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PI Industries IDFC 281111

PI Industries IDFC 281111

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Published by: equityanalystinvestor on Dec 05, 2011
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01/05/2015

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We met the management of PI Industries (PI) for an update on the business. PI is a differentiated model in the Indianagrochemical space – unlike most peers, which focus on supplying off-patent agro-chemicals, PI participates in the“innovation” value chain; e.g., custom synthesis and selling in-licensed formulations in the domestic market. After along gestation, PI’s investments in its two-pronged business model have begun paying off as reflected in 25% revenueCAGR with 57% EBITDA CAGR over FY08-11. With ~$55m revenues in FY11 and a current order book of ~$325m(primarily comprising on-patent products), PI’s contract manufacturing business is at a tipping point. The company’s~$100m domestic formulations business will be driven by the launch of innovative products in-licensed from globalplayers as it leverages the opportunity provided by the implementation of the products patent regime in India. Businessmomentum is set to accelerate, with the management targeting >30% CAGR in revenues over FY11-13 and ~200bpgrowth in EBITDA margins. We estimate 37% earnings CAGR over FY11-13. At Rs480/ share, the stock trades at 13.5xFY12E and 9.9x FY13E earnings. With a highly scalable model and strong growth visibility, PI is clearly one of thecompanies to watch out for in the agri-inputs space.
Exhibit 1: Key financials
 As on 31 March
 
FY08 FY09 FY10 FY11 FY12E FY13E
Net sales (Rs m) 3,709 4,629 5,425 7,202 9,183 11,478Adj. net profit (Rs m) 64 242 417 650 888 1,218Shares in issue (m) 14 14 22 22 25 25Adj. EPS (Rs) 4.5 17.1 19.3 29.3 35.5 48.7
% growth 47.7 279.1 12.8 52.0 21.3 37.1
PER (x) 106.5 28.1 24.9 16.4 13.5 9.9Price/Book (x) 9.7 7.2 7.8 5.2 3.9 2.8EV/EBITDA (x) 26.9 13.6 13.8 10.6 8.5 6.4RoE (%) 9.5 29.5 36.6 38.3 34.5 33.3RoCE (%) 8.6 17.9 22.5 25.8 26.9 30.1
Source: Company, IDFC Securities Research
Unique business model; strong focus on innovation
Incorporated in 1947, PI Industries has built a strong and unique business with two focused segments, namely agri-inputs and custom synthesis. Unlike peers (United Phosphorus, Rallis, etc.) who focus on manufacturing anddistributing off-patent molecules in the domestic and export markets, PI focuses on partnering with global agrochemicalplayers in the proprietary segment of the agro-chemicals market. As part of this strategy, PI concentrates on sellingnovel in-licensed agrochemical products from MNCs in the domestic market and partners with MNCs to providecustom synthesis services primarily for their on-patent agrochemical products. It does not export off-patentagrochemical products, which has traditionally been the primary growth driver for peers like United Phosphorus.
PI Industries
At a tipping point!
INSTITUTIONAL SECURITIES
UNRATED
Rs480
Mkt Cap: Rs12bn; US$230m
INDIA RESEARCH AGRI-INPUTS MANAGEMENT MEETING NOTE BSE SENSEX: 16167 28 NOVEMBER 2011
For Private Circulation only.Important disclosures appear at the back of this report”SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33.
Nitin Agarwal
nitin.agarwal@idfc.com91-22-6622 22568
Vneet Chandak
vineet.chandak@idfc.com91-22-6622 22579
 
 
2
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NOVEMBER 2011
IDFC SECURITIES
Exhibit 2: Balanced mix of agri-input and custom synthesis business
Diversified business model FY11 revenue break-up
 
Source: Company, IDFC Securities Research
After a long gestation, differentiated model beginning to deliver
PI’s adoption of an unconventional business strategy focused on partnering with MNCs involved a fairly long gestationperiod as it assiduously worked on securing and strengthening key client relationships in the custom synthesisbusiness as well as on selection/ launch of innovative agrochemical products in the Indian market. This strained itsfinancials in the interim as revenue/ profitability pick-up lagged investments in the two segments. However, PI’s strongfinancial performance over FY08-11 (25% revenue CAGR and 117% PAT CAGR) underlines the success of its strategy.
Exhibit 3: Business momentum has picked-up since FY09 despite macro economic slowdown
Source: Company, IDFC Securities Research
Over FY08-11, PI’s agri-input and CRAMS businesses grew by 21% and 50% CAGR and have firmly established thecompany as one of the leading agrochemical players in the Indian industry. In FY11, PI recorded revenues of Rs7.2bn,with the domestic agrochemicals and custom synthesis segments contributing 62% and 34% respectively. With acritical mass in place across both business segments, the management expects to maintain the high growth trajectoryin the near to medium term.
-2,0004,0006,0008,000FY05FY06FY07FY08FY09FY10FY11Consolidated revenues (Rs m)
Agri-inputs65%Customsynthesis35%
CAGR –25%
PI Industries Ltd.
 
PI Industries Ltd.
Agri-Input
Custom Synthesis
Deals in agro-chemicals, specialtyfertilizers and plant nutrients
Strong brand built over last 50 years
One of the strongest marketing anddistribution networks in rural India
25,000+ retailer base
Currently markets 22 products(including 5-6 in-licensed products)
Contract manufacturing of agchem andspecialty products (APIs & late-stageintermediates)
Strong relationships with most leadingglobal agrochemical majors
Currently supplying 10-11 ‘recentlycommercialized’agrochemical products
Another 25-30 products at differentstages of development; to be launchedover next few years
PI Industries Ltd.
 
PI Industries Ltd.
Agri-Input
Custom Synthesis
Deals in agro-chemicals, specialtyfertilizers and plant nutrients
Strong brand built over last 50 years
One of the strongest marketing anddistribution networks in rural India
25,000+ retailer base
Currently markets 22 products(including 5-6 in-licensed products)
Contract manufacturing of agchem andspecialty products (APIs & late-stageintermediates)
Strong relationships with most leadingglobal agrochemical majors
Currently supplying 10-11 ‘recentlycommercialized’agrochemical products
Another 25-30 products at differentstages of development; to be launchedover next few years
 
 
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NOVEMBER 2011
IDFC SECURITIES
Growing focus of global MNCs on innovation and higher R&D bode well for PI
While off-patent products have been gaining market share in the past 6-8 years (>9%), the proprietary ones have seenrenewed focus by companies in the past few years. With proprietary products registering higher growth rates, mostglobal players like Bayer, Syngenta, etc, have increased focus on launching new products and indicated an increase inR&D expenditure over the next few years. For example, Syngenta’s revenues from new products have grown at a CAGRof 47% in the past six years. Similarly, Bayer, one of the world’s leading innovative agchem companies, has indicated>20% annual increase in R&D expenditure by 2015 to >Eur850m. Innovation is fast becoming a significant part ofcompanies’ core business models for sustainable future growth.According to consultancy firm Phillips McDougall, investment in R&D by the agchem industry to expected to grow from$2.3bn now to $3bn by 2012. While a part of the increase is attributable to the rising cost of discovery and development(+39%; $184m in 2000 to $256m during 2005-08), higher probability of products reaching the market (unlike in thepharmaceutical industry where many products fail during clinical trials) has encouraged companies to increase theirR&D spending.
Exhibit 4: Industry snapshot – strong growth ahead for agchem industry
Innovation becoming part of core business model Proprietary products witnessing renewed interestSyngenta’s growth driven by new product launches Bayer raised its R&D spending to >€850m annually by 2015
Source: Company presentations, IDFC Securities Research
Renewed thruston launchingproprietary products
66472285002505007501,000200520102015EBayer's R&D spending (€ m)

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