Investors with a two-to-three-year investment horizon can consider the stock of agrochemical maker PI Industries. The company is poised for good growth in the near to medium term on the back of new differentiated product launches in the overseas market, strong order pipeline in the custom synthesis business and recovery in the domestic business, aided by less competitive products.
At the current price of ₹3,646, the stock trades 32.8x its trailing 12-month earnings, implying a significant discount to peers such as Bharat Rasayan (30 per cent) and Sumitomo Chemical (50 per cent). Interestingly this is despite PI Industries’ best-in-class operating profit margin (26 per cent in FY24) and return ratios (Return on Capital Employed of 24 per cent).
PI Industries is among the country’s leading exporters of crop protection chemicals – both active ingredients and formulations. Exports constitute over 80 per cent of the company’s total sales, with domestic accounting for the balance. The company is also a major player in the custom synthesis business, wherein it works closely with innovators in development and manufacturing of innovative products.
Growth levers
The growth levers for PI Industries are three-fold. First, the company’s exports have witnessed healthy growth over the last few quarters, even as companies globally have been impacted by the issue of high channel inventory and the incomplete destocking cycle. This has been a global phenomenon with retailers and distributors cutting down on their inventory primarily due to higher carrying cost, in light of the prevailing high interest rate regime. Moderation in the rate cycle over the next few quarters and completion of the destocking will provide a boost to agrochemical sales.
PI Industries has managed to weather this well, thanks to its differentiated product basket — that enjoys better margins in the export business. Also, in its custom synthesis business, as the molecules mature and progress to the next level in the discovery life cycle, the revenue scale-up will be higher. Also, this will have a positive rub-off on the company’s consolidated margins as these are innovative products and enjoy very high gross margins.
According to the management, the current order book for exports is pegged at $1.75 billion, which is more than its FY24 overall sales. In FY24, the overall revenue growth of 18 per cent was driven by a 25 per cent jump in exports, which more than compensated for the de-growth in the home market. Also, in FY24, over 70 per cent of the growth came from new products. A healthy pipeline of about 20 products lined up for launch in the near term, in addition to growth from existing basket, should help the company outpace its modest guidance of 15 per cent revenue growth.
As already stated, channel de-stocking and overall sentiment improvement will further help profitability and revenue growth for PI Industries. Besides, the export business also has a small proportion of non-agrochem products (pharma company PI Health Sciences and group companies) which, though currently small at 6 per cent, can get to a meaningful size in future.
In FY24, the company launched six new products and these have seen healthy growth. In the current year too, the company plans to launch 4-5 products. The strong growth in FY24, fuelled largely by the acquisition of Archimica S.p.A (headquartered n Lodi, Italy) by PI Health Sciences entity in April last year, will continue to drive the non-agrochem growth.
Second, in the home market too, the company has shifted focus towards in-licensed molecules, which enjoy much higher margins. In FY24, the company launched seven such products and has a development pipeline of over 20 products in various stages of development.
The other major macro tailwind for the current year is the expectation of normal rainfall during the South West monsoon season. This should help the domestic market growth in FY25. Also, the biologics portfolio in India is witnessing healthy growth. Products such as Jivagro, Claret, Eketsu and Kadett, to name a few, have aided growth.
Finally, the pharma business, which includes an integrated contract research and manufacturing business, is getting ready for a take-off. Even as the company aspires to build world-class manufacturing and research infrastructure, it is also seeing good interest from global giants, which will drive growth in the medium to long term.
What differentiates PI Industries, besides product innovation and market dominance, is the company’s ability to build a strong business model, which will continue to generate healthy returns for its investors. For instance, the company already has to its credit filed over 165 patents till date and engages with over 700 farmers.
Financials
On the financials front, PI Industries enjoys the best-in-class margins (upwards of 26 per cent) primarily on account of differentiated, limited competition opportunities. Also, its Return on Capital Employed is among the highest in the industry. Another positive for the company is its ability to maintain tight control over working capital. As a result, the cash flow from operations (CFO) has grown by over 10.5x in the last nine years.
The current multiple of CFO to the company’s operating profit is over 1x, as compared to 0.6 per cent in years preceding Covid and also early part of the current financial year. Cash conversion cycle has halved in the last two years, from about 122 days in 2022 to about 59 days now. In FY24, the company grew revenue by over 18 per cent despite huge inventory being present in the system. Operating profit for the period grew by an impressive 30 per cent. This is thanks to the better product mix, higher margins.
We believe that the company, despite being in a leadership position, is available at a reasonable valuation for investors with a medium-term horizon and hence we have upgraded the stock from accumulate to buy. However, the only key risk and monitorable in this case would be the monsoon onset and progression as any adverse development on that front can impact agrochemical sales in the current year, with a possible spill-over effect on the next year too.
