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CSM business drives business performance

Earnings better than our estimates

* PI reported strong consolidated revenue growth of 29% YoY in 1QFY23, led by the CSM business (revenue up 42%, volume growth of 30%, favorable price increase of 12% and currency movement). Revenue in the domestic Crop Protection segment grew 4% YoY. EBITDA margin expanded by 150bp to 22.4%, with gross margin remaining flat YoY.

* Factoring in a better than expected sales growth in the CSM business and an upward revision in its FY23 sales guidance to over 20%, we raise our FY23/FY24 earnings estimate by 10%/12%. We maintain our Buy rating on the stock.

Higher volume growth in CSM drives sales

* Revenue grew 29% YoY to INR15.4b (est. INR13.6b) in 1QFY23. EBITDA grew 39% YoY to INR3.5b (est. INR3b). EBITDA margin expanded by 150bp YoY to 22.4% (est. 21.9%). Gross margin stood flat YoY at 43.8%. Other expenses grew 40bp YoY to 13.4% of sales. Adjusted PAT grew 40% YoY to INR2.6b (est. INR2.2b).

* The trend in rising input costs continued, with cost pass-through undertaken both in exports (CSM) and the domestic market in 1QFY23.

* Exports grew 42% YoY to INR11.4b in 1QFY23, driven by volume growth of ~30% and a favorable price and currency movement of ~12%.

* The domestic business grew 4% YoY to INR4b in 1QFY23 due to a price increase and a favorable product mix. With sowing delayed due to a the late arrival of rains, rice/corn acreage under Kharif fell ~15%/~5% YoY, hurting domestic business.

* Its net cash position stood at INR22.2b in Jun’22 v/s a net cash of INR20b in Mar’22. Net cash flow from operating activity was INR1.9b (v/s INR5.3b in FY22). In terms of days of sales, trade working capital stands at 102 days v/s 103 days as of 31st Mar’22.

Highlights from the management interaction

* Guidance: The management raised its revenue growth guidance to over 20% in FY23 from 18-20% earlier, given the continued improvement in margin and returns. The CSM business will grow due to continued scale-up in demand for existing and recently launched products.

* New products: PI aims to commercialize seven new molecules in the CSM business and five new products in the domestic business in FY23. Two new process innovations will be commercialized in FY23. It has commercialized one new molecule in CSM in 1QFY23, with over 40 products at different development stages, of which over 35% products are targeted at the nonAgrochemical space.

* Total capex was contained at INR506m in 1QFY23. The management’s focus remains on driving higher capacity utilization by improving throughput. It has raised its FY23 capex guidance to INR6-6.5b from INR5b earlier.

* The order book in the CSM business remained ~USD1.4b, exhibiting good visibility for the future. PI has received 13 inquiries with over 15% of them being from the non-Agrochemical space.

Valuation and view

* PI has levers in place to sustain the near-term growth momentum, led by: a) sustained growth momentum in the CSM business, due to a strong (USD1.4b) order book, the rising pace of commercialization of new molecules, and a sales ramp-up in existing molecules; and b) product launches in the domestic market (four launches in FY22 and five planned in FY23), thus providing earnings visibility.

* We expect a revenue/EBITDA/PAT CAGR of 21%/28%/30% over FY22-24.

* Factoring in a better-than-expected sales growth in the CSM business and an upward revision its FY23 sales guidance to over 20%, we raise our FY23/FY24 earnings estimate by 10%/12%.

* We value the stock at 39x EPS (in line with its three-year average one-year forward P/E) to arrive at our TP of INR3,630. We maintain our BUY rating.

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