Rating Rationale

Strengths
* Leading position in the consumer adhesive and sealant market
Pidilite is the largest player in the consumer adhesive and sealant industry. It is an iconic brand in the domestic adhesives segment, where it is synonymous with the product itself. It has leveraged Fevicol's favourable market presence to acquire and develop new products and variants and build its market position. Having a well-established brand and the ability to customise the product portfolio provide the company, a competitive edge over unorganised players.

Furthermore, apart from steady growth in the adhesive and sealant categories, Pidilite is also likely to see healthy double digit growth in newer categories such as waterproofing and floor coating in the medium term. Additionally, increasing focus on some of the overseas markets (few countries in South & South East Asia, Central Africa and Middle East) will also support the growth in the medium term.

* Strong brand management, backed by extensive marketing and distribution network
The strong brand equity is backed by greater focus on quality, the diversified distribution network, and strong advertising support. Over the years, the company has imparted brand equity to commoditised products, through its aggressive and innovative marketing style. It has also developed an extensive pan-India network, comprising over 5,000 distributors, servicing 200,000 dealers, retailers and contractors. The company's presence across price points and categories acts as an effective barrier against competition.

* Strong financial risk profile
Financial risk profile is marked by a healthy networth and gearing, and strong debt protection metrics. Networth may improve further, led by healthy accretion to reserves over the medium term. The company is likely to maintain its near debt-free status over the medium term, given that its annual capital expenditure (capex) requirement will be met through internal accrual. The polychloroprene rubber project has been put on hold, and the management is looking for a strategic partner to invest and take the project forward. Any additional investment in the project will be a key rating sensitivity factor.

Weakness
* Moderate profitability and volatility in the industrial chemicals segment
The industrial specialty chemicals segment, which is a bulk commodity business, includes industrial adhesives, synthetic resins, organic pigments, and surfactants, and accounted for 16% of total revenue for fiscal 2018. Competition from international and domestic players limits the scope for passage of any hike in cost to customers.

* Weak, though improving, performance of overseas subsidiaries
Performance of overseas subsidiaries, which account for 8% of overall revenue, has sustained and earnings before interest, depreciation, tax, and amortisation (EBIDTA) has been positive since fiscal 2018. However, these subsidiaries, specifically in Brazil and the Middle East, operate on a smaller scale, with high input costs, and face competition and economic challenges. While the Brazilian subsidiary has been able to trim its losses by improving the operating efficiency, the Middle East facility was commercialised in fiscal 2016, and is currently on a ramp-up mode. Performance of international subsidiaries should improve gradually over the medium term.