the existing core product range while also

introducing new products for specific consumer needs. This combination has ensured

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Nes

tle

TT

K

Asi

an P

aint

s

Pag

e

HU

L

UN

SP

JUB

I

Mar

ico

Col

gate

Pid

ilite

Hav

ells

Tita

n

GC

PL

Cro

mpt

on

Dab

ur

GS

K

Em

ami

ITC

PE (FY19) Median

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Nes

tle

Asi

an P

aint

s

Dab

ur

Mar

ico

GS

K

HU

L

TT

K

Pid

ilite

Pag

e

Col

gate

ITC

GC

PL

Em

ami

Tita

n

Hav

ells

Cro

mpt

on

JUB

I

UN

SP

PEG (x) Median

5 June 2017


that the company has managed to grow its consumer portfolio at a 18-20% long-term

CAGR. We assume in our thesis that the company retains this DNA and the innovation

engine keeps firing generating steady long-term growth. A slowdown or a large gap in

new launches can slow down growth.

5 June 2017


HOLT® view The HOLT methodology uses a proprietary performance measure known as Cash Flow

Return on Investment (CFROI®). This is an approximation of the economic return, or an

estimate of the average real internal rate of return, earned by a firm on the portfolio of

projects that constitute its operating assets. A firm's CFROI can be directly compared

against its real cost of capital (the investors' real discount rate) to see if the firm is creating

economic wealth. By removing accounting and inflations distortions the CFROI allows for

global comparability across sectors, regions and time, and is also a more comprehensive

metric than the traditional ROIC and ROE.

Pidilite Industries vs Custom Peer Aggregate: historical and near-term expectations for returns and growth

HOLT provides the ability to aggregate economic returns and compare Pidilite relative to

its diversified chemicals custom peer group (referred to as peer aggregate).

Pidilite boasts of an excellent track record of above-peer level returns, averaging 14.2%

over the last decade. In contrast, the peer aggregate’s returns only averaged around 6.7%

during the same period. Pidilite’s economic moat is likely attributable to Pidilite Industries’

dominant market position in the Indian adhesive market with its innovative and sticky

product line and a large distribution network. The company owns India’s largest wood

working adhesive brand ‘Fevicol’ and other market leading products and brands across

sealants, water-proofing, instant glues and art materials. Due to its competitive advantage,

Pidilite Industries improved its CFROI levels from 13.3% in 2011 to 20.2% in 2015—

highest since its inception.

Given its consistently strong and stable returns, Pidilite has been awarded an eCAP in

HOLT (empirical competitive advantage), which only constitutes less than 6% of the global

universe. Under this the HOLT default fade window is extended to ten years, thus delaying

the mean reversion to long-term observed levels.

In Figure 59, near-team consensus expectations (the pink bars) for Pidilite are for robust

returns at ~19%. Market is pricing in a further increase to 21% in the next ten years (the

green dot)—demanding compared to the company’s historical returns, thus suggesting

most of the positives to be priced in.

Figure 59: High value creation by Pidilite Industries; optimistic market expectations

Peer group consists of 3M India Limited, BASF SE, Dow Chemical, Eastman Chemical Co, Henkel KGAA, Huntsman Corp, ICI Pakistan Limited, PI Industries Limited, RPM International Inc. Source: Credit Suisse HOLT®

5 June 2017


Breaking down the performance into sales, margin and asset turnover, it can be seen that

Pidilite’s strong outperformance in returns is attributable to its robust top-line growth and

high asset efficiencies compared to its peers. The company posted an impressive top-line

growth averaging ~15% over the last five years and improved its margins by 600 bp

reaching 22.2% in 2015. Maintaining its top-line growth and improving margins could be

potential drivers for growth in the future.

Figure 60: Sales, margins and turns of Pidilite Industries vs Diversified Chemicals Peer

Source: Credit Suisse HOLT®

Analysing the economic returns

Economic Profits are earnings in excess of the opportunity cost of using the assets or

capital. A firm that earns an EROI equal to the cost of capital earns zero EP. Positive

return on capital in conjunction with growth in invested capital results in value creation.

Figure 61 shows the historic Economic Profit for Pidilite which has been on an uptrend

since 2009 (except for a slight decline in 2011) reinforced by the strong value drivers

shown above. They are largely driven by incremental growth (pink bars in the Change

chart); the Economic Profit has been on an uptrend and aligns with a similar historic trend

in shareholder returns (green line).

5 June 2017


Figure 61: Economic Profit and Shareholder returns of Pidilite Industries


Understanding the drivers of value

Figure 62 below reflects the drivers of returns, in terms of margins and asset efficiency

across Pidilite and its peers. The figure reflects the firm’s current position, with the levels

of CFROI expressed by the size of the bubbles. Pidilite currently trades at one of the

highest asset efficiencies across its peers. If the company can improve margins to align

that of the aggregate peers, further improvement in CFROI levels may be plausible.

Figure 62: Improving margins could potentially be key value driver


5 June 2017


Pidilite’s market-expectations gap indicates valuation is slowly turning attractive relative to recent history

Figure 63 below shows that while consensus-driven T+1 CFROI levels (pink bars) have

been robust; the market expectations (green dots) over the past five years have been

consistently above, implying that some positives have been largely priced in already.

Having said that, with the recent correction of market expectations, the spread in

expectations between analysts’ expression of near-term corporate profitability and market

implied expectations have narrowed in the recent months, suggesting that valuation is

turning incrementally more supportive relative to its recent history.

Figure 63: Historical expectations of Pidilite Industries


CS Analyst forecasts in HOLT

CS analyst forecasts have been linked to Credit Suisse HOLT— an objective, proprietary

corporate performance and valuation framework.

The charts in Figure 64 reflect CS forecasts of a stable CFROI profile averaging at 19.7%

between 2016 and 2018. This is premised on robust top-line CAGR of 14.8% and strong

margins at ~23% as the company is well set to benefit from a revival in India macro with

ample potential business opportunities.

Due to its eCAP status on HOLT, we value Pidilite on a ten-year explicit forecast window,

thereby delaying the onset of fade. Beyond the explicit forecast period, HOLT uses a fade

DCF model to arrive at the warranted price, assuming the CFROI and discount rate fade to

6%, while asset growth fades to 2.5%—incorporating the economic reality of competition

which causes the CFROI and growth rate to regress to the mean. CS analyst’s target price

of Rs920 suggests a fade rate of 9%—which implies that the company would generate

returns above its cost of capital for the next 21 years.

5 June 2017


Figure 64: CS analysts forecast in HOLT


Current Price: INR 770.15 Warranted Price: INR 928.73 Valuation date: 01-Jun-17

Sales Growth (parallel % point change to forecasts) Mar 15A Mar 16A Mar 17E Mar 18E Mar 19E

INR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 13.1 10.8 4.8 14.1 15.6

EBITDA Mgn, % 16.3 22.2 22.4 22.8 23.3

Asset Turns, x 1.29 1.2 1.2 1.2 1.2

CFROI®, % 16.4 20.3 19.3 19.5 20.3

Disc Rate, % 2.3 2.7 1.5 1.5 1.5

Asset Grth, % 5.7 19.8 4.4 7.3 7.9

Value/Cost, x 10.2 8.6 11.3 10.0 8.9

Economic PE, x 62.0 42.6 58.4 51.4 43.7

Leverage, % 1.1 1.0 0.8 0.9 1.0

HO

LT

-

C

red

it S

uis

se A

naly

st

Scen

ari

o D

ata

PIDILITE INDUSTRIES LIMITED

(PIDI)E

BIT

DA

Marg

in (

para

llel

% p

oin

t ch

an

ge

to f

ore

casts

)

-2.0% -18% -8% 5% 19%

55%

35%

-1.0% -12% 0% 13% 28% 45%

0.0% -6% 7% 21% 37%

75%

1.0% 0% 14% 28% 45% 65%

2.0% 7% 21% 36% 54%

More than

10%

downside

Within 10%More than

10% upside

Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries .

0

2

4

6

8

10

12

14

16

18

20

2011 2013 2015 2017 2019 2021 2023 2025

Sales Growth (%)

0

5

10

15

20

25

30

2011 2013 2015 2017 2019 2021 2023 2025

EBITDA Margin

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2011 2013 2015 2017 2019 2021 2023 2025

Asset Turns (x)

0

5

10

15

20

25

2011 2013 2015 2017 2019 2021 2023 2025Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROIDiscount Rate

CFROI & Discount Rate (in %)

0

5

10

15

20

25

2011 2013 2015 2017 2019 2021 2023 2025

Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate

Asset Growth (in %)

5 June 2017


Appendix: Business segments

At a broad level, the company classifies its business into two segments:

Consumer & Bazaar (B2C) which is 85% of sales: This segment includes all branded

products. The company has strong individual brands for each of its categories such as

'Fevicol' and 'Fevikwik' in the adhesives; 'M-Seal' in sealants and 'Dr Fixit' in

waterproofing. Customers for this segment include the end retail consumers as well as

repairmen, masons, carpenters, plumbers, children, etc.

Industry specialty chemicals (B2B) which is 15% of sales: This segment includes

adhesives, resins and pigments which are supplied to institutional clients in packaging,

textile, paint, leather and such industries. These products are not branded as such.

Figure 65: ~85% of revenues come from sale of

consumer branded products

Figure 66: Share of B2C has been steadily rising;

expect the trend to continue into the future

Source: Company data Source: Company data,

Over the last ten years, the B2C part of the business has grown much faster than the B2B

portion. Margins in the consumer facing segment are much higher given the superior

pricing power. We expect this trend to continue in the future with the B2C business

increasing its share over the coming years.

Figure 67: Further break-down of segmental

revenues for each segment

Figure 68: Consumer products have grown ahead of

industrial offerings over the last ten years

Note: As of FY16. Source: Company data

Source: Company data

Cosnumer & Bazaar

84%

Industrial16%

Revenue mix (%)

80% 80% 82% 83% 83% 82% 84%

0%

20%

40%

60%

80%

100%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

Evolution of revenue mix (%)

Cosnumer & Bazaar Industrial


64%


23%

Art Material & others

13%

Industrial Resins/

adhesives65%

Orgniac Pigments &

Prep.35%


29.122.2

18.9 17.513.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0



Adhesives &Sealants

OrgniacPigments &

Prep.

IndustrialResins/

adhesives

10 yr cagr (%)


5 June 2017


Figure 69: Product range on offer under some of the leading brands

Product Variant Description

Fevicol SH Basic Basic Fevicol—Standard wood working adhesive

Fevicol SH Extra Stronger bonding and ease of application

Fevicol SpeedX Dries within 2-3 hours versus having to be left overnight especially in the case of laminates

Fevicol Heat X High Heat resistance capacity up to 170 degrees; fast bonding, grip & no spring back action

Fevicol Marine For bonding surfaces prone to high water exposure; 5 days normal waterproof

Fevicol Probond For bonding of acrylic and PVC sheets which are otherwise difficult to bond with wood

Fevicol SR998 For fast bonding of surfaces where it is difficult to apply direct pressure

Fevicol Ezee Spray Unique first in the market spray format wood bonding adhesive for quick application

M-Seal Basic Used as sealant to block leaks, as a bonding agent in some cases, also as a filler for levelling

M-Seal Basic (white) Used as an alternative to white cement to preserve aesthetics

M-Seal Super Can work in completely wet environments; does not need application area to be dried

M-Seal Plumber For fastening and leak proofing GI pipes; joints can be easily re-opened. Safe on water

M-Seal Plumber white A white variant of the same product to retain aesthetics

M-Seal Thread Seal tape To seal GI pipes. Much stronger than other available tapes. Used in plumbing, garage work

M-Seal PVC white cement For rigid PVC pipe joints and PVC sheets bonding and sealing

Dr Fixit Roofseal Tough, flexible waterproof coating for roofs

Dr Fixit Roofseal Flex Heavy duty cementitious waterproof coating for new roofs

Dr Fixit Bathseal range Dr. Fixit bathseal range of products for 100% leak-free bathroom waterproofing

Dr Fixit Solyseal Waterproofing of above ground & below ground concrete structures

Dr Fixit Raincoat For exterior walls

Dr Fixit Raincoat cool Reradiates most of solar heat back into atmosphere, thus lowers the surface temperature

Dr Fixit Wonderproof 1 For application on severely damp walls; combats negative water pressure


Figure 70: CS segmental revenue growth forecasts

Segmental growth FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Adhesives & sealants 14.2 18.1 13.9 20.9 33.6 29.1 14.1 8.2 21.1 22.5 17.6 14.2 13.1 17.5 6.2 16.0 15.0

Construction/ paints chemicals 37.4 13.8 27.2 27.2 45.2 28.2 31.9 17.0 27.8 23.9 17.6 10.6 19.0 5.3 4.5 13.0 21.0

Art material & others 16.3 13.8 18.1 18.7 63.3 36.7 16.4 84.1 9.0 4.6 47.1 39.7 13.1 1.6 4.0 16.0 16.0

Industrial 12.3 5.7 22.7 9.9 30.7 19.6 21.9 15.5 21.1 7.4 6.4 16.5 7.1 4.7 1.0 7.0 10.0

Source: Company data

International foray: Early days but profitability

turning the corner

Pidilite has over the years forayed into international markets. The company targets using

its strong brand equity to market to the Indian diaspora in international markets. Besides,

the company has selectively acquired some established brands in overseas markets. For

example, about a decade back, it bought Sargent Art in the US which deals with the art &

craft segment. Several of Sargent's products are now also sold in India. More recently, in

Sri Lanka, it bought Chemix which was the market leader in the water-based adhesives

segment.

In the future management plans to be more focussed around the SAARC region and

expects to grow faster than the India business given its low base.

5 June 2017


Figure 71: CC revenue growth for international

revenues

Figure 72: Revenue breakup of the international

business


Revenues from international business get captured in the non-standalone (consolidated

standalone) reporting and are clubbed with the other but much smaller domestic service

business such as Nina and Percept water-proofing and such.

Figure 73: International operations contribute ~10%

to the top line and <5% to the bottom line

Figure 74: Revenue growth and profitability has

improved over the last two years


Figure 75: Financial performance of global subsidiaries in constant currency

Source: Company data, Credit Suisse estimates

0%

5%

10%

15%

20%

25%

FY13 FY14 FY15 FY15 FY16 FY17

International subsidiaries CC growth (YoY)

North America

42%

South America17%

SAARC14%

SE Asia9%

ME & Africa18%

(400)

(300)

(200)

(100)

0

100

200

300

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Non-standalone sales and profits

Net Sales (Rs mn) PAT (Rs mn) (RHS)

-10.0

-5.0

0.0

5.0

10.0

15.0

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

Non- Standalone % Consol.

Net sales EBITDA PAT

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

0

500

1,000

1,500

2,000

2,500

3,000

NorthAmerica

SouthAmerica

Bangladesh Srilanka Thailand Egypt Dubai Others

Rs mn

FY17 sales FY16 sales FY17 EBITDA margin (RHS)

5 June 2017


Valuation matrix

Figure 76: Valuation matrix

Company CMP (Rs) M Cap

(USD Bn)

PER

(FY18)

PER

(FY19)

Rating Target

Price (Rs)

Upside

(%)

Earnings CAGR

(FY17-19E)

ROE

(FY18)

ROCE

(FY18)

EV/EBITDA

(FY18)

FMCG

HUL 1098 36.9 47.4 40.2 NEUTRAL 1100 0% 18.0% 153.0% 129.8% 32.4

ITC 318 60.0 31.3 27.4 OUTPERFORM 360 13% 14.7% 28.8% 23.7% 21.9

Nestle 6725 10.1 55.0 47.0 UNDERPERFORM 5900 -12% 17.4% 35.3% 35.7% 31.4

Colgate 1021 4.3 40.9 34.7 NEUTRAL 1050 3% 18.5% 53.3% 55.1% 24.5

Dabur 286 7.8 35.5 31.1 NEUTRAL 275 -4% 12.4% 25.5% 19.3% 30.4

Marico 324 6.5 44.7 38.6 NEUTRAL 300 -7% 15.3% 34.9% 31.7% 32.2

GSK 5406 3.5 31.3 28.0 OUTPERFORM 6000 11% 11.3% 24.6% 18.4% 22.1

Emami 1144 4.0 33.1 28.1 OUTPERFORM 1250 9% 19.0% 38.1% 37.6% 30.3

GCPL 1815 9.6 38.9 33.0 OUTPERFORM 2000 10% 19.6% 21.9% 17.4% 28.9

Spirits

United Spirits 2482 5.6 65.3 42.2 OUTPERFORM 2600 5% 44.1% 20.8% 22.8% 35.0

Discretionary

Jubilant Foodworks 936 1.0 54.4 38.8 OUTPERFORM 1100 18% 40.8% 10.0% 11.0% 19.9

Titan 552 7.6 46.8 37.9 OUTPERFORM 560 1% 24.7% 20.5% 20.8% 31.4

Page Industries 14485 2.5 48.8 39.4 NEUTRAL 15000 4% 23.6% 41.9% 37.5% 30.7

TTK Prestige 6727 1.2 49.9 42.4 UNDERPERFORM 5000 -26% 19.7% 15.9% 14.0% 32.1

Asian Paints 1162 17.3 48.4 41.1 UNDERPERFORM 1000 -14% 16.2% 33.0% 29.7% 30.5

Havells 485 4.7 41.1 33.2 NEUTRAL 550 13% 24.1% 21.0% 21.5% 25.7

Crompton Consumer 235 2.3 39.5 31.7 OUTPERFORM 270 15% 22.7% 81.7% 41.4% 25.2

Pidilite Industries 796 6.3 43.5 36.5 OUTPERFORM 920 16% 17.8% 24.2% 21.7% 26.9

Note: priced as of 5 June 2017. Source: Thomson Reuters, Credit Suisse estimates.

5 June 2017


Companies Mentioned (Price as of 02-Jun-2017) 3M India (TMIN.NS, Rs13711.7) Asian Paints (ASPN.BO, Rs1162.85) BASF (BASFn.DE, €85.31) Berger Paints (BRGR.NS, Rs253.95) Colgate-Palmolive India (COLG.BO, Rs1026.0) Crompton Greaves Consumer Electrical Limited (CROP.BO, Rs241.75) Dabur India (DABU.BO, Rs284.1) Dow Chemical Company (DOW.N, $63.05) Eastman Chemical (EMN.N, $81.11) Emami Ltd (EMAM.BO, Rs1137.0) GlaxoSmithkline Consumer Healthcare (GLSM.BO, Rs5420.85) Havells India Ltd (HVEL.BO, Rs483.75) Henkel (HNKG_p.F, €127.4) Hindustan Unilever Ltd (HLL.BO, Rs1086.95) Huntsman C (HUN.N, $24.51) ICI Pakistan (ICI.KA, PRs1110.13) ITC Ltd (ITC.BO, Rs319.15) Jubilant Foodworks (JUBI.BO, Rs927.95) Jubilant Life (JULS.NS, Rs736.35) Marico Ltd (MRCO.BO, Rs321.9) Nestle India (NEST.BO, Rs6644.8) PI Industries (PIIL.NS, Rs810.0) Page Industries (PAGE.BO, Rs14276.05) Pidilite Industries (PIDI.NS, Rs791.55, OUTPERFORM, TP Rs920.0) RPM International (RPM.N, $55.97) TTK Prestige (TTKL.BO, Rs6702.45) Titan Company Ltd (TITN.BO, Rs472.25) United Spirits Ltd. (UNSP.BO, Rs2343.4)

Disclosure Appendix

Analyst Certification Rohit Kadam, CFA, and Arnab Mitra each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

5 June 2017


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (65% banking clients) Neutral/Hold* 39% (61% banking clients) Underperform/Sell* 14% (55% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. This material is intended for your use only and not for general distribution. This material is not intended to promote or procure a particular outcome in the UK General Election (the "Election"). Credit Suisse does not promote or endorse any party in the Election. This material does not constitute, and should not be interpreted as, a recommendation by Credit Suisse as to the merits of a particular outcome of the Election.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Pidilite Industries (PIDI.NS)

Method: We rate Pidilite an OUTPERFORM as we believe the business has over the years built a sustainable business moat and stands to benefit strongly from rising consumption spends in India. Our target price of Rs920 is based on discounted cash flow with a WACC assumption of 10.6% and a 5% terminal growth rate assumption.

Risk: Key risks to our Rs920 target price and OUTPERFORM rating are: (1) a sharp rising in crude linked input costs, and (2) a sluggish and protracted macro recovery in India.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (UNSP.BO, EMAM.BO, BASFn.DE, CROP.BO, HLL.BO, HNKG_p.F, ASPN.BO, DOW.N, NEST.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (EMAM.BO, BASFn.DE, CROP.BO, HLL.BO, HNKG_p.F, ASPN.BO, NEST.BO) within the past 12 months. Credit Suisse provided non-investment banking services to the subject company (EMAM.BO, GLSM.BO, TITN.BO, BASFn.DE, ITC.BO, DOW.N, JUBI.BO, NEST.BO) within the past 12 months Credit Suisse has managed or co-managed a public offering of securities for the subject company (NEST.BO) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (EMAM.BO, BASFn.DE, CROP.BO, HLL.BO, HNKG_p.F, ASPN.BO, NEST.BO) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (UNSP.BO, EMAM.BO, COLG.BO, BASFn.DE, CROP.BO, HLL.BO, HNKG_p.F, ASPN.BO, DOW.N, JUBI.BO, NEST.BO) within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (EMAM.BO, GLSM.BO, TITN.BO, BASFn.DE, ITC.BO, DOW.N, JUBI.BO, NEST.BO) within the past 12 months A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (PIDI.NS, HVEL.BO, UNSP.BO, EMAM.BO, GLSM.BO, TITN.BO, COLG.BO, MRCO.BO, TTKL.BO, CROP.BO, ASPN.BO, DABU.BO, PAGE.BO, DOW.N, JUBI.BO, NEST.BO) within the past 12 months. Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (TMIN.NS, JULS.NS, PIIL.NS, BRGR.NS, PIDI.NS, HVEL.BO, UNSP.BO, EMAM.BO, GLSM.BO, TITN.BO, COLG.BO, MRCO.BO, TTKL.BO, CROP.BO, HLL.BO, ASPN.BO, DABU.BO, ITC.BO, PAGE.BO, JUBI.BO, NEST.BO) As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (JUBI.BO).

https://plus.credit-suisse.com/

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html

https://rave.credit-suisse.com/disclosures/view/selectArchive

5 June 2017


Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (JUBI.BO). Arnab Mitra worked as an employee in Hindustan Unilever.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=304066&v=-6g32qyu1t7axxxpkawqf2mpsp .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (BASFn.DE, HNKG_p.F). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (NEST.BO) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (India) Private Limited ................................................................................................... Rohit Kadam, CFA ; Arnab Mitra To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (India) Private Limited ................................................................................................... Rohit Kadam, CFA ; Arnab Mitra

Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.

Important disclosures regarding companies or other issuers that are the subject of this report are available on Credit Suisse ’s disclosure website at https://rave.credit-suisse.com/disclosures or by calling +1 (877) 291-2683.

https://rave.credit-suisse.com/disclosures


https://rave.credit-suisse.com/disclosures/view/report?i=304066&v=-6g32qyu1t7axxxpkawqf2mpsp

https://rave.credit-suisse.com/disclosures/view/report?i=304066&v=-6g32qyu1t7axxxpkawqf2mpsp


5 June 2017


This report is produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates.The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk.

This report is issued and distributed in European Union (except Switzerland): by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Germany: Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). United States and Canada: Credit Suisse Securities (USA) LLC; Switzerland: Credit Suisse AG; Brazil: Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; Mexico: Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); Japan: by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau ( Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; Hong Kong: Credit Suisse (Hong Kong) Limited; Australia: Credit Suisse Equities (Australia) Limited; Thailand: Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok10500, Thailand, Tel. +66 2614 6000; Malaysia: Credit Suisse Securities (Malaysia) Sdn Bhd; Singapore: Credit Suisse AG, Singapore Branch; India: Credit Suisse Securities (India) Private Limited (CIN no.U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777; South Korea: Credit Suisse Securities (Europe) Limited,

Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

https://www.credit-suisse.com/who-we-are

outperform initiation a near-monopoly with a 'sticky

Documents