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In-line quarter; realigned growth guidance to high single-digit

PI’s Q2 EBITDA at Rs6.3bn (+14% YoY/+8% QoQ) was in line with our estimates due to stable CSM exports QoQ. CSM revenue grew 10% YoY, driven by robust volumes and growth of new products, while the domestic and pharma businesses remained subdued. Management has lowered its FY25 revenue growth guidance of 15% to 7-9% (vs 18-20% for FY24), amid continued global industry challenges, and expects to maintain 26-27% EBITDA margin. FY25 capex guidance remains unchanged at Rs8-9bn. We now believe that this guidance is more realistic in nature and tweak our FY25/26/27 estimates by +8%/-2%/-3% to factor in higher other income in FY25 and lower growth in FY26/27E. We maintain our REDUCE rating with TP of Rs3,900 (30x Sep-26E EPS), while awaiting visibility on scaling up of new patented molecules.

Company lowers its revenue expectations for FY25

The management cut its revenue growth forecast to high single-digit for FY25 (earlier guidance of 15%); we have reiterated earlier that growing with historical run rate on a higher base with single molecule concentration looks difficult. We stay cautious on pyroxasulfone concentration risk, low visibility on scale up of large patented molecules to offset risk of concentration, and higher cash balance which are a drag on RoCEs. The gross margins of 51.8% remained steady on superior product mix (guidance of 50-51%). The company has guided for sustainable EBITDA margins in the range of 26-27% for exports and the domestic business. We believe that going forward, the decline in margins due to lower operating leverage will be offset by lower pharma R&D spends.

CSM business stable QoQ with higher share of pyroxasulfone

The Custom Synthesis and Manufacturing (CSM) business clocked revenue of Rs17.2bn (+10.2% YoY/Flat QoQ), primarily driven by volume growth, and growth of new products by 42% YoY. Increase in CSM is mainly on account of scale-up of products commercialized over the last 3 years. PI commercialized 4 new products for exports in Q2, and plans to launch 7-8 new products by the end of the year. Customers are sitting at elevated inventory levels leading to slower product offtake. We understand that the oversupply situation of off-patented molecules has led to a price crash, reducing demand for high-cost patented products. We await for guidance from Kumiai on AXEEV for the upcoming year. The company is focusing on capacity expansion in line with its strategy.

Domestic business to improve in H2; pharma pulling down margins

The domestic segment de-grew 5% YoY in Q2 due to lower institutional sales, while delayed monsoons did not help the company. We believe that higher reservoir levels will help the company in gaining market share in Q2, negating the pricing pressure from generics. Pharma business recorded revenue of Rs411mn in Q2, lower QoQ due to high inventory at the customer’s end (2 products with 2 customers). Pharma business incurred loss of Rs551mn largely due to one-off R&D spends and bad debts provision of Rs320mn. PI has onboarded a 3 CXO-level leadership team, including a new Global CEO in Q2.

Other highlights

* Total capex outlay for Q2FY25/YTD was at Rs2.34bn/Rs3.84bn (pharma capex outlay for Q2FY25/YTD of Rs358mn/Rs730mn).

* Trade working capital reduced from 84 to 70 days.

* PI launched 2 innovative brands in Q2FY25 for exports (4 in H1FY25; 7 in FY24), and 2 products in domestic agri brands (4 in H1FY25).

* PI filed for 8 patents in Q2FY25 (13 in H1FY25), taking the total to more than 180. Around 5-6 innovative products are likely to be launched in FY25, with a robust pipeline of over 20 products under registration and development.

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