Multiple long-term triggers for PI Industries

But near-term global agrochemical demand is expected to be soft with recovery towards end of FY18

Cost savings from the joint venture with Japan’s agrochemical major Kumiai Chemical, higher agrochemicals demand and outsourcing is expected to keep PI Industries’ revenues and operating profit growth steady going ahead. PI on Thursday announced it would start a 50:50 joint venture with the Japanese partner to manufacture and distribute the flagship agrochem product Nominee Gold. The manufacture of the product, which accounts for 15-17% of revenues and profits of PI, will help save 25-30% of manufacturing and logistics costs as well as bring down the working capital intensity, believes Ritesh Gupta of Ambit Capital. The Kumiai JV is the third one the company has entered into over the past year, with Mitsui and BASF being the other two companies, for new product registration and distribution in India. 

Going ahead, new launches and current capex are expected to add to the company’s growth. In the company’s custom synthesis and manufacturing (CSM) segment, the order book is at a strong $1 billion, comprising 8-9 molecules and has increased from $800 million in Q3FY17. Analysts at Anand Rathi Research believe that growth in the current quarter is expected to be weak given lower global demand. They, however, expect demand to improve in the second half of the current year as crop prices bottom out and inventory shrinks over a period of time. Given its ongoing expansion and thus additional capacity (Rs 200 crore in FY18 including R&D investments), increased revenues from in-licensed products, steady exports and new launches, analysts expect revenue growth over the FY17-19 period to be 15.5%. While operating profits will grow by a similar number, margins are expected to be in the 23.5-24% band. 
 

Gupta of Ambit believes there will be a gradual improvement in CSM revenues in FY18 and a full-blown one in FY19, driven by higher agrochem demand as well as contracts from new molecules. This, coupled with $10-billion worth of molecules turning generic, and the outsourcing opportunity will be another trigger for the company. The brokerage believes that the key strength of the company lies in execution as its operating profits over the past two years have grown by 25% annually despite tough conditions for exports and domestic business. 
 

While the stock is trading at about 19 times its FY19 estimates, given the triggers, most brokerages are valuing it at 26 times FY19 estimates with target prices in the range of Rs 1,000-1,100. Given the current prices, there is an upside of over 20%.