PI Industries could soon dethrone UPL as biggest agrochemical firm

With improving business and product mix, the company’s gross margins expanded 171 basis points.
PI Industries’ (PI’s) strong performance for the quarter ended September (second quarter, or Q2), led by growth in both domestic and export markets, helped its stock scale fresh all-time highs on Friday. Though it closed the day 1.5 per cent higher, it takes the total gains for the stock to 46 per cent over the past four months.

With this, the market capitalisation of the agri-sciences company at Rs 33,325 crore is just shy of the largest Indian agrochemicals player, UPL, at Rs 34,623 crore. What’s more, as the Q2 numbers beat expectations and the outlook remains firm, there could be more legs to the rally in the PI stock.

Analysts say the momentum in agrochemical custom synthesis manufacturing (CSM) business remains strong to drive exports as PI has a strong order book. The domestic performance will be supported by the acquired Asia-based portfolio of Italy-headquartered Isagro, normal monsoon improving reservoir levels, and better rabi season prospects, which together are keeping the Street sentiment firm.

While regular product launches in the domestic and export markets will help maintain traction, PI is also exploring inorganic growth opportunities in the pharma CSM space and has already raised money to fund its plans.

Given the improvements, analysts, while having introduced 2022-23 (FY23) estimates, have raised their forward earnings estimates too. Those at PhillipCapital factoring in Q2’s outperformance have upgraded their earnings before interest, tax, depreciation, and amortisation (Ebitda) estimates by 10 per cent and 3 per cent for 2020-21 (FY21) and 2021-22, respectively, and expect Ebitda to grow 25 per cent annually over FY20‐23.

PI’s strong 28-per cent year-on-year (YoY) growth in revenue during the September quarter was led by 33 per cent growth in the domestic business and 25 per cent growth in the CSM business (exports). Exports contributed 69 per cent to the overall revenue and the company said that demand for key molecules remains strong. Domestic growth was also aided by the Isagro acquisition completed in December 2019.

With improving business and product mix, the company’s gross margins expanded 171 basis points (bps). Operating leverage further helped Ebitda grow 45 per cent YoY (to Rs 280 crore) and thus, margins expanded 300 bps. With other income almost trebling due to the recent fundraising, the pre-tax profit surged 55.3 per cent, while lower tax rate aided net profit growth of 77 per cent YoY to Rs 218 crore, ahead of expectations. Analysts at Motilal Oswal Securities (MOSL), for instance, had estimated a net profit of Rs 178 crore.

Analysts expect the momentum to continue in the second half. The CSM order book is already strong at $1.5 billion. Analysts say the increasing pace of new molecule launches and existing product ramp-up will help sustain the growth momentum.

The integration of the Isagro acquisition, meanwhile, has also helped the company diversify its portfolio towards fruit and vegetable and horticulture products, thereby derisking its business model from the predominant field protection (agrochemical) products. Further, the added product range through Isagro yields higher margin, compared to crop chemicals, and should mean better profitability for the domestic business. The regular launch of products in the domestic markets adds to the earnings visibility, say analysts.

The integrated Isagro facilities to be used for CSM supplies will also benefit the company. PI’s two new plants are soon expected to come on stream and will imply adequate capacities to cater to growth.

After the completion of fundraising of Rs 2,000 crore through qualified institutional placement, the company is exploring acquisitions in the pharma CSM space, which it hopes to complete in some quarters and drive long-term growth.

Credit Suisse, while expecting PI’s entry into pharma CSM to be fruitful in 15-18 months, says that in the interim, consistency in agrochemical performance can support valuation. Raising FY21-23 earnings estimates by 7-8 per cent, Credit Suisse has raised the target price to Rs 2,450 (from Rs 2,300 earlier) for the stock trading at Rs 2,196.55.

MOSL, too, sees an upside of 19 per cent and expects revenue, Ebitda, and net profit to grow 25 per cent, 31 per cent, and 39 per cent annually in FY20-23.


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