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Strong earnings growth momentum continues

* PI Industries (PI) reported a strong 3QFY21 performance, led by a 40%/26% YoY growth in Custom Synthesis and Manufacturing (CSM)/Domestic business. EBITDA growth of 48% YoY (on a high base of last year) was on the back of gross margin expansion and operating leverage.

* PI reported in line numbers in 3QFY21. We, thus, maintain our estimates for FY21E/FY22E/FY23E. We value the stock at 33x FY23E EPS to arrive at TP of INR2,659, implying 18% upside. Maintain Buy.

Domestic business and CSM drives overall performance

* Revenue was up 37% YoY in 3QFY21 (including Isagro’s performance, which was absent in the base quarter) to INR11.6b (v/s our estimate of INR11.2b). EBITDA was up 48% YoY to INR2.8b (v/s our expectation of INR2.7b). EBITDA margin expanded 180bp YoY to 23.7% (v/s our estimate of 24.1%), supported by gross margin expansion and operating leverage.

* Adjusted PAT grew 61% YoY to INR1,954m (v/s our expectation of INR2,058m), aided by higher other income (+104% YoY to INR389m) and lower tax rate (25.9% v/s 28.7% last year). The same was offset by higher finance cost (+74% YoY to INR66m) and higher depreciation (+38% YoY to INR440m). In 9MFY21, revenue/EBITDA/PAT grew 35%/48%/61%.

* 3QFY21 exports/CSM revenue rose 40% YoY (to INR9b) on pro-active raw material planning and efficient capacity utilization. All commercial molecules have maintained a strong demand focus in line with its order book.

* Revenue for domestic Agrochemicals grew 26% YoY (to INR2.6b), supported by: i) Isagro’s sales, and ii) good traction from PI brands like Nominee Gold, Osheen, Awkira (wheat herbicide). and Londax Power (Rice herbicide).

* The order book stood ~USD1.5b (flat QoQ), which provides higher visibility for sustainable growth over the next 3-4 years.

Highlights from the management commentary

* Capital expenditure for 9MFY21 stood at INR3.2b. In 9MFY21, PI generated CFO of INR6.7b.

* Four molecules have been commercialized in CSM as on 9MFY21. PI plans to commercialize another 5-6 molecules at various stages of development by FY22-end. At the commercial stage, PI has 24-25 products. At the synthesis stage (R&D), the company has 40-45 products at various levels.

* At present, PI has 15 active MPP, with MPP no. 10 in Jambusar coming on stream in 4QFY21. Two new plants were commercialized last year, of which one plant is operating at 80% utilization, while the other is operating below 50% utilization.

Valuation and view

* PI reported strong all-round performance during 3QFY21 with over 25% revenue growth in CSM and the domestic business. EBITDA margin expansion was led by gross margin expansion and operating leverage. Adjusted PAT growth was higher than EBITDA growth due to lower tax rate and higher other income.

* The company has levers in place to sustain the growth momentum in the near term, led by: a) ramp-up in operations of two multi-purpose plants that have recently commenced and one new MPP is planned to be made ready by 4QFY21, b) revenue from the Isagro acquisition, c) sustained growth momentum in the CSM business on strong (USD1.5b) order book, increasing pace of commercialization of new molecules, and ramping up of sales of existing molecules, and d) product launches in the domestic market (2-3 annually) providing earnings visibility.

* With the completion of INR20b QIP, the company is exploring inorganic acquisition opportunities in the Pharma space, which would drive long-term growth. The company would deploy capital to the existing business.

* PI reported in line numbers in 3QFY21. We, thus, maintain our estimates for FY21E/FY22E/FY23E.

* The company trades at an average of 31x over the last three years on a one-year forward basis. On the other hand, we have ascribed 33x P/E after considering the strong growth outlook for the existing business and its venture into the Pharma segment, which presents a huge opportunity for the company to play on. We expect revenue/EBITDA/PAT CAGR of 25%/31%/39% over FY20-23E.

* We value the stock at 33x FY23E EPS to arrive at TP of INR2,659, implying 18% upside. Maintain Buy.

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