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Is PI facing pressure due to global macro headwinds and new Chinese capacities for its key molecule?

PI Industries (PI) is an outlier in the Indian agrochemical space, with a healthy double-digit growth backed by its CSM business, which focuses on patented molecules. However, recent media articles indicate pressure on the company’s key product due to capacity additions in China. Is PI facing pressure due to the new capacity in China and global stress? We will talk about it in this note.

? PI has a track record of industry-beating revenue growth (18% CAGR in FY16- 23) and a sustainable margin profile (over 20% in FY16-23; ~24% in FY23).

? PI's moat lies in its strong export-focused CSM business, as no other Indian player offers the width and consistency that PI does. The company is banking on this factor by consistently launching new molecules.

? In FY23, the CSM business accounted for 78% of consolidated revenue and 83% of EBITDA. Pyroxasulfone is one of PI’s key molecules (~35% of revenue as per media article), which it manufactures for Kumiai Chemicals (Japan).

? Global demand for pyroxasulfone has been robust, as reported by Kumiai Chemicals (developer) in 2022, with 53% YoY growth. Pyroxasulfone was one of the key factors for PI’s strong performance over the years, shielding it from global headwinds in the agrochemical industry.

? However, PI’s stock price has been under pressure over the last few weeks due to several events related to pyroxasulfone such as:

? Shandong Weifang Rainbow Chemical, a Chinese company, has announced its foray into the manufacturing of pyroxasulfone. It is setting up a 2,000MTPA plant with an investment of RMB300m.

? This is the third Chinese company announcing a capacity for pyroxasulfone, which can have a negative impact on PI’s exports.

? Kumiai has cut it FY24 guidance, thereby indicating demand pressure. Since Kumiai is one of the largest clients of PI, a guidance cut translates into a weak outlook for the company.

? Further, the global agrochemical industry is still witnessing oversupply from China and lower demand in key geographies such as Latin America. The anticipation of global stress catching up with PI is another reason why the stock has been under pressure.

? However, the management has denied any such news of negative impact on the company, calling it mere speculation, and indicated that there is no such stress on the company’s full-year guidance and growth. It further highlighted that pyroxasulfone is a patented product (until 2025 in developed markets) and will not have much impact from the upcoming Chinese facilities

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