PI Industries

Background

PI Industries (earlier Pesticides India) incorporated in in 1947, has Agrichemicals and Custom Synthesis as main business segments. It operates 5 multi-product plants at Gujarat & Jammu and one R&D unit in Udaipur, Rajasthan.


Main Products/Segments

Agrochemicals Product basket includes – Insecticides, Herbicides, Plant Nutrients and Fungicides. Insecticides contribute more than 50% of revenues, while Herbicides and Plant Nutrients contribute over 30% revenues. Rice crop and the Fruits and Vegetable segment are the top contributors, Cotton being the other significant segment. PI  Industries has over 50 years of experience of manufacturing & marketing Agrochemicals in India.

PI Industries entered the Custom Synthesis business in mid 1990s. The custom synthesis business caters to process and manufacturing requirements of Innovator companies in the Agrochemicals, Pharma Intermediates, and Specialty Chemicals sectors.


Main Markets/Customers

Agri-Inputs: ~60% of overall Sales in FY11, caters to Farmers through an extensive 2500-3000 dealer distributor pan India network. Five zonal offices, 24 branches, 220 sales staff, and 800 field staff support this pan India network.

From being a generic manufacturer of the reverse engineered off-patent agro-chemical products, PI has made the transition to in-licensing innovator company products for exclusive marketing rights to distribute their products in India. As per the company 40% of Agri-Inputs business is contributed by in-licensed products currently, and the mix is likely to go upto 50% with newer launches. PI purchases in-licensed products from the principals at a certain price and creates formulations/further manufacturing activities on these products to pack them under its own brand, and sells them in India. Most of it is branded sales, no bulk supplies to other players.

PI has a strong association with reputed companies such as Bayer, BASF, Chemtura and also a robust pipeline of exclusive co-marketing arrangements with top Japanese agro-chemical companies.

Custom Synthesis: ~35% of overall Sales in FY11, 100% exports catering to innovator companies from developed economies mainly Europe, Japan, and a small presence in US. 90% of these are all early stage, patented molecules.

With over 14 years of experience in custom synthesis business, PI has acquired strong competencies and proven its capabilities by working with more than 300 molecules at various stages of process development with up to 15 stage chemical reactions.

PI’s transparent non-compete and IP driven business model has earned it the confidence of clients while its core competence in process research and manufacturing has helped it partner global MNCs and Innovator companies -some ~30 active clients currently for agro-chemicals, pharma and specialty chemicals. As per the company, PI has more than 100 researchers and chemists to handle these assignments.


Bullish Viewpoints

  • Solid Track record – PI Industries have grown solidly over the last several years. Last 5 yrs have seen it clocking a compounded annual growth rate (CAGR) of 22% clocking ~720 Cr in Sales in FY11 from 318 Cr in FY07 . Operating profits have grown at a 5yr CAGR of 42%, while Profit after Tax has grown at an astounding 5yr CAGR of 73% to touch 64 Cr in FY11 from 7.19 Cr in FY07, or 9x in the last 5 years.
  • Consistent Improvement in Margins – Its good to see consistent upward trend in Operating and Net Margins in the last few years. FY07 and FY08 had Operating margins around 10%, going up to 14% in FY09, to 16% in FY10 and over 17% in FY11. 1QFY12 saw Operating Margins climbing to ~21%. As per the company, this is on the back of economies of scale with fixed costs getting spread over a larger base, and improving product mix and realisations in both its business segments. Clearly PI industries is operating at a different level, today.
  • Fast growing blockbuster brand(s) – During FY10, PI launched a new rice herbicide in India – Nominee Gold which had got a tremendous response from the farming community and has even been actively recommended by many state agricultural universities for adoption in rice cultivation. PI is expecting this product to achieve status of the largest rice herbicide in the coming years, contributing significantly to the growth of the company. With a portfolio of solidly growing products in-market and a pipeline of exciting new products, PI is poised to further scale up its business in FY12.
  • Innovative in-licensing model – PI works on an in-licensing model that helps it test market and work extensively in field promotion for newer innovative products, before looking to commercially launch the products. As per the company, there are 7-8 molecules in the pipeline under evaluation and registration stages and is targeting to launch 2 new products in FY2012. These are broad-spectrum insecticides with large market potential. All in-licensed products are based on long-term agreements and none of the products are due for expiry within next 5 years. Most of them have usage life of 15-20 years.
  • Agri growth drivers in place – As per the Management key drivers are quite positive. The Met department is expecting a normal monsoon. Early estimates of crop acreages are high and the agri produce prices are also running at an all time high. These are three key indicators which suggest that FY12 is expected to be a better year for the Agri-Input industry.
  • Strong order Book in Custom Synthesis – Current order book (1QFY12) is in excess of US$ 340 million with tenure of execution ranging from 2-4 years depending on different products. Most of the products are at start-up volume levels and are expected to ramp up significantly with time. As per the company, currently 14-16 products are in commercial scale, while some 24-26 products are at developmental Pilot & R&D stages. 65-70% of the Order book is from Europe, 20% from Japan, and the balance spread out.
  • Huge Capacity Expansion – PI Industries spent ~91 Cr on capital expenditure in FY11 mainly on expanded capacities at its Ankleshwar facility. It is also developing a SEZ project for Custom Synthesis at Jambusar in Gujarat on the back of the expanded order book, for which it has acquired 22.3 acre land. A total investment of Rs. 125 crore has been earmarked for this of which 75-100 Cr may be utilised in FY12, and the balance 25-50 Cr in FY13. As per the company this additional capacity may have a revenue generation potential  ~325-350 cr.
  • Robust recent financial performance – Agri business had grown ~38% over FY10 and custom synthesis business logged a 23% growth over FY10. Overall Sales grew by over 32% in FY11 to ~719 Cr from 543 Cr in FY10.  EPS on an adjusted basis grew by 57% to 51.19 from 32.69 in FY10. 1QFY12 registered a 59% increase in Sales to clock ~207 Cr (130 Cr) despite the polymer business sell-off, while EPS (adjusted for extra-ordinary income) surged 159% to over Rs. 20 (Rs. 7.8).

Bearish Viewpoints

  • Execution Risks – The main risks are on proper execution of expansion projects. Any delay in setting up enhanced capacities may impacted projected growth from custom synthesis business segment.
  • Effect of Monsoon – The Agri-Inputs business is largely dependent on the monsoon. While the FY12 Rabi crop (sown in winter months and harvested from May onwards) has reportedly been good, the Kharif crop (sown in the rainy season Jun-Sep) may still get affected by poor monsoons in the remaining months.
  • Sharp increase in Working Capital in FY11 – Working Capital/Sales shot upto ~29% in Q4FY11 as compared to ~22% in Q4FY10. Debtor days shot upto 90 days in Q4FY11 from 52 days in Q4FY10. Inventory dayssimilarly had climbed up to 72 from 52 days. The company maintained peak sales shift form Q3 to Q4 in FY11 responsible and normal working capital trends will resume in a couple of months. 1QFY12 indeed has seen debtor days down to 59, though Inventory days have increased somewhat to 75 days.
  • Huge increase in debt Levels in FY11 – Total debt sharply increased from 150 Cr in Q4FY10 to 248 Cr in Q4FY11. Company maintained this was mainly on account of short term unsecured loans to cover higher working capital requirements in Q4FY11. That this was not representative of the full year, company cited Interest costs for FY11 (18.19 Cr) being lower than FY10 (18.31 Cr). As Working capital normalises and sale proceeds of Polymer division (April 2011) accrues this would be brought down. 1QFY12 has indeed seen debt levels coming down sharply to 133 Cr. However going forward, additional capex requirements of ~75-100 Cr for SEZ project during the year is going to see increased debt levels.
  • Forex fluctuations – The Rupee/US$ fluctuations may effect custom synthesis business
  • Poor Liquidity – As on 1QFY12, Promoters hold 63.66%. Of the balance FI & FIIs hold 3.87%, Corporate Bodies hold 9.49%, Foreign Corporate Bodies hold another 12.85%, with Directors, relatives and Friends holding another 1.46% – totaling 27.67%. Effective float is just 8.67%. This implies significant impact on bulk entry and exit costs.

Barriers to entry

  • Unique Non-Compete model  – From inception PI has made trust-building the cornerstone of its strategy in custom synthesis and has refused to market competing products. As per the company, PI is the only Custom Synthesis business in the country where more than 90% of the molecules are patented or are at early stage of commercialization.
  • Strong Customer lock-ins – In the custom synthesis business, Innovator companies as a prudent strategy do not keep a single source. But usually for new products, for IP protection, and for other confidentiality issues they also do not keep more than two sources. If it is a huge global blockbuster kind of thing then they may have three sources, but usually not more than two sources.
  • Strong Brands – PI Industries has made the transition from being a generic manufacturer of the reverse engineered off-patent agro-chemical products, to in-licensing innovator company products with exclusive marketing rights to distribute their products in India. As per the company, PI brands are usually #1 or #2 brands in their categories.

Interesting Viewpoints

  • Strong Guidance from Company – On the back of a good monsoon for Agri-Input business and strong execution in custom synthesis segment, the company has guided for a 40% growth in Sales and an EBITDA margin expansion of 1.5% in FY12 (17.19% in FY11).
  • Sale of Polymer business – PI achieved successful closure of the sale of PI Polymer to Rhodia SA for 76 Cr. Post this transaction PI is completely focused on agri inputs and custom synthesis, both high margin and highly scalable businesses. PI booked 30 Cr of the proceeds as Extraordinary Income and the rest to be used to fund growth plans of existing business and/or bring down the debt. The disposal of the low-margin (EBITDA 10%) Polymer business is also expected to provide a fillip to overall margin expansions.
  • Joint Research Centre with Sony Corporation – PI industries signed an agreement with Sony Corporation to set up a joint research centre at Udaipur, named as PI-Sony Research Centre, it was formally inaugurated in January 2011. This R&D Centre will be engaged in developing commercially viable processes for molecules invented by Sony. These researched chemicals are expected to find use in futuristic products like flexible television, solar cells etc. This is a big testament on PI Industries custom synthesis capabilities. Work on several new molecules has already started, and revenue visibility is reportedly from FY13.
  • Currently India is amongst the lowest per capita consumers of pesticides at 380 gms per hectare while it is 2 kg/ha for China, 1.9 kg/ha for Europe and 1.5 kg/ha for the US. Also, out of the total crop area for rice, wheat and cotton in India, only 35-40% is treated with pesticides which indicates that the low penetration is likely to drive consumption of pesticides in India. [Source: Agrochemicals Market in India, FY11]

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


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