IGI Logo

CSM segment moving from strength to strength

* PI industries (PI) has built a strong business model by strengthening its presence in the CSM segment in the agrochemical industry. Going ahead, it aims to diversify into the pharmaceutical segment and other niche chemistry. The company continues to build a strong domestic agrochemical franchise with the launch of better products in the crops and pesticide segments over the years.

* We believe that any correction in the stock is an opportunity to buy a quality business at a better valuation. The stock has traded at an average P/E of 37x/35x over the last three/five years on a one-year forward basis. We ascribe 36x FY25E EPS after considering the strong growth outlook for existing businesses and its acquisition in the pharma segment – which adds up to PI’s total addressable market (TAM) (from USD31.5b to USD136.5b in 2022), providing a long runway for growth.

* We value the stock at 36x FY25E EPS (in line with its 3/5-year avg one-year forward P/E) to arrive at a TP of INR4,560. Maintain BUY. 

CSM business helps to sustain growth amid difficult global scenario

* The company’s focus on export CSM has been the key differentiator compared to other agchem/chemical players in India. PI has a strong track record of an industry-beating revenue CAGR (18% 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.

* The company works with 20 global innovators, manufacturing over 25 products on a commercial scale and evaluating over 60 molecules in their R&D center.

* Where global generic agrochemical companies are facing headwinds in the form of subdued prices and volumes due to overcapacity in China, PI is faring well on the back of its CSM business focused on patented molecules (volume growth of 29% YoY in 1QFY23).

Commercialization of new molecules in CSM maintains momentum

* PI's CSM business specializes in agrochemicals, primarily patented molecules, which account for 90% of revenue. The company collaborates with global agrochemical innovators to optimize the manufacturing process, reduce costs, and enhance product quality. PI has strong partnerships with over 20 global customers, including Kumiai Chemicals, Nissan Chemicals, Mitsui Chemicals, Bayer, BASF and Corteva.

* PI's CSM business has demonstrated impressive growth, with a 28% CAGR in FY18-23 and an estimated 21% CAGR from FY23-25E.

* The company has a robust pipeline of molecules at various stages, including R&D and recent commercialization. PI commercialized one molecule in 1QFY24 and plans to launch four to five more molecules annually from FY24 onward, as per its guidance.
The launch momentum is driven by the rise in outsourcing by global innovators, lower competitive intensity in the CSM market (due to global consolidation), cost advantages, a steadfast commitment to protecting intellectual property rights, and the wealth of expertise accumulated over the years.

* PI has improved its R&D capabilities by adding more scientists and researchers (473 in FY23 vs. 228 in FY21), which reflects in the increase in its cumulative patent filings to 147 in FY23 from 102 in FY21 (Refer Exhibit: 19)

* As per WTO, India is a growing hub for chemicals, ranking as the world's secondlargest agro-chem exporter in 2022, surpassing USA. The Indian agro-chem market is set to grow 10-12% in FY24, with exports accounting for a 50% share, driven by the 'China plus one' strategy, declining EU competition, and Indian government support.

* PI ranks among the top five global players in the agrochemical CSM sector, with a focus on early-stage molecules. The company maintains competitive margins, with EBIDTA margin of ~24% in FY23 compared to its global peer CABB Chemicals, which has EBITDA margin of 22-23% in CY22. (Refer Exhibit: 22).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412