PI Industries - A differentiated play; initiate with Buy - Anand Rathi

PI Industries (PII) is one of the larger players in the domestic agrochemicals sector, and has over the years built strong expertise in custom synthesis manufacturing (CSM). On the back of strong R&D and commensurate production capacities, it has built a steady pipeline of in-licensed products in agro chemicals (3-4 annually) as well as CSM (strong order book of US$310m). Accordingly, we expect the company to post revenue and PAT CAGR of 25% and 34%, respectively for FY12-15. Hence, we initiate coverage on it with a Buy recommendation with a target price of Rs. 778.

New CSM facility should boost exports. We expect significant volume growth from its newly commissioned CSM (export-dedicated) plant at Jambusar SEZ (Gujarat). Thus, CSM revenues over the period FY12-15 should be able to post a CAGR of 37% and touch ~Rs. 9.6bn.

Commercialisation of almost a dozen patented products, with staggered launches (3-4 annually) could offer considerable pricing power and boost margins as well as profits in the same period.

High-margin in-licensing business a gamechanger. The share of inlicensing business within agro chemicals has risen to ~50% (20% in FY09), following PII's focus on the same. Moreover, its policy of exclusive tie-up model is convenient for nurturing the high-margin in-licensed business, which forms 50% of the Rs. 5bn agro chemicals segment. Accordingly, we expect the agri-chemicals segment to post 15.9% CAGR over the next two years on back of consistent launches of innovators' in-licensed products.

Our take. Strong traction from CSM (order book of 4.5x FY12 sales) and visible pipeline of high-margin in-licensed products could propel a 30% EPS CAGR over FY12-15. This could enable a 95bps improvement in EBIDTA margin over FY12-15. At our target price, PII would trade at P/E of 14x Sep'14E earnings. Risks. Disruption in demand and rising competition.

Source : Equity Bulls

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