PI Industries: Buy

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.

While the premium segment of the crop protection sector in India has been dominated by multi-national companies, PI Industries is relatively well-placed, thanks to its business model of partnering foreign brands for launching products in India. It, therefore, does not have to directly compete with globally renowned plays.

Any slowdown in the agri-input business too is, to some extent, offset by the company's presence in contract research and manufacturing for early stage molecules.

With an order book of $340 million (Rs 1,700 crore) which is six times the segment revenue for FY-11, this division promises to drive growth.

Core business

PI Industries sold its polymer compounding division (10 per cent of revenue) in FY-11 to focus on its core agri-input business. The agri-input business now accounts for over 60 per cent of its revenue.

Unlike peers, PI Industries has been shifting away from generic products and instead is focusing more on novel ones. This not only ensures lesser competition but provides higher profit margins.

This also means holding a more compact portfolio of 24 products, which includes products for which it has license from foreign players such as Bayer. The contribution of generic products to the company's revenues is, therefore, slowly on the decline, with close to 40 per cent of agri-input sales coming from in-licensed products.

In-licensed products have high margins of 25-30 per cent as against around 15 per cent in generics. They will, thus, remain the key to holding up margins even during a slowdown.

Its key product now, a herbicide called Nominee Gold, has witnessed fast growth deriving Rs 100 crore of cumulative sales, just two years after launch in FY-10.

Driving growth

In the last couple of years, PI Industries' profits have been driven by custom synthesis and contract manufacturing of agro chemicals. While there are any number of players in the CRAMs business, PI Industries' model differs from the others as it focuses on patented, high value, complex and early stage molecules.

In other words, the company mainly does process research for innovators for their newly discovered molecules. It ensures that it is the only supplier or there are a maximum of two suppliers to the innovator companies. And since its work is high-end, it yields far superior margins.

This segment currently enjoys EBITDA margins of 18-20 per cent. That's 3-4 percentage points higher than the agri-input business.

At least half of PI Industries' orders in this segment are multi-year contracts, which will help provide a steady stream of revenue. The remaining are annual orders. While the long-term contracts are hedged for currency risk, the annual orders are not. This, to some extent, exposes the company to currency risks.

But commodity price fluctuations in this segment can be passed on to the customer. To this extent, the margins of this business can be expected to be less volatile.

Financials

PI Industries expanded its sales by 23 per cent annually in the last three years to Rs 836 crore in FY-11. Net profits jumped 165 per cent annually in the same period to Rs 64 crore, aided by a low base.

Shifting to more novel products in its agri-input business and increased orders in the custom synthesis business have been the key factors behind the jump in net profits.

FY-12, however, is likely to end on a sedate note, with the agri-input business, which still accounts for a chunk of revenue, seeing a slowdown across industry.

Also, higher depreciation and interest on account of its fixed asset investment for its custom synthesis business means lower net profit margins for sometime.

While PI Industries has been borrowing to set up a new premise in Gujarat for its custom synthesis business, it has managed to keep its debt equity ratio at less than 1.

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