PI INDUSTRIES LTD

KEY INFORMATION FOR PI INDUSTRIES LIMITED

Date

08 January 2021

Market Price (INR)

2335

52Week H/L

2650/970.1

Market Cap (INR Bn)

354.71

Shares Outstanding (Mn)

152

Industry

Agrochemical

Recommendation

Buy

Target Price

2713

Upside/Downside

14.3%

 

Key Financial

FY20

FY21E

FY22E

FY23E

Sales

33,665

41,882

53,824

66,920

Growth (%)

18.50%

24.41%

28.51%

24.33%

EBITDA

7,178

9,732

12,934

16,186

Margin (%)

21.32%

23.24%

24.03%

24.19%

PAT

4,566

6,263

8,285

10,309

EPS

33.097

41.204

54.506

67.823

Growth (%)

11.30%

24.50%

32.28%

24.43%

DPS

3.6

7.0048

10.901

13.565

ROE (%)

17.43%

19.94%

21.78%

22.28%

ROCE (%)

22.96%

26.68%

30.00%

31.52%

EV/EBITDA(x)

60.7x

48.8x

36.0x

27.1x

P/E(x)

68.6x

55.1x

41.6x

33.5x

 

Share Holding Pattern (%)

Promoter

46.75%

FIIs

14.72%

DIIs

25.74%

Others

12.79%

A unique business model of PI’s Growth

PI Industries follows the in-licensing model in domestic markets, whereas the contract manufacturing (CSM) business model in the export market. It is a unique business model.

PI Industries is an established leader in the CSM business in India. They have built a niche in process engineering of agrochemical by leveraging their R&D process and manufacturing capabilities. PI is collaborated with more than 18 global innovators for contract manufacturing of intermediates and molecules. The company has a sturdy order book of USD 1.5 bn, that can be executed in the next 3-4 years. The company is coming up with a new production facility in Jambusar, Gujarat plant, which would provide a robust revenue and earnings visibility for the next 3-4 years to support the healthy order book. We expect PI’s CSM business revenue would grow at a CAGR of 24.7% over the F20-F23E.

PI forays into the new business segment like pharma, and specialty chemical, and follows a superior and successful CSM business model. We believe this would be a key catalyst in the future.

PI Industries is leveraging its strong relationship with global players to offer novel products, followed by an in-licensing business model. The company has a strong product pipeline, a recently launched product, superior brand-building capabilities, and the distribution network’s vast reach. The domestic business is expected to grow at a CAGR of 15.7% over F20-F23E.

Available at an attractive valuation

The robust revenue visibility prospects across all segments would deliver a healthy earnings growth of 31.2% to the bottom line over the next three years. We believe that PI deserves a premium valuation compared to its peers and is valued at PE 35x F23E EPS, and arrived at a target price of INR 2374.

COMPANY PROFILE

PI Industries Ltd has been using science to revolutionize agriculture in India with some of the largest Agro brands in its portfolio, bringing innovation to the agro-input space, increasing productivity, enhancing output, and creating economic value for millions of farmers for a better life. Today the company has a strong marketing and distribution network in India with 10,000 active dealers/distributors. It has reached more than 1 Lakh retailers with strong agricultural extension capabilities and unique product delivery mechanism and has created a successful track record of earning farmers’ trust with innovative ideas.

MANAGEMENT PROFILE

 Name

 Designation

 Raman Ramachandran

 CEO, Director & MD

 Prashant Hegde

 CEO – Agro Chem Business

 Rajiv Batra

 Chief Financial Officer

 K.V.S Rao

 CEO – CSM Business

 Mayank Singhal

 Executive Vice Chairman of the Board, Managing Director

 Devendra Ray

 President & Head-Mfg Strategy

 Rahul Gautam

 Chief People Officer

Sameer Dhaga

 Chief Information Officer

Atul Gupta

 President – Operation

Anand Kamat

 Sr. VP – Supply Chain

P.V. Srinivas

 Sr. VP – Process Technology

Naresh Kapoor

 Compliance Officer & Company Secretary

K.V. Satish Kumar

 Chief Sustainability Officer

A healthy order book in CSM business remains the key growth driver

PI Industries is an established leader in the agrochemical CSM business in India. They have built a niche in the process engineering of agrochemicals by leveraging their vital research and manufacturing capabilities. PI offers a one-stop solution for process scale-up and large-scale manufacturing for global innovators.

The company helps global manufacturers efficiently commence their newly discovered molecules by providing them with research and commercial manufacturing services. Their cost-efficient manufacturing, skills in chemistry, and quality-driven services are an overall value proposition for global manufacturers.

In the CSM business, PI’s strategy is to focus on early-stage, patented molecules. It is either the only supplier or one or two suppliers focused on complex chemistries involving multiple production processes. In this business, the company enters into multi-year or annual contracts with its customers. PI Industries Ltd chooses to renew specific contracts annually for the flexibility that provides, like switching to more remunerative molecules should an opportunity arise. The long-term agreements are fully hedged on currency risk and commodity price risk, supporting the steady profit margins.

Global innovators rely on superior technology and innovation capabilities for the outsourcing partner like PI Industries Ltd has. This kind of CSM business once scaled up then it is a low-risk business model that provides strong revenue visibility and steady profitability.

The company has a robust and proven track record over the last 20 years and built up a healthy CSM order book of USD 1.5 bn, and has expected to execute within the next 3-5 years. They also take spot contracts on a typically annual basis, contributing 20-25% to CSM business’s revenues.

PI Industries has a relationship with more than 18 global innovators and works with most of them. Its top 5 clients generate 50-55% of CSM business revenue.

Due to the supply-side disruption in china, the company has witnessed higher inquiries from global players. The R&D spending has increased sharply over the last few years, reflecting a higher number of molecules in the pipeline. During Fy20, it carried out the synthesis of 44 new development molecules. Out of these, 13 molecules scaled up successfully, and five molecules were transferred to the next stage. With the higher number of molecules under the scale-up phase, the management is very confident to commence 6-7 molecules annually.

Adding capacity to support growing order book

The order book of PI Industries has been growing over the previous few years. The company has been consistently adding capacity to support its growing order book. It recently commenced two multi-purpose plants worth INR 3-3.5 bn. PI is aiming to achieve assets turnover 1.5x-2x. They are also planning to add two more multi-purpose facilities at Jambusar, over F22-F23E. We witnessed that PI&rsquo's fixed assets have grown sharply over the past few years, which will continue to guide higher CAPEX over the next few years. PI usually sets up a new plant only when the clients commit 70% of the new plant capacity. PI currently has 60 molecules in the pipeline. They have received >70 further inquiries, of which ~20% are in the non-agrochemical region.

A firm order book and upcoming production capabilities in Jambusar provide robust revenue visibility over the next 3 years with steady margins. We expect their CSM business revenue would grow at a rate of CAGR ~25% during F20-F23E.

Consistently launching new novel products to enhance domestic product portfolio

PI Industries Ltd has a 6% of market share and is a dominant player in the domestic agrochemicals market. The company focuses on introducing differentiated products in the domestic market, which gives a sustainable competitive advantage.

In the domestic agrochemical market, PI Industries follows an in-licensing model. The company in-licenses new molecules from global innovators and develops them into a strong brand proposition in the domestic market. In-licensed molecules are highly potential and are early-stage products for which PI enjoys exclusive market rights. The In-license business model allows the licensee to benefit from PI’s vast distribution network, and simultaneously, PI Industries Ltd gets the opportunity to launch new products in the domestic market exclusively. PI has built a long-standing relationship with its global innovators. It could provide an opportunity to introduce new products through an in-licensing model and allow co-marketing rights in early-stage products in India. The company also manufactures and markets branded generic products.

They have a unique product portfolio spanning more than 40 brands across herbicides, fungicides, insecticides, and specialty chemicals, including 6-8 in-licensed products and 10-12 co-marketed products. PI enjoys a higher margin compared to peers in the domestic market, mainly due to the higher portion of in-licensed and co-market products.

Substantial entry barriers to a unique business model

The industry faces a high entry barrier in India in the form of a lengthy registration process and 3-year complete data protection for the product. Over the years, the company has built a reputation through innovative products, property & data security, and a long-standing relationship with global innovators and deep farmer connections. Any company that wants to replicate the success of PI needs a significant amount of time and cost.

Innovatory product portfolio drives growth

The “ Nominee Gold” (Bypsyribac Sodium), a rice herbicide product launched by PI in Fy10, went a blockbuster product and generated the highest revenue and margin compared to its other products. But, once the exclusivity period ended for “ Nominee Gold” in Fy17, the product started facing healthy price competition. Earlier, the company imported the “ Nomine Gold,” which has now begun in-house production. We believe this should provide some more relief to face tighter competition.

The key drivers behind the success of PI are its effective products in the domestic market. The company has a niche product lineup at different registration stages from which they introduce 2-3 products every year before the Rabi and Kharif seasons. We witnessed the success of early-stage products like “ Nominee GOLD,” which brought a robust growth in a multi-year period.

In October 2019, PI launched a new wheat herbicide. The product is registered under the 9(3) category and in-licensed from Kumiai Chemicals. The management expected that the product has a strong potential. Also, it can be used on multiple crops. We believe that PI could replicate their success for “ Awkira”, and its sales will ramp up in the next 2-3 years.

We expect a 15.7% revenue growth CAGR over F20-F23E led by new novel products and a favorable sectorial scenario.

Enters into Pharma and Specialty business, a high growth vertical

PI has announced its entry into the pharma CSM business in Feb 2020. They have already successfully developed and scaled up the intermediate used for COVID drugs. PI has started supplying two large customers based out of Japan and India from 1QFy21. Over the next 3-4 years, the company management aims to achieve double-digit revenue from the pharma CSM business. Management expects demand for the intermediates of pharma to grow expeditiously as the product commences in other countries. PI does not require any regulatory approvals as they are only manufacturing intermediates.

PI Industries Ltd is also looking to enter specialty chemicals segments like electronic chemicals, floor specialty, fine chemical, etc. It also looks to replicate its successful CSM business model-driven, by its process and technology in other different segments.

Inorganic path supports the growth

PI completed an acquisition of Isargo Asia in December 2019 worth of INR 3.5 bn. lsagro Asia was engaged in local distribution and agrochemical exports, with reported revenues of Rs3.1 bn, and a profit of Rs230m for FY19 where its domestic business contributed 65% of overall revenues, export business used to contribute 35%. It had two production plants for agrochemical technical grade manufacturing and one for formulations, spread across 30 acres, is adjacent to PI’s manufacturing unit in Panoli.

We see acquisition could unlock the synergies and accelerate growth momentum through improvement in plant utilization and efficiencies.

A strong earnings growth visibility

PI Industries is in a well-placed position for strong earnings growth over the next three years. We forecast overall revenues would clock at a CAGR of 25.7% over F20-F23E, driven by the CSM business. The company’s domestic business revenue would grow at a CAGR of 15.7% over F20-F23E on the back of new launches and ramp up the recently launched products. The CSM business is expected to continue its growth momentum and deliver a CAGR growth of 24.7% over F20-F23E, driven by a healthy order book. The growth of earnings will remain intact and is expected to grow at a CAGR of 28% over the F20-F23E, supported by strong revenue growth and seeing 290 bps improvement in EBITDA margin. EPS would grow at a CAGR of 27% over the period F20-F23E.

Outlook and Valuation

The unique business model of PI makes them well-positioned for growth. We believe a solid order book in CSM business and expectation of novel product launch and recently launched products in the domestic market would offer a predictable earnings growth. PI aims to deliver a healthy growth of revenue of 25.7% over F20-F23E. The operating margin improvement by 292 bps will lead to the EBITDA growth of 31% over F20-F23E, while PAT is expected to grow at a CAGR of 31.2% during the same period.

The company has raised INR 20 bn to fund inorganic growth and explored new verticals and its capacity expansion and utilization, which we believe.

The company enters into new verticals like, Pharmaceuticals, and Specialty Chemicals will act as crucial drivers for growth in the future.

We believe PI deserves the premium valuation compared to peers on the back of a unique model with higher growth prospects and growth potential in new verticals. However, we valued PI at PE of 40x F23E EPS and arrived price target of INR 2713.

Key Catalyst: Growth in new business (Pharma & Specialty Chemical) and recently launched new products.

Risk: A downturn in the global agrochemical market and competition in the domestic market.

PI Industries Key Financials

Income Statement

F2019

F2020

F2021e

F2022e

F2023e

Revenue

            28,409

            33,665

        41,882

        53,824

        66,920

Other Income

                  595

                  489

              601

              662

              728

Total Income

            29,004

            34,154

        42,483

        54,486

        67,647

COGS

            15,502

            18,474

        22,616

        28,796

        35,668

Gross Profit

            12,907

            15,191

        19,867

        25,690

        31,979

Employee Exp

               2,647

               3,209

           3,979

           5,113

           6,357

Other Expenses

               4,496

               4,804

           6,157

           7,643

           9,436

EBITDA

               5,764

               7,178

           9,732

        12,934

        16,186

D/A

                  930

               1,367

           1,633

           2,099

           2,610

EBIT

               4,834

               5,811

           8,098

        10,834

        13,576

Fin. Cost

                     50

                  170

              327

              420

              522

share P/L of Associates & Jv

                      -  

                       8

     

PBT

               5,379

               6,138

           8,373

        11,076

        13,782

Tax Expenses

               1,277

               1,572

           2,110

           2,791

           3,473

PAT

               4,102

               4,566

           6,263

           8,285

        10,309

Basic EPS

               29.74

               33.10

           41.20

           54.51

           67.82

DPS

                 3.60

                 3.60

             7.00

           10.90

           13.56

Dividend Pay-out

12%

11%

17.0%

20.0%

20.0%

 

Segments

F2019

F2020

F2021e

F2022e

F2023e

Domestic Agri Inputs

          9,569

          9,000

       10,350

       12,006

       13,927

CSM

       18,840

       24,660

       30,332

       38,218

       47,773

Other (Pharma, Specialty)

 

                  5

       1,200

       3,600

          5,220

Total Revenue

       28,409

       33,665

       41,882

       53,824

       66,920

           

Domestic Agro Inputs

33.7%

26.7%

24.7%

22.3%

20.8%

CSM

66.3%

73.3%

72.4%

71.0%

71.4%

Other

 

0.0%

2.9%

6.7%

7.8%

           

YoY

         

Domestic agro Inputs

12.1%

-5.9%

15.0%

16.0%

16.0%

CSM YoY %

29.5%

30.9%

23.0%

26.0%

25.0%

Other

   

23900.0%

200.0%

45.0%

 

Balance sheet

F2019

F2020

F2021e

F2022e

F2023e

PPE

       11,791

       17,338

      23,338

       26,338

       29,338

CWIP

          1,544

          2,371

        2,371

          2,371

          2,371

Goodwill

 

             828

            828

             828

             828

Other Intangibles Assets

                66

             409

            409

             409

             409

Intangible Assets underdevelopment

             284

             336

            336

             336

             336

Inv. Accounted for using equity method

             102

             109

            109

             109

             109

Investments

                70

                70

              70

                70

                70

Loans

                41

                61

              61

                61

                61

Others fin. Assets

             149

                82

              82

                82

                82

DTA

             141

                 -  

               -  

                 -  

                 -  

Other Non-Curr Assets

             451

             411

            411

             411

             411

Total Non - Curr Assets

       14,639

       22,015

      28,015

       31,015

       34,015

Inventories

          5,357

          7,989

        9,294

       11,834

       14,658

Trade Receivables

          6,618

          6,465

        8,032

       10,175

       12,651

Investments

          1,119

          1,325

        1,325

          1,325

          1,325

CCE

             614

          1,244

            434

          3,426

          8,246

Bank Balance other than Cce

             278

                98

              98

                98

                98

Loans

                63

                83

              83

                83

                83

Other Financial Assets

             254

             313

            313

             313

             313

Contract Sales

             520

          1,022

        1,022

          1,022

          1,022

Current Tax Assets

                 -  

             146

            146

             146

             146

Other Current Assets

          2,086

          1,548

        1,548

          1,548

          1,548

Total Current Assets

       16,909

       20,233

      22,295

       29,970

       40,090

Total Assets

       31,548

       42,248

      50,310

       60,985

       74,105

Long term Borrowings

                99

          3,994

        3,994

          3,994

          3,994

Other Financial Liabilities

             190

             832

            832

             832

             832

Provision

             290

             124

            124

             124

             124

DTL

 

             102

            102

             102

             102

Total Non-Curr Liabilities

             579

          5,052

        5,052

          5,052

          5,052

Short term Borrowings

                 -  

          1,083

        1,083

          1,083

          1,083

Trade Payables

          5,130

          5,909

        7,126

          9,073

       11,336

Other Financial Liabilities

          2,419

          2,970

        2,970

          2,970

          2,970

Provision

             126

             424

            424

             424

             424

Other Current Liabilities

             435

             575

            575

             575

             575

Current Tax Liabilities

                  5

                44

              44

                44

                44

Total Current Liabilities

          8,115

       11,005

      12,222

       14,169

       16,432

Total Liabilities

          8,694

       16,057

      17,274

       19,221

       21,484

Share Capital

             138

             138

            152

             152

             152

Other Equity

       22,716

       26,053

      31,251

       37,879

       46,127

Total Equity

       22,854

       26,191

      31,403

       38,031

       46,279

Total Equity & Liabilities

       31,548

       42,248

      48,677

       57,252

       67,762

 

Cash Flow

F2019

F2020

F2021e

F2022e

F2023e

PBT

       5,379

       6,138

       8,373

     11,076

     13,782

D/A

          930

       1,367

       1,633

       2,099

       2,610

Fin. Cost

            50

          170

          327

          420

          522

Operating profit Before W.C

       6,594

       7,774

     10,333

     13,595

     16,914

(Inc.)/Dec in Trade Receivables

     -1,493

       1,267

      -1,567

      -2,143

      -2,476

(Inc.)/Dec in Inventories

         -837

      -1,850

      -1,305

      -2,540

      -2,824

Inc. / (Dec) in Current Provisions and Trade Payables

       1,498

          319

       1,217

       1,947

       2,263

Cash Generated from OP before Tax

       5,091

       8,029

       8,677

     10,860

     13,877

Income Tax Paid

     -1,183

      -1,048

      -2,110

      -2,791

      -3,473

CFO

       3,908

       6,981

       6,567

       8,069

     10,404

Capex

     -3,685

      -6,743

     -6,000

     -3,000

     -3,000

CFI

     -3,216

      -9,851

      -6,000

      -3,000

      -3,000

Proceeds from issue of Equity

               -  

                -  

           14

           -  

           -  

Interest Paid

          -50

         -179

         -327

         -420

         -522

Dividend Paid

         -831

         -748

      -1,065

      -1,657

      -2,062

CFF

     -1,251

       3,500

      -1,377

     -2,077

     -2,584

Net Cash Flow

         -559

          630

         -810

       2,992

       4,820

Effect of exchange differences on translation of Forex Cce

                -  

                -  

                -  

                -  

                -  

Net Inc./(Dec) in CCE

         -559

          630

         -810

       2,992

       4,820

Opening CCE

       1,173

          614

       1,244

          434

       3,426

Closing CCE

          614

       1,244

          434

       3,426

       8,246

PI Industries Stock Performance

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This report is only for the information of our customers. Recommendations, opinions, or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.

 

 

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