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Healthy growth led by CSM

PI Industries (PI) delivered another steady quarter, with a 17/8/15% yoy growth in revenue/EBITDA/PAT to Rs13.55bn/Rs2.9bn/Rs2.3bn. Sales growth was led by Global Agrochem Exports (CSM), which grew at 19%. Domestic Agri Brands business grew by 8% YoY on sales. Exports contributed 80% to the total sales. Trend of rising input costs continued while pass through happened only partially in both the segments. Partial pass through and lower export incentives led to marginal GM decline of 50bps. Overheads increased by 24% on account of higher power and fuel cost, and shipping cost, leading to EBITDAM decline of 180bps to 21.9%. EBITDA/PBT/PAT grew by 6/2/14% respectively. For 9MFY22 sales/EBITDA/PAT grew by 16/7/14% respectively with EBITDAM decline of 180bps to 21.4%. During 9MFY22, the company added eight new customers and has more than 40 products in pipeline. Stock price declined by 28% from its peak of Rs3497 in Sept’21. At current valuations of 36x FY24e/26x EV/E we believe there is 17% upside on the stock. BUY rating with TP of Rs2990.

CSM segment growth remains strong; Domestic segment recovered in 3Q

Despite a high base, CSM revenue grew by 19% YoY to R10.7b. Domestic revenues grew modestly by 8% YoY supported by price hikes in key products. During 9MYF22, exports grew by 24% to Rs28.bn while domestic business declined 3% to Rs10.3bn on account of high base of last year and unfavorable Kharif season. However, good Rabi season led to some recovery in domestic business in 3QFY22. In CSM, four new molecules were launched while three more are planned in 4QFY22. More than 40 products are at different scale up stages. R&D pipeline for CSM has more than 20% non-agrochem products. In domestic agrochem, PI successful launched one new insecticides for rice and 2 specialty fungicides focused on horticulture and rice. The company also successfully launched a number of new brands in the horticulture segment with Jivagro.

Margin pressure, healthy capex and higher inventory levels

Gross margins of 46.4% declined marginally by 50bps led by higher input cost and lower export incentives. Though company has taken price hikes, pass through has been partial in 3Q. Full impact will be realized in 4Q. Higher overhead cost and shipping cost impacted margins by 180bps to 21.9%. Total capex incurred in 9MFY22 stood at RS2.3bn while focus remains to driver higher capacity utilization. The company maintained higher inventory level (stood at Rs13.6bn) higher compared to last year to avert supply chain disruptions and meet customer supply schedules.

Valuations & View – Buy

Core business of PI remains in rude health and is unlikely to see any major headwinds to growth of 14-15% (revenue) over the next 2-3 years. Diversification into adjacencies through inorganic routes remains a top agenda for the company. Apart from technology scale-ups, PI is evaluating various M&A opportunities, both India and globally. With current valuations of 36x FY24e EPS/ 26x EV/E (stock has declined by 28% in 6Mths) there is sufficient margin of safety. BUY rating with target price of Rs2990.

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