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Broadening its horizon with API acquisition Earning below estimates, but strong show on high base

* PI Industries (PI)’s operating performance during the quarter was impacted by one-time expenses pertaining to (i) COVID management, (ii) consulting fees, and (iii) other costs related to various strategic projects. Thus, despite this, the company reported EBITDA growth of 9% on the high base of last year.

* PI acquired the Active Pharma Ingredient (API) business division of lnd Swift Laboratories Limited (ISLL) for INR15.3b, thereby marking its foray into the Pharma segment. The API business of ISLL has a diversified portfolio of 20+ products, with a leadership position (global Top 5) in several of them, and a good R&D product pipeline. The acquisition is the right fit for PI considering the quality of the asset, approvals of the facility, current product portfolio, and pipeline of products. Thus, PI could leverage its knowledge in process chemistry and its operating efficiency to expand into the Pharma space. On an FY21 basis, PI has acquired at EV/EBITDA of 7.6x and PE of 17.8x (v/s 68.3x for PI).

* We increase our earnings estimate for FY23E by 4%, factoring in the acquisition based on the details currently available – which would be revisited once there is more clarity on the same. Maintain Buy, with TP of INR3,720.

CSM drives revenue growth; one-time cost dents EBITDA margin

* Revenue stood at INR11.9b (est. INR13.1b) in 1QFY22, up 13% YoY. EBITDA stood at INR2.5b (est. INR2.7b), up 9% YoY. The EBITDA margin contracted 80bp YoY to 20.8% (est. 20.3%) on higher employee and other expenses. The gross margin stood at 43.8% (+170bp YoY) due to a change in the product mix. Adjusted PAT was up 29% YoY to INR1,872m (est. INR2,100m).

* Overhead costs increased 26% YoY, largely due to one-time expenses pertaining to COVID management and consulting fees and other costs pertaining to several strategic projects.

* CSM revenue increased 31% YoY (to INR8b) in 1QFY22, led by strong volume growth in key products.

* Revenue for domestic Agrochemicals de-grew 13% YoY (to INR3.9b), impacted by a higher base and delayed monsoons.

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

Highlights from management interaction

* Three new products were commercialized in CSM in 1QFY22 and >30 active inquiries were made at different stages. Six new molecules are scheduled to be commercialized in FY22. The commissioning of three new molecules is in progress.

* Product research efforts yield results: PI has got two promising leads – one for a novel fungicide and another for a novel broad-spectrum insecticide, with sizable potential market opportunity in progressing to the development phase. Both have shown promising results in the initial evaluations. Currently, discussions are underway with global innovators for the development partnership.

* Launches in the domestic business: Three new products are expected to be launched in 2Q, which would strengthen its position in Rice, Cotton, and Horticulture portfolio.

* Capex stood at INR710m for 1QFY22 and spend of INR3,500m is targeted for FY22.

Valuation and view

* The company has levers in place to sustain the near-term growth momentum, led by a) ramp-up in operations at two multi-purpose plants (MPP), which commenced in FY21, and plans for one new MPP to be commercialized by 2QFY22; b) revenue from the Isagro acquisition; c) sustained growth momentum in the CSM business on account of a strong (USD1.5b) order book, the increasing pace of commercialization of new molecules, and sales buildup in existing molecules; and d) product launches in the domestic market (three new launches in 2QFY22) providing earnings visibility.

* PI acquired the API business division of lnd Swift Laboratories Limited (ISLL) for INR15.3b, thereby marking its foray into the Pharma segment. The acquisition is the right fit considering the quality of the asset, approvals of the facility, current product portfolio, and pipeline of products. Thus, PI could quickly leverage its knowledge in process chemistry and its operating efficiency to expand into the Pharma space. On an FY21 basis, PI has acquired at EV/EBITDA of 7.6x and PE of 17.8x (v/s 68.3x for PI). We await further details on the scale-up of the acquisition.

* The stock has traded at an average of 33x over the last three years on a oneyear forward basis. We ascribe 40x P/E after considering the strong growth outlook for existing businesses and its acquisition in the Pharma segment – which adds up to the opportunity size PI currently caters to, providing a long runway for growth.

* We expect a revenue/EBITDA/PAT CAGR of 28%/34%/33% over FY21–23E.

* We increase our earnings estimates for FY23E by 4%, factoring in the acquisition based on the details currently available – which would be revisited once there is more clarity on the same. We value the stock at 40x Sept’23 EPS to arrive at TP of INR3,720. Maintain Buy.

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