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Operating Leverage drives earnings

Earnings better than our estimates

* PI reported strong consolidated revenue growth of 31% YoY in 2QFY23, led by both CSM/Domestic businesses (revenue up 29%/36% YoY), on the back of strong volume growth of 25%/31%, respectively. EBITDA margins improved 280bp YoY to 24.4%, on account operating leverage benefit and favorable product mix.

* Factoring in a better-than-expected sales growth and margin expansion, we raise our FY23/FY24 earnings estimate by 10%/9% and reiterate our Buy rating on the stock.

Higher volume growth in Domestic and CSM boost sales

* Revenue grew 31% YoY to INR17.7b (est. INR16.2b) in 2QFY23. EBITDA grew 48% YoY to INR4.3b (est. INR3.6b). EBITDA margin expanded 280bp YoY to 24.4% (est. 22.5%), led by a 140bp/120bp YoY decline in employee/other Expenses to 7.6%/13.2% (as a percentage of sales) while gross margin stood at 43.8% (up 20bp YoY). Adjusted PAT grew 46% YoY to INR3.3b (est. INR2.7b).

* Exports (CSM)/Domestic revenue grew 29%/36% YoY to INR12.8b/INR4.9b in ? ? 2QFY23, majorly driven by volume growth of ~25%/31%, respectively, and balance by favorable price and currency movement. Newly launched brands in the domestic market are registering strong growth.

* For 1HFY23, Revenue/EBITDA/Adj. PAT grew 30%/44%/43% to ~INR33.1b/INR7.8b0/INR6b, respectively. Domestic/Export revenue mix stood at 27%/73% in 1HFY23 v/s 29%/71% in 1HFY22.

* PI’s net cash position stood at INR23.2b in Sep’22 v/s INR22.2b in Jun’22, led by higher CFO of INR3.1b v/s INR1.8b in 1HFY22. Trade working capital stands at 111 days v/s 103 days as of 31st Mar’22.

Highlights from the management commentary

* Guidance: The management maintains its revenue growth guidance of over 20% in FY23 along with a ~100bp YoY margin improvement.

* New products: PI aims to commercialize seven new molecules in the CSM business and launch seven new products in the domestic business in FY23. In 1HFY23, the company has commercialized one new molecule in CSM and launched five new products in the domestic business.

* Capex: The management has increased its capex guidance of FY23 to INR7b from INR6-6.5b earlier.

* CSM business order book increased 29% to ~USD1.8b, exhibiting good visibility for the future. PI has received about 15 inquiries in 1HFY23 with over 25% 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, driven by a strong (USD1.8b) 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 (five new launches in 1HFY23 and two new launches planned in 3QFY23), thus providing earnings visibility.

* We raise our FY23/FY24 earnings estimate by 10%/9% on the back of betterthan-expected sales growth and margin expansion. We value the stock at 40x Sep’24 EPS to arrive at our TP of INR4,470 and reiterate our Buy rating on the stock.

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