Consistent execution; maintain OW stance
* PI’s Q2FY21 earnings beat our revenue/EBITDA/PAT estimates by 12%/27%/60% on the back of robust 33% yoy growth in the domestic business (+14% above our estimates) led by Isagro acquisition. Excluding Isagro, the domestic business declined 3% yoy (in line with our estimates).
* Export revenue increased 25% yoy to Rs8bn, aided by two MPP commissioned in Q4FY20 and ramp up of other MPPs as customer demand remained robust. PI’s export order book stood at USD1.5bn, indicating ~USD108mn of new order, wins which is a lifetime high.
* Isagro reported strong double-digit revenue growth in Q2 (~12% growth contribution in Q2FY21) on the back of operational synergies with PI’s domestic business and higher demand from the fruits and vegetable segment.
* Management guided on call that new acquisitions should deliver higher ROCE than the current company average after one year of integration due to technology synergies. We expect PI to deliver a 29% EPS CAGR over FY21-23E and maintain strong Buy. We roll forward our TP to Mar’23E EPS and arrive at a revised TP of Rs2,450. Key catalyst: 1) progress on utilization of QIP funds, and 2) new capex plan for FY22.
Isagro drives domestic growth: Consolidated Q2 domestic/exports revenues increased 33%/25% yoy to Rs3.6bn/Rs8bn (14%/11% above our estimates). Isagro domestic business contributed 37% to domestic growth, while the legacy domestic revenue declined 3% yoy due to higher placements in Q1FY21. Growth in exports was driven by ramp-up of volumes for molecules commercialized over the last two years.
Product mix and SG&A savings leads to margin expansion: Consolidated gross margins improved 171bps yoy to 44.1% due to a change in the business mix in favor higher margin products on the back of portfolio rationalization in the domestic business. However, H1 gross margin remained flat (down 37bps yoy), indicating normalized H1 performance. Q2 consolidated EBITDA increased by 46% yoy to Rs2.8bn, with 298bps yoy expansion in EBITDA margin to 24.2%. SG&A expenses improved 187bps yoy due to operating leverage and temporary savings in travel and physical marketing costs. The tax rate declined 1000bps yoy to 17% due to higher contribution from SEZ, which management expects to normalize going forward.
QIP update: Management maintained that it is likely to deploy all the QIP proceeds within next 12- 18 months and would ramp up the acquisitions within three years. Management expects the new acquisitions to deliver higher ROCE than the current company average after one year of integration vs. earlier expectation of at par ROCE.
29% EPS CAGR over FY21-23E: We expect PI to deliver a 29% EPS CAGR over FY21-23E on the back of the robust order book execution in the export segment. We expect PI’s ROIC to improve by 337bps to 32.6% over FY21-23E. We maintain strong Buy and OW stance in our EAP. We roll forward to Mar’23E EPS and arrive at a revised TP of Rs2,450.
Key risks: 1) Inability to find suitable acquisition; 2) Raw material price pressure; 3) Delay in commission of new MPP plants
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