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Next growth phase to emanate from pharma venture

PI Industries reported topline growth of 40% YoY to | 1197 crore against our estimate of | 1185 crore. Growth was led by the CSM business, up 47% YoY to | 1006 crore. Revenue from domestic agri input was up 11% YoY to | 191 crore, largely driven by Isagro (up 52% YoY). Revenue from domestic branded formulation fell 11% YoY to | 100 crore. Change in the product mix and removal of MEIS benefits affected gross margins, which was down 469 bps YoY to 42.1%, translating into a below expected operational performance for the quarter. OPM contracted 279 bps YoY to 19% leading to EBITDA growth of 22% YoY to | 227 crore vs. our estimate of | 290 crore. Higher other income (| 44 crore vs. | 7.6 crore in Q4FY20), owing to increase in liquid investments/cash post QIP, negated the impact of poor operational performance, to a certain extent. PAT grew 63% YoY to | 179.9 crore against our estimate of | 212.3 crore.

CSM business likely to drive overall growth ahead

The company launched four molecules last year, while it had around 25 molecules under the CSM portfolio earlier. The order backlog remains at around $ 1.5 billion, of which around 65-70% constitutes long term contracts while the rest are from a short-term contract. Going ahead, there are around 5-6 molecules at various stages of development, which is expected to be commercialised, going ahead. This would expand CSM portfolio and thereby the order backlog. Going ahead, since the new MPP is expected to get commissioned by Q2FY22, we expect better execution to lead to strong topline growth in years to come.

Return ratios likely to improve ahead

The company mobilised around | 2000 crore through QIP last year, which will be largely deployed for inorganic and organic expansion. Since PI is almost at advance stages to finalise pharma acquisition, we expect successful integration along with ramp up of activities to translate into better group performance. Since pharma venture is expected to generate better return ratios against the base business, we expect the same to translate to improvement in group ratios in years to come.

Valuation & Outlook

The company is expecting to increase its share in the API CDMO space post its maiden entry in the Pharma space. Since the market opportunity is large and PI has already delivered strong growth in the agri CSM segment, we expect it to also garner potential scale in the pharma space. We value the company at 40x PER of FY23E (~1.6x PEG). We arrive at a target price of | 3010 (earlier | 2845) and maintain our BUY rating on the stock.

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