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Margin recovery to take a while

PI Industries (PI IN) reported very weak Q2, with disappointment mainly coming in from 780bps erosion in gross margin caused by price reduction for its key molecule (post its genericization) and inability to pass through cost escalation under current market conditions. EBITDA declined 57% to INR 2.3bn due to negative operating leverage and continuous investment in development of new businesses. Management highlighted that gross margins would continue to be under pressure in the next two quarters, which is likely to be a key overhang. We revise PI to Reduce with a lower TP of INR 1,822, on 30x H1FY29E earnings.

CSM – Pricing pressure dents margin:

PI is witnessing significant pricing pressure following the genericization of a key molecule that went off-patent, resulting in a sharp decline in realizations. While PI continues to be cost-competitive globally, it indicated that the pricing pressure could persist. Further, pricing discounts of 13-14% across the broader export portfolio, with ~5% higher input costs have weighed on profitability. Management is prioritizing market-share retention and volume protection over near-term margins, with stabilization dependent on an improvement in global demand and pricing conditions.

Pharma business to scale-up on new molecule commercialization:

The pharma business delivered a healthy growth of ~20% YoY, with quarterly revenue of ~INR 0.75bn, supported by deeper customer engagement and commercial manufacturing of Galidesivir API. PI is strengthening its CRDMO capabilities through the Hyderabad Centre of Excellence and commissioned QC laboratories at Lodi. PI indicated a few deals in the pipeline and is confident of achieving INR 5-6bn in revenue with EBITDA breakeven in the next 2-3 years.

Biologicals growing at a rapid pace:

Domestic biologicals business grew 55%, and global biological business 96%, driven by commercialization of new products as well as network expansion. Teikko, which is world’s first biological product having foliar application, was commercialized in Mexico and the US. For the US market, PI has already registered three peptides for launch through five brands. In Brazil, label extension for two biologicals on corn and cotton crop would expand the market size

Revise to Reduce with a lower TP of INR 1,822:

While recovery looks gradual, starting from FY28, pharma and electronic chemicals offer promising diversification opportunities in the long term. The CSM business is continuing to face subdued demand, now with added pricing pressure. We have reduced EBITDA estimates by 40%/39%/36% for FY27E/28E/29E. We revise PI to Reduce (Accumulate earlier) with a lower TP of INR 1,822 (INR 2,937 earlier) based on 30x H1FY29E earnings. Higher than expected topline growth and earlier than expected recovery in margin expansion are key risks.

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