After strong Q2, uptick ahead for agrochemical major PI Industries stock

After a sharp rally, valuations reflect the strong Q2 show

A significant outperformance in the September quarter for the 2022-23 financial year (Q2FY23) by agrochemical major PI Industries led to an 8.6 per cent surge in the stock price on Wednesday. While the stock has given up some gains in trade on Thursday on valuations concerns, prospects remain strong on the back of a robust order book in the custom synthesis and manufacturing (CSM) business.

Revenue momentum remains a key near-term trigger for the company. Sales in the CSM or the exports segment, which accounted for 72 per cent of its revenues in the quarter, were up 29 per cent year-on-year (YoY) on a higher base. This was led by 25 per cent growth in volumes while favourable prices and currency movement accounted for the rest.

The order book in the CSM segment saw a robust 29 per cent growth to $1.8 billion which offers good revenue visibility. Enquiries have been healthy in the first half (H1) of FY23 with about a quarter of them being in the non-agrochemical space. While the company commercialised one new molecule in the CSM space in H1FY23, it is looking at a total of seven molecules to be commercialised in the current year.

The domestic formulation business too saw traction with a 36 per cent revenue growth. This was aided by a 31 per cent growth in volume and 5 per cent uptick in prices. Growth in Q2 for this business, which has been muted as compared to exports over the last many quarters, was led by new launches. The company is looking at bringing out seven new products in the domestic business in FY23.

While the firm has posted a 30 per cent revenue growth in the first half of the year, it has stuck to its 20 per cent plus growth guidance for FY23. This, according to Abhijit Akella and Prasenjit Bhuiya of Kotak Institutional Equities, indicates that the phasing of CSM order deliveries is relatively front-ended in FY23. Revenue growth could also be hit by a correction in chemical prices and domestic business growth too could slow down in H2 on a normal base, they add.

Gross margins were slightly higher over the year ago period, rising 20 basis points (bps) to 45.2 per cent, with higher raw material prices being offset by price hikes and a favourable product mix. Profitability at the operating level was much better as the metric rose 280 bps to 24.4 per cent on volume led (operating leverage) gains and superior product mix. Given better than expected growth and margin expansion, brokerages have raised their earnings per share estimates for FY23 and FY24 by 5-9 per cent.

Prabhudas Lilladher Research expects the company to report a strong 21 per cent revenue growth and 25 per cent net profit growth over FY22-25 period. At the current price, the stock is trading at 35 times its FY24 earnings estimates; investors should await a better entry point.