India Midcaps

RESULT UPDATE

PI INDUSTRIES
Cultivating growth
India Equity Research| Agriculture

PI Industries (PI) posted an adjusted PAT significantly ahead of our estimates owing to a betterthan-estimated revenue growth and an expansion in EBITDA margin. We reiterate our positive outlook on PI for posting a robust growth in profitability backed by a strong order book in custom synthesis and a steady expansion in margin. Owing to the robust business growth, we are revising FY12E and FY13E EPS up by 8% and 7% respectively. We maintain BUY with a revised target price of INR 1,340.

EDELWEISS RATINGS Absolute Rating Investment Characteristics BUY Growth

MARKET DATA (R: PIIL.BO, B: PI IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 1,118 : INR 1,340 : 1,118 / 388 : 12.5 : 14 / 315

Firm revenue growth, margin expansion buoys up profitability

A strong revenue growth of over 80% Y-o-Y in agri-input as well as in custom synthesis has helped PI post an overall growth of 59% Y-o-Y (despite the absence of the polymer revenues in Q1FY12). An improved product mix and the absence of low margin polymer business in Q1FY12 lifted the EBITDA margin by 600 bps Y-o-Y to 20.9%. Sales proceeds from the polymer division stand at INR 730 mn on which the company has booked a profit of INR 303 mn. While the reported PAT is at INR 480 mn, the adjusted PAT (adjusting for the post tax profit from polymer business sale) stands at INR 243 mn Y-o-Y, up 149%.

Avg. Daily Vol. BSE/NSE (000) : 18.1 SHARE HOLDING PATTERN (%)

Others 28.9%

Key highlights
Agri input revenue at INR 1.4 bn in Q1FY12; custom synthesis accounts for the rest Debt levels have improved significantly to INR 1,331 mn at Q1FY12-end vis--vis INR 2,484 mn in FY11 due to repayment of debt from the polymer business sale proceeds, conversion of debentures into equity in April 2011 and improvement in working capital cycle Order book for custom synthesis is at USD 340 mn, up from USD 300 mn at the end of FY11

FIIs 3.3% MFs, FIs & Banks 4.1%

* Promoters pledged shares (% of share in issue)

Promoters* 63.7%

NIL

PRICE PERFORMANCE (%) BSE Midcap Stock Index 1 month 4.4 (3.0) (4.8) 57.5 55.9 127.0 Stock Over Index 53.1 58.8 131.8

Outlook and valuations: Strong outlook; maintain BUY

Owing to better than expected results and a strong outlook, we have factored in higher growth rates, and are revising the EPS up to INR 77.8/share and INR 111.7/share for FY12E and FY13E respectively. The stock is available at 14.4x and 10.0x consolidated P/E for FY12E and FY13E respectively and a strong ROAE of over 30% for FY12 and FY13. We revise our target price to INR 1,340 (previously at INR 995) based on 12x FY13E EPS. We maintain BUY recommendation on the stock.
Financials (Standalone) Year to March Net revenues (INR mn) EBITDA (INR mn) Core profit (INR mn) Adj. Diluted EPS (INR) Diluted P/E (x) EV/EBITDA (x) ROAE (%) Q112 2,068 432 243 19.2 Q111 1,303 195 98 8.7 % change 58.7 121.7 148.6 120.2 Q411 % change 2,126 399 204 18.2 (2.7) 8.2 19.2 5.6 FY11* 7,202 1,241 651 51.5 21.7 11.7 FY12E* 9,389 1,787 982 77.8 14.4 8.8

3 months 12 months

Varun Guntupalli
+91 22 6623 3481 varun.guntupalli@edelcap.com

Manoj Bahety, CFA

+91 22 6623 3362 manoj.bahety@edelcap.com

35.3 34.3 * Annual numbers are on consolidated basis

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July 27, 2011

Edelweiss Securities Limited

Agriculture
Other highlights

Working capital cycle eased for the company with the receivables declining to INR 1,460 mn at the end of Q1FY12 from INR 1,760 mn at FY11 end Inventory level is at INR 1,800 mn at Q1FY12 end vis--vis INR 1,410 mn at FY11 end due to the built up of inventory (to cater to strong sales expectation going forward) Net working capital stands at INR 1,650 mn in Q1FY12 end vis--vis INR 2,100 mn at FY11 end (INR mn) FY13E* 12,157 6,970 986 1,807 9,762 2,394 162 244 0 1,989 578 1,411 0 1,411 126 13 111.7 10.0 6.4

Financial snapshot - (Standalone) Year to March Revenues Raw material Staff costs Others Total expenditure EBITDA Interest Depreciation Other income PBT Tax Adjusted net profit Extraordinary items Net profit Equity capital (FV INR 10) No. of shares (mn) Adj. EPS (INR) P/E (x) EV/EBITDA (x) as % of net revenues Raw material Staff expenses Other expenses EBITDA Net profit

Q112 2,068 1,100 167 369 1,636 432 50 42 0 340 97 243 237 480 126 13 19.2

Q111 1,303 736 126 246 1,108 195 36 35 0 124 26 98 0 98 112 11 8.7

% change 58.7 49.5 32.6 50.0 47.7 121.7 39.2 18.5 175.1 275.1 148.6 390.9

120.2

Q411 2,126 1,226 155 345 1,727 399 54 43 0 302 99 204 0 204 112 11 18.2

% change (2.7) (10.3) 7.4 6.9 (5.2) 8.2 (6.3) (3.3) 12.3 (1.8) 19.2 135.3

5.6

FY11* 7,202 4,204 566 1,191 5,961 1,241 181 153 7 914 263 651 0 651 112 13 51.5 21.7 11.7

FY12E* 9,389 5,446 765 1,391 7,602 1,787 216 186 0 1,385 403 982 237 1,219 126 13 77.8 14.4 8.8

53.2 8.1 17.9 20.9 11.7

56.5 9.7 18.9 14.9 7.5

57.7 7.3 16.2 18.8 9.6

58.4 58.0 57.3 7.9 8.1 8.1 16.5 14.8 14.9 17.2 19.0 19.7 9.0 10.5 11.6 * Annual numbers are on consolidated basis

Table 1: Change in estimates

Revised FY12E 9,389 40.0 17.0 45.0 22.0 77.8 FY13E 12,157 25.0 18.0 35.0 22.0 111.7 Earlier FY12E 8,897 30.0 17.0 40.0 22.0 71.8 FY13E 11,529 25.0 18.0 35.0 22.0 103.8

Revenue (INR mn) Agri-inputs Revenue growth (%) EBITDA margin (%) Custom synthesis Revenue growth (%) EBITDA margin (%) EPS (INR)

Source: Edelweiss research

2 Edelweiss Securities Limited

PI Industries
Company Description
Incorporated in 1947, PI Industries (erstwhile Pesticides India Limited) focuses on agri-Input, custom synthesis and polymer compounding with strength of over 1,100 employees. PI currently operates three formulation and two manufacturing facilities as well as five multiproduct plants across Gujarat and Jammu, and one R&D unit in Rajasthan at Udaipur. PI is one of Indias leading players in the agri-input industry, primarily dealing in agrochemicals, specialty fertilisers, plant nutrients and seeds. The company has exclusive rights with several global corporations for distribution in India, and is constantly evaluating prospects to further expand its product portfolio. The fine chemicals business unit of PI focuses on custom synthesis which entails dealing in custom synthesis and contract manufacturing of chemicals including commercial evaluation of chemical processes, process development, lab and pilot scale up as well as commercial production. The company has a strong product portfolio as a result of exclusive tie-ups with leading agro-chemical, pharmaceutical and fine chemical companies around the world.

Investment Theme
PI is expected to deliver strong profit CAGR of 47% and robust ROEs of more than 30% over FY11-13. It is a preferred partner for global MNCs for custom synthesis on account of its competencies in process research and manufacturing, coupled with its non-compete and IP driven business model. PI has built up a strong order book of ~USD 300 mn to be executed within the next 3-4 years and by Incurring capex of INR 2 bn over FY11-13. EBITDA margin pf the company is likely to expand owing to improving product mix, higher operating leverage and sale of the low margin polymer business.

Key Risks
Any execution delay in setting up new capacities would impact the growth in the custom synthesis business. Indian agriculture is largely dependent on monsoon hence poor monsoon could be a demand dampener for the agri-input division. On account of the very low liquidity in the stock, it might act very volatile. USD/INR volatility may impact export revenues as well as margins.

Edelweiss Securities Limited

Agriculture

Financial Statements (Consolidated)

Income statement Year to March Net revenues Raw material costs Gross profit Employee expenses Other expenses Operating expenses Total expenditure EBITDA Depreciation & amortisation EBIT Interest expense Other income Profit before tax Provision for tax Core profit Extraordinary/ Prior period items Profit after tax Equity shares outstanding (mn) EPS (INR) basic Diluted shares (mn) EPS (INR) diluted CEPS DPS Dividend payout (%) Common size metrics (% net revenues) Year to March Cost of goods sold Operating expenses EBITDA margins Depreciation & amortisation Interest Net profit margin Growth metrics (%) Year to March Revenues EBITDA PBT Net profit EPS FY09 4,629 2,799 1,830 397 787 1,185 3,984 645 112 533 222 8 318 76 242 242 10.6 22.8 10.6 22.8 36.4 FY10 5,425 3,183 2,242 445 926 1,371 4,554 871 129 743 183 11 572 153 419 419 10.6 39.4 12.6 33.2 53.4 1.4 4.2 FY11 7,202 4,204 2,998 566 1,191 1,757 5,961 1,241 153 1,088 181 7 914 263 651 651 11.2 58.2 12.6 51.5 76.9 4.5 9.0 FY12E 9,389 5,446 3,943 765 1,391 2,156 7,602 1,787 186 1,601 216 1,385 403 982 237 1,219 12.6 77.8 12.6 77.8 92.5 4.5 5.5 (INR mn) FY13E 12,157 6,970 5,187 986 1,807 2,793 9,762 2,394 244 2,151 162 1,989 578 1,411 1,411 12.6 111.7 12.6 111.7 131.0 4.5 4.7

FY09 60.5 25.6 13.9 2.4 4.8 5.2

FY10 58.7 25.3 16.1 2.4 3.4 7.7

FY11 58.4 24.4 17.2 2.1 2.5 9.0

FY12E 58.0 23.0 19.0 2.0 2.3 10.5

FY13E 57.3 23.0 19.7 2.0 1.3 11.6

FY09 24.6 99.2 225.9 283.7 283.7

FY10 17.2 35.1 79.5 72.9 45.6

FY11 32.8 42.4 59.8 55.4 55.4

FY12E 30.4 44.0 51.6 50.9 50.9

FY13E 29.5 34.0 43.6 43.7 43.7

Edelweiss Securities Limited

PI Industries
Balance sheet As on 31st March Total equity capital Total preference capital Reserves & surplus Shareholder's equity Secured loans Unsecured loans Total debt Deferred tax liability (net) Sources of funds Gross fixed assets Accumulated depreciation Net fixed assets Capital work in progress Total fixed assets Investments Inventories Accounts receivable Cash and cash equivalents Loans and advances Current assets Current liabilities Provisions Current liabilities & provisions Net current assets Miscellaneous expenditure Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Add: Depreciation Add: Interest and other non-cash items Gross cash flow Less: Changes in working capital Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid FY09 35 903 939 1,894 138 2,032 250 3,221 2,590 798 1,792 74 1,866 4 1,042 923 51 305 2,321 950 23 973 1,347 4 3,221 88 FY10 71 206 1,269 1,546 1,053 444 1,498 270 3,313 2,924 923 2,001 86 2,087 5 1,028 1,034 54 347 2,463 1,189 53 1,243 1,221 3,313 145 FY11 112 81 1,944 2,137 1,560 918 2,478 326 4,941 3,617 1,076 2,540 335 2,875 5 1,410 1,766 84 503 3,763 1,568 134 1,702 2,061 4,941 191 FY12E 126 3,458 3,584 1,700 144 1,844 326 5,754 4,317 1,263 3,054 80 3,134 5 1,641 2,057 195 503 4,396 1,716 66 1,782 2,614 5,754 284 (INR mn) FY13E 126 4,802 4,928 1,250 144 1,394 326 6,648 5,067 1,506 3,560 80 3,640 5 2,100 2,331 234 503 5,169 2,100 66 2,167 3,002 6,648 390 (INR mn) FY13E 1,411 244 162 1,816 349 1,468 750 718

FY09 243 112 274 629 317 312 331 (19)

FY10 419 129 199 747 (131) 877 363 514

FY11 651 153 262 1,067 843 224 947 (723)

FY12E 1,219 186 (21) 1,384 442 942 845 97

FY09 312 24 (316) 20 (331) -

FY10 877 (519) (355) 3 (363) (17)

FY11 224 745 (940) 30 (947) (58)

FY12E 942 (623) (208) 111 (845) (66)

FY13E 1,468 (678) (750) 39 (750) (66)

Edelweiss Securities Limited

Agriculture
Profitability ratios Year to March ROACE (%) ROAE (%) ROA (%) Current ratio Receivables (days) Inventory (days) Payables (days) Cash conversion cycle (days) Debt-equity (x) Debt/EBITDA Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover Du pont analysis Year to March NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield(%)

FY09 18.0 29.7 8.2 2.4 71 112 118 66 2.2 3.2

FY10 22.8 33.8 12.8 2.0 66 119 123 62 1.0 1.7

FY11 26.4 35.3 15.8 2.2 71 106 120 57 1.2 2.0

FY12E 30.0 34.3 18.4 2.5 74 102 110 67 0.5 1.0

FY13E 34.7 33.2 22.8 2.4 66 98 100 64 0.3 0.6

FY09 1.6 2.8 5.6

FY10 1.7 2.9 4.4

FY11 1.7 3.2 3.9

FY12E 1.8 3.4 3.3

FY13E 2.0 3.7 2.9

FY09 5.2 1.6 3.6 29.7

FY10 7.7 1.7 2.6 33.8

FY11 9.0 1.7 2.2 35.3

FY12E 10.5 1.8 1.9 34.3

FY13E 11.6 2.0 1.5 33.2

FY09 22.8 283.7 36.4 49.1 12.7 2.9 21.0 -

FY10 33.2 45.6 53.4 33.7 7.7 2.4 15.1 0.1

FY11 51.5 55.4 76.9 21.7 5.9 2.0 11.7 0.4

FY12E 77.8 50.9 92.5 14.4 3.9 1.7 8.8 0.4

FY13E 111.7 43.7 131.0 10.0 2.9 1.3 6.4 0.4

Edelweiss Securities Limited

PI Industries
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Institutional Equities Head Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Miscellaneous

Chambal Fertilisers and Chemicals, Coromandel International, Deepak Fertilisers and Petrochemicals Corporation, EID Parry, Jain Irrigation, PI Industries, Shree Renuka Sugars, Usher Agro, Zuari Industries

Recent Research Date 22-Jul-11 20-Jul-11 20-Jul-11 Company Title Price (INR) 333 84 Recos Buy Hold

Coromandel Rich pickings; International Result Update Chambal Fertilisers Fertilisers Non-fertiliser businesses lag; Result Update Subsidy blues over opening inventory; Sector Update

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 2 stocks under review > 50bn Market Cap (INR) 117 132 Hold 51 Reduce 18 Total 203 < 10bn 21 Reduce depreciate more than 5% over a 12-month period Rating Interpretation Rating Buy Hold Between 10bn and 50 bn 65 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period

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