Near-term headwinds for PI Industries

PI Industries gained about 17 per cent over the last month on positive growth commentary from the management and brokerage upgrades. Some analysts have revised their estimates for FY19 as they expect growth to be driven by new product launches, higher growth from its foray into the pharma space, and recovery in the custom synthesis space.

The company reported an eight per cent fall in revenues year-on-year (y-o-y) in the first half of the year due to softness in exports, uneven rainfall distribution in the kharif season, and transition to the goods and services tax (GST) regime. Despite the muted first half, the management has maintained its FY18 growth guidance of 10 per cent.

This means that in the second half, the company will have to grow over 25-27 per cent, led by the exports business (custom synthesis/manufacturing), which account for 60 per cent of revenues, to achieve its guidance. With execution in custom synthesis picking up in the second half of the financial year, analysts at HSBC said operating leverage, which had worked unfavourably in the first half of FY18, should play a positive role in expanding margins in the second half. Margins in the first half had contracted by 200 basis points (bps) to about 22.7 per cent.

Analysts at CIMB, however, said a 27 per cent growth for the second half of FY18 was wishful thinking. They said if domestic business grows at 8-10 per cent, exports will have to grow at 35 per cent to achieve the guidance, which, according to the analysts, is improbable. The reason for the scepticism is a weak global market, especially Brazil, cautious commentary from agrochemical companies and muted sales of herbicide pyroxasulfone, which accounts for half of the company’s exports in FY18. 

While there could be near-term headwinds, the PI management, according to Sharekhan, is confident of long-term prospects, given a revival in the custom synthesis and manufacturing segment, new product launches in the domestic market, lower global inventory levels and leadership in the Nominee Gold brand (12 per cent of PI’s revenues) in the domestic market. In addition, entry into the pharma segment (intermediates), will also help increase the addressable market size significantly. 

Given the near-term overhang and the sharp price increase, analysts say valuations at over 25 times its FY19 earnings is on the higher side. Investors should await for clarity on growth in export revenues before taking any exposure to the stock.

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