I was reviewing my portfolio holdings in detailed manner & following are notes from my reading. This thread covers almost all the points below. The notes below can be seen as summary of the thread in a way.
Industry (Cliché Information)
Top 6 companies, Syngenta – Bayer – BASF – Dow – Monsanto – DuPont, command 75% of sales in global crop protection market.
Indian agrochemical industry size is ~2.5bn$ (Growing at 9%) & export market size is ~2.5 bn$ (growing at 15%).
Average yield per hectare in India is half that of China & crop protection chemical at 0.7 kg is lower than that of even Pakistan (1.3kg).
In India, there are 125 producers (60 large & medium) who produce 60 technical grade pesticides. Around 70% of these are off-patent pesticides. Also there are more than 1200 pesticide formulators present in India.
This cliché information satisfies one of the investment criteria that the products have large market size (domestic & potential for exports) for several years.
- Agrochemicals (insecticides, fungicides, herbicides)
- Plant nutrients
- Specialty fertilizers
- Hybrid seeds
There are three ways in which products are created –
- In-licensing of newly launched/patented molecules by innovators
- Co-marketing partnerships with multi-nationals
- Manufacturing & marketing of select branded generic products
The company has products in following segments – rice, vegetables, sugarcane & cotton
Some of the key brands comprise - Nominee Gold, Osheen, Foratox, Fosmite, Biovita and Roket
Sales & Marketing
The company has 40,000 retail points, 9000 distributors & 29 stocking points across India as per AR FY12-14.
ARFY15 mentions reduced number – 8000 distributors & 35,000 retail points.
AR FY16 mentions – 5000 distributors & 40000 retail points.
(Above average marketing organization?).
Due to large number of producers, low awareness & spending power of farmers, having pricing power is difficult in this industry. Company seems to have moderate pricing power due to some hit brands & strong marketing setup.
Monsoon & climatic variations remain one of the key risk areas for this business. A bad kharif season in FY13 caused inventories to rise leading to price erosion.
Crude oil is one of raw materials & price variations also pose risk. Raw material to sales ratio has remained constant at 55% for last many years.
Government regulation & price control, low spending power of farmers also remain one of the long-term risks to this business.
CUSTOME SYNTHESIS & MANUFACTURING
Only a handful of global innovators innovate on new molecules due to high cost of discovery to commercialization (~0.25 bn $). The average time taken for this process is ~10 years. The global CSM market size is pegged at 85 bn $.
- Chemical process research
- Molecule development
- Analytical method development
- Synthesis of reference chemicals with high purity/impurity
- 5-batch analysis under GLP conditions (?)
- Commercial scale production
Clients are based in these countries – Japan, Europe as per AR Pre-FY13. Later company got award from Bayer – that is also another customer.
In January 2011, a Joint Research Center was setup with Sony Corporation at Udaipur. The potential areas for molecules are flexible TV, Solar cells etc.
Any violation of confidentiality agreement, IPR violations would ruin the reputation of the company & can cause long lasting harm to CSM business.
This business was sold to Rhodia, S. A., French multinational company due to profit margin pressure in April 2011.
RESEARCH & DEVELOPMENT
Company has good research organization & research focus areas include – Agrochemicals, Fine Chemicals, Specialty & Photographic Chemicals, and Pharmaceutical chemicals.
Formulation Development Lab was started at Udaipur that is engaged for the development of new Agri formulations.
Strong R & D focus with move towards more complex molecules remains one of the major reasons that evoke interest in this company.
Rajendra Dev Kapoor
Listed as Director in Monsanto India since 2006. Listed as director on PI board in 2015. Seems to have left company in 2016 to become MD at Sollinos agro.
Devendra Kumar Ray, Head - Operations
Head of operations for ~3 years, total 25 years of experience.
Rajnish Sarna, Director, CA
25 years of experience, focus on CSM exports - turning R&D & Operations into service models.
Prashant Potnis, CTO
25 years of experience, worked in BASF, Clariant, Syngenta.
Average employee salary has grown at an impressive CAGR over last few years.
- Growing demand for crop protection chemicals (0.7kg/ha Vs. 3 kg/Ha global average)
- New Products (indigenous & in-licensed), New Crops (e.g. product for cotton segment), New Segments (like Pharma)
- Geographical Reach (expansion of distribution network & exports)
- Good Monsoon/Good Cultivation (Good Kharif & rabi)
- Margin improvement
- PI Life Science Research Ltd.
- PI Japan Company Ltd.
- PIIL Finance & Investments Ltd. (?)
- 38% increase in agri input business
- Shares split 2 to 1
- Only one director present at AGM
- Convertible shares were converted this FY & number of shares increased from ~1.11Cr to ~1.25Cr shares.
- Only two directors present at AGM – Singhals absent
- Shares split 5 to 1
- QIP worth ~117Cr
- Only two directors present at AGM – Singhals absent
- Promoters changed from individual holdings to Parteek Finance & Investment Co. (Delhi High Court Order)
- Mention of exploring CSM in non-agro area
- Promoters finally again changed from Parteek Finance & Inv. Co. to individual holdings.
Company mentioned it uses following tools to obtain latest information –
STN is basically database of all IP, scientific information worldwide (sepecially in the world of chemistry). STN tools review 95% patents in world, world’s top 25 pharmaceutical companies use STN. STN seem to be providing a very good interface to search information.
It is another search tool that allows search by author, journal, chemical structure, reaction structure etc.
ChemOffice Professional is an integrated suite of scientifically intelligent productivity tools that enables researchers to capture, store, retrieve and share data and information on compounds, reactions, materials and their properties.
The latest models of GC-Mass, HPLC-Mass, And Preparative HPLC & ICP are used for spectral analysis & preparation of standards. (What are these models & standards??)
Overall, PI remains an excellent company to invest in due to best or above average setup in all the areas of business like – Sales & Marketing, Brand Building, Research & Development, Operational Excellence, Financial Management.
It has products that are retail in nature as well as B2B in nature. The products are getting more complex & more interdisciplinary in nature by the day. This creates very high entry barrier for competition.
The operating margins have started improving in last few years & levels should be maintained or expanded.
The management seems to have good integrity & there is no evidence to say otherwise.
There are still several axes of growth that are not fully exploited.
The areas to watch out for are as follows –
Management depth - Mayank Singhal is still very young but still need to get a good reading on whether company is one-man army or there remains an intelligent team at the helm.
Also size would become an anchor for growth going forward.
The stock is well discovered (32% holding by FII + MF) & richly valued.
Disc - I hold, not a buy/sell reco