PI Industries - Temporary Blip, Fundamentals Intact; Result Update Q2 :: Edelweiss report

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PI Industries: Buy ::Business Line

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The crop protection sector in India is cyclical, with weather conditions, crop prices and cost of imports determining its prospects. With the outlook for 2012-13 remaining cautious, the more diversified agri plays such as PI Industries seem better placed.

Investors with a two-year perspective can consider small exposure to the stock of PI Industries. At the current market price of Rs 561, the stock trades at about 11 times its expected per share earnings for FY-13, at a good discount to the larger Rallis India.

PI Industries -- DKey Takeaways from Concall ::Manish Shah

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Key takeaways from the Q1FY12 Concall of PI Industries :

1. Agri-Input segment grew by 84 % YoY to stand at Rs. 145 cr. in Q1FY12.

2. CSM segment grew by 83 % YoY to stand at Rs. 62.1 cr. in Q1FY12.

3. CSM segment has the current order-book of USD 340 mn. (~INR 1500 cr.) and has a great visibility of business and will be the key growth driver going ahead.

4. EBITDA for the qrtr. Was at Rs. 43.2 cr. which translates into an EBITDA margin of 20.89 %, a 596 basis points expansion YoY. Such healthy EBITDA margins were the result of better product-mix in both the operational segments, benefits due to inventory whose price had escalated and intelligent input-cost management.

5. Company expects to improve EBITDA margins further even from current levels in the next two to three years taking into account product-pipeline and sales visibility that the company has in both the operational segments.
   
6. Agri-Input segment attained margins of around 19 % while CSM segment attained margins of around 22-23 % for Q1FY12.
   
7. Balance Sheet for the qrtr. has improved significantly with debt level getting reduced from Rs. 248 cr. as at 31^st March 2011 to Rs. 133 cr. as of 30^th June 2011. Working Capital Turns have improved considerably from around 3 as at 31^st March 2011 to 4.6-4.7 as at 30^th June 2011. Debtors level is at Rs. 146 cr. (31^st March – 177 cr.) and inventory level is at Rs. 185 cr. (31^st March – 147 cr.).
   
8. Planned CAPEX is at Rs. 125 cr. spread over two years including current year for commisioning of new multi-product plant for CSM segment. Erection-Installation-Development work is going on at full swing since last 4 months, equiplments and machinery are already ordered and some have already reached the site and the company is expecting to commision the plant by December 2011 or latest in Q4FY12.
   
9. Company plans to launch two new products in this fiscal year in Agri-Input segment (one is a broad-spectrum insecticide), most probably in Q2 and Q3. In all, as on date, company has a pipeline of 7-8 products to be launched in the span of coming 3 years in Agri-Input segment.

10. Company will think of raising its 40 % growth guidance given for FY12 after seeing the business of Q2FY12 which is the most critical quarter for Agri-Input segment. Till the month of July 2011, the qurter has performed as per the expectations.

11. Company follows a unique business model (as far as CSM segment is concerned) of focus on patented and early-life cycle molecules which derisks it from almost all the adversities of business. Also, there are only handful of companies operating in Europe and Japan which follow similar business model with no competition arising from India as also China. To add further, the probability of emergence of any competition in near future is also very low becuase of intense entry barriers as well as tremendous efforts required to establish such a business model. To get the business related to patented or early lifecycle molecules, a sound and rigourous internal control and quality system has to be in place which requires many years; IPR-respect is the prime criteria for such business-relationship and it has to be depicted by building relationship with the innovator over many years ; A company wishing to procure patented or early-lifecycle molecules related business has to go through a strict evaluation process by the innovator company at many levels which takes atleast 2 to 3 years.

12. PI Industries has built a strong association with innovator companies around the world, especially in Agri space, over the span of last 12 years by demonstrating utmost repect to IPR while formulating a no-conflict business model and over last 3 years it has been busy charting out the strategies to benefit the most out of such association and unique business model. The exponential growth that the company has registered since last few quarters has been the result of the same and is expected to continue over next many years with good expansion in margins.

Conclusion :

Before concall I was expecting that Pi might have grossed 125 cr. from agri-input segment in Q1FY12 but it has turned out to be even better at 145 cr. which is really a pleasant surprise.

The margins of agri-input segment have almost expanded 250 basis points which augurs well and depicts efficient management by the company of input price fluctuations. Although, I feel that to end fiscal FY12 with a 19 % margins in agri-input space might be a daunting task as two new products are planned to be launched in next six months which might put slight pressure on margins. However, 17.5-18 % margins are easily achievable in agri-input segment on a yearly basis.

Now, to come to my earlier stated point asto why this year might be the blockbuster year for PI as far as agri-input segment goes.... If i just cite here the example of last year i.e. FY11, Q2 was the highest qrtr. as far as revenues were concerned (for agri-input segment). It clocked almost 123 cr. in Q2FY11 from agri-input alone.... This is the reason why before upping the guidance of FY12, management rightfully decided to wait for the performance of Q2FY12... This depicts the quality of management to under-promise and over-deliver which is a healthy sign.

Now, forget the astonishing 84 % growth that Pi's agri-input segment registered in Q1 and evenif I take just a nominal 30-40 % growth for Q2FY12, it makes me believe that PI will easily surpass Dhanuka and Insecticides in FY12... Now, here I have not calculated the upside that could arise from newly launched products in case they are received very well by the channels and end-farmers.

As far as CSM segment is concerned, a 83 % growth YoY is on a lower scale and so immaterial and in any case, for CSM business the real growth stroy will start from FY13 onwards once the new plant gets fully operational. Just consider here a simple case, a 1500 cr. order-book is pending and already company has 25-30 molecules still in the pipeline under evaluation as on date which equal to a similar amount (each molecule has avg. revenue generating potential of 10-15 mn. USD)... The interesting thing here is that  majority of these molecules are from non-agri space which depicts a good diversification as far as segmental order-book is concerned.

Sony-PI relationship is proceeding as per schedule and although analysts tried to put words in management's mouth to speak out regarding meaningful contribution from the venture in FY13 but I expect a joint patent to be filed by PI-Sony in FY14 only and this centre could very well become a billion dollar opportunity for PI in coming decade.

To conclude, I will base my FY12 expectations based on Q2FY12 topline (as margins are not a concern).. If its able to achieve a topline in excess of 250 cr. for Q2FY12 then no one can stop PI Industries to attain a 1000 cr. revenue mark this fiscal itself with EBITDA of around Rs. 200-210 cr. and PAT of Rs. 105-110 cr. without exceptional gain which entails to an EPS of Rs. 84 on the conservative side.

FY2011 Annual Report of Standard Chartered PE-backed company P.I. Industries

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FY2011 Annual Report of Standard Chartered PE-backed company P.I. Industries Ltd. (NSE - PIIND ; BSE - 523642) for your perusal. Key Takeaways from the annual report are also attached for reference.

Key Takeaways from recent FY2011 Annual Report of P. I. Industries Ltd. :

1. Revenue of the company increased by 33 % YoY to Rs. 719 cr. backed by a 38 % rise in Agri-Input business and a 23 % rise in Custom-Synthesis (CSM) business.

2. Operating Profit increased by 41 % YoY to Rs. 123.64 cr. backed by a 105 basis points expansion in OPM. This expansion in margins was achieved inspite of the fact that company's Polymer business (which is now sold off to Rhodia, S.A.) witnessed significant pressure on margins because of input-cost pressures.

3. Company foresees FY12 to attain similar growth rates with a good expansion in margins backed by new product launches in Agri-Input segment and ~Rs. 1350 cr. order-book of CSM business.

4. In end-FY11, company has started commercial production of some very promising products revenues of which are going to accrue in FY12.

5. Key highlight of FY11 was the signing of an agreement with the largest electronics company of the world, Sony Corporation to set-up a joint research centre in Udaipur, named PI-Sony Research Centre, which was inaugrated in January 2011. As per the agreement, this R&D centre will be engaged in developing commercially viable processes for molecules invented by Sony.

6. In PI-Sony R&D centre, work has already commenced on innovative chemicals meant for use in futuristic products likeflexible television and solar cells. This centre is projected to be a potential future growth driver for the company.

7. Company's flagship brand in Agri-Input segment viz., Nominee Gold has attained a status of the fastest growing herbicide brand of India. In coming years, company expects Nominee Gold to attain a status of the largest herbicide brand in India with respect to Rice crop.

8. In FY11, company has, in association with a leading MNC, successfully introduced a herbicide in soyabean and pulses segment.

9. In FY11, company has filed registration for two new molecules and has signed four new agreements with original patent holders to evaluate the domestic launch of their innovative molecules in herbicide / fungicide segment.

10. Company has signed a distribution agreement with a leading MNC for marketing of its new generation insecticide and acaricide which will help PI further strengthen its dominant position in plantation, field crops, vegetables and fruits.

11. In FY11, company filed Seven patent applications for new non-patent-infringing processes developed for various molecules.

12. Company's upcoming plant at Jambusar is presently under construction and is expected to get commissioned in last quarter of FY12. This plant, once operational, is expected to contribute heavily towards the growth of the company.

PI Industries Q4FY11 Con Call Summary: Emkay

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PI Industries Q4FY11 Con Call Summary:

We attended the conference call of PI Industries on 19th April, Tuesday.

The company reported consolidated revenues of Rs 2.1 bn (+52% YoY), PAT of Rs 204 mn (+93% YoY) in Q4 2011. For FY2011, it reported revenues of Rs 7.2 bn (+33% YoY) and PAT of Rs 651 mn (+55% YoY).

Key Takeaways from the call:

Company Specific

n    Management expects to clock 35-40% revenue growth in FY 2012. They expect sales volumes to be the main contributor of revenue growth in the coming year.

n    They expect volumes to grow by 30-32% while price realizations would support growth by 4-5% in FY2012.

n    PI Industries has been able to outperform the industry in terms of revenue growth in FY 2011. In FY 2011, company recorded sales growth of 33% while industry growth is around 15%.

n    As per the company, they have a current order book of $300mn in custom synthesis segment.

n    Both agri business & custom synthesis segment is expected to grow at 35%-40% in FY2012.

n    Management expects EBITDA margins to expand by 100-150 bps because of a favorable shift in product mix and improved operating leverage.

n    As per the company, preference shares & debentures would be converted into equity in FY2012.

n    Company’s raw material costs have been increasing for the last 3-4 months. However, in the last 2 months, it has been able to pass on the raw material cost increases to its clients.

Industry Related

n    Management expects agro chemical industry to witness strong growth ahead because of increased food requirements in the economy. They expect the industry to grow at more than 15%.

n    Further, demand for agro chemicals would continue to increase in the coming years as farmers increasingly adopt agro chemicals to boost yields. Good monsoon season would also improve the agriculture sector performance.

n    As per the company, agri commodity prices would continue to be strong supported by robust demand for food grains.

n    Management also stated that passing of raw material costs increases on to the customers is an industry wide phenomenon.