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CSM continues to drive growth; domestic flat

About the stock: Incorporated in 1947, PI Industries focuses on complex chemistry solutions in agri and pharma sciences.

* The company maintains a strong research presence through its R&D facility in Udaipur, where it has a dedicated team of over 300 scientists

* The revenues of the company can be divided into custom synthesis manufacturing (CSM) and domestic agrochem formulation business with the former contributing ~74% to overall revenue in FY22 and the rest coming from the domestic formulations business

Q3FY23 Results: Numbers were in line with I-direct estimates on revenue front while EBITDA and PAT came in above I-direct estimates due to favourable product mix, higher-than-expected other income and low tax rate.

* Reported revenue growth of 19% YoY to | 1613.2 crore. CSM was up 23% YoY to | 1328.6 crore while domestic formulation was up 2% YoY to | 285 crore

* Gross margins grew 73 bps YoY to ~47.2% while EBITDA margin expanded 387 bps YoY to 25.7%. Absolute EBITDA was up 40% YoY to | 415.1 crore

* PAT increased 58% YoY to | 351.8 crore, driven by strong operational efficiency

What should investors do? The stock appreciated at 26.1% CAGR in the last three years

* We upgrade our rating from HOLD to BUY on the back of better growth outlook of the CSM business and consistency in performance.

Target Price and Valuation: We value PI Industries at 32x FY25E EPS to arrive at a revised target price of | 3615/share (earlier | 3930/share).

Key triggers for future price performance:

* Strong CSM order backlog of ~US$1.8 billion bodes well for future growth

* Proposed foray into pharma CDMO could expand revenue visibility further and diversify its revenue stream, to a certain extent

* Launch of four to five new products every year in both segments and foray in horticulture in domestic segment to aid strong revenue growth

Alternate Stock Idea: Apart from PI Industries, in our chemical coverage, we also like SRF.

* Trigger for SRF’s future revenue growth would be increasing specialty chemical business

* BUY with a target price of | 2550

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