PI Industries: Rich harvest

Agri-stocks are back in focus, thanks to the expectation of normal rainfall during the ongoing South-West monsoon season. Within the agri-input space, agrochemicals hold good growth promise over the next two to three years, given the expectation of a pick-up in the global agrochemical market.

It’s been a rough ride for global agrochemical players in the last few years, thanks to the demand slowdown and resultant consolidation in this space. Even in such challenging times, some companies have managed to deliver good performance. PI Industries is one such. The company managed to buck the weakness in the market and almost doubled its revenue to ₹2,277 crore in 2016-17 from ₹1,148 crore in 2012-13. This was largely on account of the company’s ability to bring out new products by partnering with other global innovators to launch their innovative products back home.

Over the years, the company has been strengthening its partnerships with global majors for new products. Healthy partnerships and launches, coupled with a recovery in the agrochemical industry, should hold the company in good stead. The stock currently trades at about 21 times its estimated 2018-19 earnings. This is lower than its median valuation of about 23 times over the last couple of years. Investors with a two- to three-year horizon can consider buying the stock at current levels.

PI Industries, a 70-plus-year-old company, derives about half its revenue from custom synthesis and manufacturing, wherein the company works closely with innovators across the product development lifecycle. It not only partners with innovators for development but also undertakes commercial manufacturing of the products on behalf of the client. The company’s retail distribution business which focusses on distribution of its products — own brands and out-licensed (from global players) accounts for a significant portion of the company’s overall revenue. PI Industries has been selling these products through its distribution network comprising 8,000 distributors and over 40,000 retail touch points across the country. The company has a portfolio of 41 principal brands across categories — agrochemicals, fungicides, herbicides and other specialty products.

The growth prospects for the company in the medium term appear good. First, PI Industries has demonstrated its ability to build a strong portfolio of products by partnering with global innovators. Adding to its existing partnerships, the company recently entered into a strategic partnership with BASF to offer a broad portfolio of crop protection solutions to Indian farmers.

Under this pact, PI Industries will co-market BASF's latest innovative fungicides used in crops such as rice, maize, vegetables and fruits. Under the tie-up, the company will also promote BASF’s new herbicide for maize. The four new molecules that will be launched in India through this agreement are expected to support PI Industries’ growth in the medium term.

Likewise, last year, the company announced a strategic partnership with Japan’s Mitsui Chemicals to form a joint venture — Solinnos Agro Sciences which will offer product registration services to facilitate launch of new, innovative products in India.

Second, the company’s export order book has witnessed steady growth. The current order book stands at $1 billion (about ₹6,500 crore), of which about $0.2 billion were added in the March 2017 quarter. This should help the company sustain healthy growth over the next two years. While the management has guided for lower export sales in the first half of the current fiscal, it anticipates a pick-up beginning the second half of 2017-18.

Third, utilisation at the company’s facility at Jambusar in Gujarat (Unit 2 and 3), commissioned in late 2015 and further expanded in 2016, is currently at less than 70 per cent. This is expected to improve over the next two years and thereby help operating leverage. This should translate into better operating performance over the medium term.

Four, the company has planned capex of about ₹200 crore for 2017-18, particularly to cater to the export demand. Revenue from these investments should start flowing in over the next couple of years.

While the improving industry outlook and growth triggers for the company are positive, concerns remain.

The news flow around the adverse effects of specific crop protection chemicals, time and again, can be a dampener. For instance, there was a lot of dispute around the carcinogenic possibility of Glyphosate, following a resolution by the WHO in 2015 supporting the claim. This led to oversupply of the product and a steep fall in the price globally. While the chemical, which is used in Monsanto’s flagship Roundup weedicide, has been declared safe for public use by the European Chemical Agency (Echa), there have been petitions signed by citizens seeking a ban on the chemical in the EU market. Such cases may risk growth.

In 2016-17, PI Industries’ revenue grew 9.6 per cent y-o-y to ₹2,276 crore. The company reported a 4.5 percentage points improvement in its operating profit margin to 22.7 per cent compared with the same period last year. This was made possible through better product mix and operational efficiencies aided by improving utilisation at the company’s facility at Jambusar. Net profit grew 46 per cent to ₹459 crore.

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