Stock Review: PI Industries

 

PI Industries is likely to fare well in future on the back of robust demand for agri inputs and growth in the synthetic chemicals business

 

UDAIPUR-BASED PI Industries is an agrochemicals company that provides inputs and solutions to farmers in key areas of crop protection chemicals, specialty products and plant nutrients. Incorporated in 1947, the company has a significant focus on contract manufacturing of fine chemicals (CRAMS – contract research and manufacturing services). While agri-input accounts for over 60% of the company's total business, CRAMS forms the rest over 30%. Till December 2010, polymer compounding segment used to form the balance of the total business, which has since been divested.

   With a pan-India presence and over 25,000 retail points, PI has a vast distribution network. The company has three formulation and two manufacturing facilities and four multi-product plants under its three business units in Jammu and Gujarat. Also, PI has an agro-chemical research and development facility in Rajasthan.

   Globally, PI offers end-to-end solutions in the fine and specialty chemicals space to the multinationals in Japan, the US and Europe. The company looks to expand its overseas business in the coming quarters.

GROWTH OUTLOOK

In December 2010, the company sold off its polymer compounding business to France-based chemicals major Rhodia. The deal is likely to complete by the end of March 2011. The transaction will enable the company to focus on agri-inputs and custom synthesis segments, which together form a major chunk of PI's revenue. Also, the company is expected to witness improved profitability on the back of the divestment of the polymer business, which was highly working capital intensive. The company looks to use the proceeds to bring down its debt-equity ratio from the current level of almost 1 and the balance to fund its inorganic growth in the near future.

   Recently, PI has opened a research centre in partnership with Sony in Udaipur, PI-Sony Research Centre. The partnership looks to develop synthetic organic chemicals for applications in the electronic industry. While the high technical capabilities of Sony and large chemical manufacturing facilities of PI would help the venture develop the synthetic organic chemical produce in a cost-effective manner, the joint patenting will benefit PI to improve on its profitability.

   Going ahead, the company aims at 40-45% growth from its current businesses in FY12. Also, the company has lined up a capex of 125 crore for the next two years to boost capacity and inorganic growth.

FINANCIALS

During the September 2010 quarter, the company posted a nearly 45% growth in the top-line against the previous quarter. The agri-inputs business, which forms over 60% of the company's total business, continues to be the major growth driver. The next major business segment, custom synthesis, posted a somewhat subdued performance during the quarter. During the December 2010 quarter, the company expects the agri-inputs business to continue posting healthy set of numbers. Moreover, it expects a significant ramp up in the CRAMS business in the coming quarters owing to the delivery schedules of various customers.

   Over the past four quarters, the company has posted an operating profit margin in the range of 15-18%. Going ahead, on account of the divestment of its polymer centric business, the company expects an improvement in its profitability driving the operating margin to 23-24% in the next two to three years. The current institutional shareholding in the company is around 2.5%, with promoters holding around 71.3% stake.

VALUATION:

The stock of PI Industries has almost trebled against the benchmark Sensex over the past one year. At the current market price of 572, the stock trades at a price-to-earnings ratio of 13.3 for the trailing 12 months. Given the robust demand for the agri-inputs business and anticipated growth in the synthetic chemicals business, the company is expected to fare well in the coming quarters.