PI Industries - A Unique Bet on Indian Agriculture & Patent Power

(Mahesh Shah) #1

I am in the midst of detailed research on the co. and as soon as I am done I will be coming out with detailed report on the same soon.

In case u want annual reports of the company I can mail u them…just for a quick update, in Jan2011 Sony has signed a coll.R&D agreement with PI as also the MD of PI is presently Co-Chairman, CII National Council on Agriculture… recently PI had a concall post Q3FY11 numbers and broad takeaways from that were :

(1) Co.'s agri-input business has grown by 36 % in first nine months of FY11 which is the highest growth achieved amongst its listed peers.

(2) Its Nominee Gold herbicide which was launched last year is doing extremely well and is expected to become a blockbuster brand in few years in respective category.

(3) In-licensing molecules currently constitute 30-35 % of the agri business which is expected to rise to 50 % in 2 years which will enable the co. to improve margins further.

(4) In Fy12, Co. is going to launch two molecules in agri segment (insecticides).

(5) In agri segment all its business is from retail and has no institutional contribution which is a unique model in the listed peer space.

(6) Agri segment is going to do very well in Q4FY11 as because of rains the season has got shifted to Q4.

(7) At present Insecticides contribute 50 % to the agri business, 30 % is contributed by herbicides while other agri-inputs contribute 20 % to the agri segment revenue.

(8) In custom synthesis space (CSM), PI is following a unique no-conflict business model which is somewhat similar to Divis.

(9) In the CSM space it is the only or one of the only two suppliers to its clients.

(10) Its CSM business has the provision to pass on raw material increase to the customer.

(11) In CSM, majority of its clients are from agrochemicals space at present but the mix is shifting to other sectors like imaging, electronics& pharma.

(12) 95 % of CSM business accrues from patented products and that too in their early lifecycle which makes PI the only company with such business model in India.

(13) Order book position at the end of Dec.2010 stands at 250 mn. US$ which is to be executed in 2-3.5 years.

(14) Its new plant for CSM business is expected to get operational by December 2011. With the existing capacity and the new plant, PI will be able to serve orders worth 700-750 cr. per year in CSM business at 100 % utilisation.

(15) CAPEXfor the new plant is put at Rs. 125 cr.by FY12 & FY13 out of which 16-18 cr. has already been spent and initial works have started and the entire CAPEX requirement is to be met by internal accruals as well as out of the proceeds of sale ofpolymer business which will get concluded by 31st March 2011.

contd… in next post…

(Mahesh Shah) #2

contd… from last post…

(16) In the first 9 months of FY11, 3 to 4 molecules in CSM business are commercialised and stabilised which has put slight pressure on the margins and the delivery offtake has started to pick-up in Q3FY11 wherein it has attained 100 % growth YoY. Q4 is expected to see similar performance for CSM business but the full benefit of the commercialised molecules is expected to be seen from FY12 onwards in which PI’s CSM business is expected to grow significantly.

(17) There is usually a lag period between 3-6 months for the molecules to get commercialised and stabilisedbut once that happens the yields improve substantially and delivery offtake picks up.

(18) R&D capability of PI is getting recognised with Sony signing with it a collaborative R&D agreement for carrying out joint research on organic chemicals. This parternership is expected to put PI in the big league few years down the line.

(19) PI has sold off its polymer business to Rhodia and the funds raised out of the sale is to be utilised for the new plant which is being set-up for CSM business.

(20) Co. is operating at approx. EBITDA margins of 16.5 % in agri segment and 20 % in CSM business. ForQ3FY11, Agri business contributed 85.80 cr. which is YoY growth of 15 % whereas CSM business contributed 87 cr. whichentails to a YoYgrowth of 99.5 %. For 9 months ending Dec.2010, Agri Business contributed 305.1 cr. which is 36 % growth YoY whereas CSM business contributed 150.6 cr. which is 6 % growth YoY. The sluggish growth in CSM business is due toshift in delivery schedules in favour of second half and time taken for commercialisation of 3 molecules.

(21) Co. plans to continue its focus on innovative products in both of its operating business segments and wants to pitch itself as a pure R&D focussed co. in the years to come.

(22) Co. believes that the business model which it is following is unique in India and in such model initial scale-up might be slow but once a critical scale is achieved, the scale-up will be exponential with decent margins since it is the critical supplier for most of the products it serves.

Brief Overview of last 5 Years Financials :

Shareholding :

Currently, Promoters hold 71 % stake in the company and Standard Chartered PE holds 5 % equity (CCPS converted last year at Rs. 327— post bonus adjusted price works out to Rs. 218) while Mr. Seshadri & his associates (of Halcyon Resources) hold around 2 %. Rowanhill Investments, a European investment firm holds 11 % equity in the company which (as per sources) is selling its part stake in the market to improve liquidity of the company on the bourses.

Standard Chartered PE still has unconverted CCPS worth 8.1 cr. and unconverted OCDs worth 29.4 cr. which, as per sources, is going to get converted into equity by next month at Rs. 500-525 per share. Evenif we assume the pruce of conversion at lowest being 450 rs. which is the low of past six months, then the equity of PI after the said conversion will be somewhere at 13.5 cr. with 14.9 % stake held by Standard Chartered PE and62-65 % stake held by promoters with no likely equity dilution till FY13.

Debt :

Current debt is at approx. 165 cr. and as per the management concall, management will be keeping D/E at 1 even with planned CAPEX and acquisitions because of expected internal accruals as well as proceeds from sale of polymer business to Rhodia (which sources say will be close to 80 cr.)

Fellow members’ views are invited on the company which will help me in my research on the company. The analysis that I have done so far make me believe that the story is interesting here with clean management and backing by a respectable PE firm coupled with a closed company structure and management’s new-found willingnessto share company’s prospects with financial fraternity. I believe that company will command a premium valuations on the bourses because of its unique and growth-oriented business model and make it a rare concept stock operating with decent margins.


(Mahesh Shah) #3

The problem of upload was with the table of last 5 years financials… hence, have deleted the table from the post and so section " Brief Overview of last 5 Years Financials : " is blank.


(Mahesh Shah) #4

Table reformatted and uploaded below :

Brief Overview of last 5 Years Financials as well as recently reported current FY11 Financials :

9 months ending Dec.'10






Net Revenue







Operating Profit







Net Profit







(Vinod MS) #5

Hi Mahesh,

Thank you for the detailed report.

The stock has gone up 3 times in last 12 months! Upside in the shortterm could be difficult unless there are huge triggers.

Does the CSM business have enough potential for scaling up if it is only about research? After inventing a molecule in the CSM bus, does the com also involve in manufacturingthe product?



(Mahesh Shah) #6

Hi Vinod,

To answer second part of your query first, Yes, PI is involved in maufacturing and it is just that it is involved with the molecules in very early part of its lifecycle. To most of its suppliers it is the only or one of the only two suppliers since 95 % of the csm business comes from patented molecules. Also, to clarify, PI is not directly involved in inventing any molecule in csm business - that part is done by global innovators with whom PI deals with; PI is rather involved in product process research so as to manufacture the molecule with high yield and scheduled delivery time.

Rgdg. the scalability aspect of csm business, at present PI has an order-book of approx. 1100 cr. to be executed in 2-3.5 yrs… This order book itself is 5 times of FY11e csm revenues of around 200-230 cr. Hence, till FY14 atleast a revenue of 300-350 cr. per year can easily be achieved in csm business out of only the present order-book assuming that there will be no fresh inflow of order. The important point to note here is that almost 70 % of the current order book is gained by PI in last 10 months which depicts a healthy trend and promises increase in order-book in months to come. Also, 80 % of the order-bookis contributed by Agrochemical sector which leaves ample scope to tap other segments like imaging, electronics and pharma which are fast making their dent in the order-flow. Hence, as far as scalability goes, i don’t think its a concen as far as PI’s csm business goes. With the new plat becoming operational by Dec.2011, PI will have a capacity to serve orders worth 700-750 cr. p.a. in FY13 and company has adopted a policy in csm business of not expanding w/o tying up offtake…

I think one needs to understand first PI’s business model to assess its future potential and for that I am explaining the model in brief for both of PI’s operating segments below :

P. I. Industries Ltd. (BSE â 523642) is a company engaged in two high-potential business segments viz. Agri-Inputs & Custom Synthesis (CSM). It derives its strength from its strong association with leading global innovator companies to whom it offers a unique no-conflict business model with utmost respect to IPs. The success of this business model is evident from the fact that 95 % of PI’s CSM business comes from patented molecules and that too in early part of their lifecycle. Such early-stage association with global innovator companies makes PI their partner rather than a supplier which derisks its business to a great extent. Another aspect which makes the business model of PI (in CSM space) a relatively safe and derisked one is the fact that to most of its customers in CSM space, PI either is the only or one of the only two suppliers. Hence, the only risk that remains with PI is the delivery risk which is taken care of by the professional and efficient management at top assisted by the inputs from Standard Chartered PE (which currently holds 5 % stake in PI that is likely to be raised to 12-15 % by April 2010) and Halcyon Resources (founded by ex-KPMG, ex-Anderson head Mr. Seshadri who himself holds 1.17 % stake in PI).

In agri-input business too, PI adopts a very unique business model which is quite distinct from its peers. It derives its agri-input business model from its other segment viz., CSM wherein first it draws global innovator companies’ molecules to CSM space and then, if the management feels that such innovative molecule also has a market potential in India, then it enters into an inlicensing arrangement with the respective global innovator company which not only enhances the trust of the customer but gives PI a privileged status in customer’s business strategy. The success of this agri-input business model is evident from the performance of PI’s flagship brand Nominee Gold, a rice herbicide, which was brought to India by PI via inlicensing arrangement with Japan’s Kumiai Chemical. Within just one and a half year of Nominee’s launch, it has attained brand leadership status in the respective category and is expected to contribute almost 20 % to the current FY11 agri-input business revenues of PI. Agri-input business model of PI derives its strength from its strong distribution network which is spread across 1500 + disributors and a pan-india reach to 25000 + retailers.


(Vinod MS) #7

Hi, Mahesh,

I got it. The goodwill of the global innovator cos is the greatest asset in this model.

The growth in CSM revenues of PI was so sudden that it looks like outsourcing possibilities suddenly dawned upon the global cos

How many global cos have a tieup, who are the major ones? How long is the relationship with these cos (is it a new & untested relationship built only in the last one year?)

Do not know about the manufacturing process much…is the “process research” aunique competency (will each molecule have totally different and complex process). Can other large chemical/pharma manufacturers see the profit in CSM bus and scaleup faster than PI? Who are the current competitors?

Is this potential already priced-in considering the 3 fold jump in the stock price ofPI?

Thank you again for explaining in detail.



(Mahesh Shah) #8

Hi Vinod,

Firstly Thanks for your kind words.

Now, to get back to your points, I think you need to look at the history of PI as also hear the entire concall to understand some things which are complex. I will be more than happy to provide you the entire playback of 74 minutes long concall which was held recently. Its in mp3 form and if u want that do mail me I will immediately provide it to you. Also, I have with me past 10 ARs of PI which give a great insight into the road traversed by the company in last many years in both agri-input and csm space. I will provide you that also as research is a very tough process and we need to dig deeper and deeper into a company to arrive at fair and true potential of the company.

Now, to reply to your points, i will try to do it as briefly andsimplistically as possible so that things get crystal clear.

To your first point that “growth in CSM revenues of PI was so sudden that it looks like outsourcing possibilities suddenly dawned upon the global cos” ,

No- it is not sudden. Its the result of last 10 years efforts put-in by the company and the relationship built in and credibility established. Yes… PI is into csm business since 2000 and I don’t know you are aware or not but the business model which PI has adopted of focussing on patented products, it takes a great amount of time to estblish trust and prove your R&D capability. Once these things are done scale-up is very fast as in India there is no company following such model of focus on patented products (most are focussing on off-patent molecules) and that too in their early lifecycle. Such molecules are very critical to the innovator companies and so they pick their suppliers very carefully. This is the reason why in early part there are just one or maximum two suppliers selected after rigorous evaluation as any delay in delivery or flaw can result in significant loss of revenues to innovator companies. Hence, it was the efforts of PI since last many years that has resulted in swell in order book and it was not atall sudden.

Now, to your second point as to “How many global cos have a tieup, who are the major ones? How long is the relationship with these cos (is it a new & untested relationship built only in the last one year?”

I will say here that many of such relationships are kept confidential except the ones that we can know of when the company inlicenses their molecules for Indian market (as in case of Nominee). Hence, co. has not provided no. of companies with which it currently has tie-up and their names. However, the relationship in this business are not atall untested and short since these are critical relationships which affects both parties equally- also, the current order book is the result of last many years relationship which PI has built with global agrichem companies and so the relationships oversighting the order-book are of many years.

Now, to your third point as to “Do not know about the manufacturing process much…is the “process research” aunique competency (will each molecule have totally different and complex process). Can other large chemical/pharma manufacturers see the profit in CSM bus and scaleup faster than PI? Who are the current competitors?”

Yes- the process research especially in early lifecycle of a patented molecule is a unique competency since in early stage the molecule delivery channel is highly volatile and therefore takes a time of 6 months to stabilise… once stabilisation is done only after that delivery can start. Other companies in India normally focus on off-patent products. Also, a few who focus on patented products like Divis has a slight different operating landscape and model than PI. To add further, focus on patented molecules is a time-consuming process and the scale-up here is much slower in the initail stage and so companies in India will not attempt to do so. As far as competition goes, there are no domestic competitors for PI and the current order-book is established by PI by winning orders against Saltigo, Lonza and DSM - all global majors in CSM space.

Now, rgdg. your last point “Is this potential already priced-in considering the 3 fold jump in the stock price ofPI?” …

I will say a clear NO. Such innovative companies always quote at premium and PI is a concept stock and soshould quote at a significant premium. If you consider FY11e numbers, then PI’s agri-input business should close in at 400 cr. and csm business at minimum 200 cr. Based on FY11e estimates PI is currently quoting at a p/e of just 11 and a mcap-to-sales of just 1.reasonable valuation of PI should be somewhere at either 15 p/e or a mcap-to-sales of 1.5-2 considering its underownership, clean management, backing by a strong PE and pending order-book giving visibility of future revenues and profts.Once the tie-up with Sony materialises in 3-4 years, PI should quote at a valuation of Divis somewhere at 25+ p/e. To just highlight a point, to inaugurate Sony-PI R&D facility Mr. Osamu Kumagai, Sony’s vice-president was himself present which gives PI a great recognition.

Lastly, again I will say I will be more than happy to provide you playback of entire concall which is a must hear if you want to understand the company better.


(Vinod MS) #9

Dear Mahesh,

thank you again for explaining in detail. The picture is quite clear now. I did go through the AR available in their website. Have mailed you for the con-call file



(Mahesh Shah) #10

Hi Vinod,

Have mailed you all the 8 mp3 files of concall playback as well as FY02 to FY08 ARs of PI. FY09 and FY10 Ars are there on company’s website.

Do check all the files are properly rcd. or not since they are very long.


(Vinod MS) #11

Dear Mahesh,

Thank you very much for the reports and con call files. The story is quite impressive. I liked the model and future prospects especially in the electronics and pharma sectors. As you mentioned the trust and godwill of the clients is very critical.

I was just comparing the performance of Divis Labs ( http://www.divislabs.com/inside/custom.asp) They seem to be operating in the same sphere. The com had a hugerun up in 07-08 and then corrected and has been flat after that. Did you have a chance to look at this com?

This seems to be slightly illiquid stock with low volumes.



(Vinod MS) #12

Hi, to add to the above…I went thru the Divis AR. Theyhad a degrowthin 09-10 owing to global slowdown. They seem to be operating only in the Pharma space, but the nature ofCSM bus is same. PIis a better play considering the different industires in CSM and ofcourse there own agrichemical business.

A better idea about prospects in electronics segment and industry-wise breakup of orderbook will definitely give more confidence



(Mahesh Shah) #13

Yes Vinod,

I had looked at Divis when I first started researching PI but came to the conclusion that PI is at a stage where Divis was at in 2000-2001… PI is in a stronger position than Divis of 2001 because of its order-book constituting patented products whereas Divis had a strong component ofAPI even then. The current scale as well as valuation at which Divis trades at will make Divis a buy on decline stock whereas the scale and valuation at which PI trades in as also considering it is an underowned stock makes PI a great buy at current levels as current subdued rate is the result of pending conversion of PE firm and once that is done its true valuation can get attained.

As far as break-up of order-book goes, do hear the concall all aspects are covered there. Agrochemicals sector at present constitutes 70-80 % of the current order-book but fresh orders are coming from electronics, imaging and pharma sectors which will increase their contribution 2 years down the line.


(Mahesh Shah) #14

As per the latest data available, HSBC AMC has bought 0.68 % equity of PI Industries via two of its funds - HSBC MidCap Fund (0.58 % or 66,000 shares) and HSBC Smallcap Fund (0.1 % or 11,000 shares).


(Mahesh Shah) #15

Monsoon, the key factor for agri-input players like PI Ind., is forecast to be normal this year… A consecutive normal monsoon year will significantly boost the financials of the company.

Normal monsoon likely this year

April 3, 2011: New Delhi, Apr 3 India is likely to experience a normal monsoon for the second consecutive year, raising hopes for a good crop for millions of farmers across the country.

âThere are no worrying signs as yet,â said Mr D Sivananda Pai, chief forecaster and Director of the National Climate Centre.

The La Nina phenomenon, marked by intense cooling of the equatorial and east Pacific Ocean, is expected to continue till June, he said. Such condition is known to benefit the south-west monsoon.

Mr Pai said as per current indicators, scientists do not foresee any immediate warming of the equatorial Pacific- a phenomenon that could affect the south-west monsoon.

A normal monsoon is likely to bring cheers to over 235 million farmers as it will help in sowing of rice, sugarcane, soyabean and corn and lead to high agricultural output.

Last year, the country saw a normal monsoon with 413 of the 597 meteorological districts receiving normal or above normal rainfall. Nearly one-third of the 597 districts received deficient rains, while 11 got scanty falls last year.

South Asian Climate Outlook Forum, with representatives from weather offices of the regional countries, is meeting in Pune later this month to develop a consensus-based outlook for the ensuing summer monsoon.

The India Meteorological Department (IMD) is expected to come out with its long term forecast of the summer monsoon rainfall season by the end of this month.

(Mahesh Shah) #16

stock up 20 % today…


(Vinod MS) #17

Mahesh, thank you once again, gave a very good startfor this year… great runup. Is the met report the sole reason? FIIs could have shown some interest I guess. Since I still havent developed the muscles to hold on to something heavier by 20% I exited and will look for a re-entry at 650.

(Vinod MS) #18

I mean 20% in a single day…

(Mahesh Shah) #19

PI Industries Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on April 14, 2011, inter alia, to consider the following:

1). To consider and approve the Audited Financial Results of the Company for the year ended March 31, 2011 and

2). To recommend dividend, if any, for the year ended March 31, 2011.


(Mahesh Shah) #20

PI Industries posts excellent results… Topline at 212 cr. for Q4 with OP at 35.6 cr. and NP at 20.4 cr.

Declares rs. 4 div. and split to rs. 5.

Results are ahead of expectations… will have to check rgdg. separate figures for agri and csm businessess… will come back on that…

For details refer link http://www.bseindia.com/xml-data/corpfiling/AttachHis/PI_Industries_Ltd_150411_Rst.pdf