There are some times in a Business (we are invested in) that we get the sense that the business has crossed the "chasm" and reached the next level. Its extremely important (for those invested and tracking) to recognise and take advantage of these moments.
Such a moment was on us in Feb 2016, when PI Management "quietly" dropped a line - we have set up 2 dedicated plants at an investment of 150 Cr each, dedicated to 2 independent customer products. We all know - the trajectory of the business/market perception of performance since then in PI Industries. (thought this was irrefutable evidence that PI business had become much more stronger and crossed over to the next level, but was surprised to see none of my-invested/tracking friends paying attention).
I believe probably another such "moment" may again be visible to be detected in PI Industries business choices being made. So, here's an attempt to ignite spark in those curious to think more/and thus find out more - whether PI business is again about to get much more robust?
Questions for PI Industries
Agri-Chem - Factors
Consistent Revenue growth ahead of industry growth - the secret sauce?
Consistent Market share gains over last 6-7 years?? - result of conscious choices made?
Distinctively unique Product segment choices - Nominee Gold (Rice herbicide FY16 210 Cr), Osheen (Rice Insecticide FY16 150 Cr), Biovita (FY16 100 Cr), Keefun (Insecticide cum fungicide for Vegetables FY17 70 Cr) and Vibrant (Rice insecticide FY16 30 Cr) - continue to drive ahead of the market growth? New brands like Vibrant & Keefun 100 Cr+ individual brands (potentially)?
New launch Vibrant (API – Thiocyclam) rice insecticide - uniqueness of the product - action on two common insects i.e., stem borers and leaf folder. Competing Fipronil and Rynapyxyr (Dupont) market size 60 Cr, and Fiprolin 25 Cr. Product can be extended to cotton and vegetable crops?
Upgraded version of Biovita (~ 60 Cr revenue size in FY15/16)?
Nominee Gold - currently 10% of rice acreage (42mn ha)? Potential target segment for Nominee ~30% of rice acreage?
Basmati Rice seeing good jump (up by Rs 400/100kg) in realisations - agrochemical use likely to be more robust
Increasing crop-based approach? Rice based Portfolio predominantly; Cotton, Fruits & vegetables ~ 12, 15% growths
Role of farmer engagement (farmer profiling) and better quality fruits & vegetables portfolio - as compared to Bayer?
Increasing scope for Herbicides 28% and Fungicides 23% - much lower adoption vs Insecticides 50%?
In-licensed products ~70% of domestic revenues? Can be maintained?
Top 5 products - 60-65% of PI’s domestic sales??
Role of Distribution Network ~29 branches/10,000 distributors/Centralised SAP and clear Distribution Policies
Schedule of 2 new innovative product launches every year - Visibility?
Distinctively unique Product segment - how robust is that development/under trials/test data pipeline - to continue to support crucial Business Model choices??
More than 70% of domestic agrichem market is generics? Continued scope for growth of innovatives?
Impact of Modi Crop Insurance/Soil Health Card schemes - on increased pest control usage
10-15% segment growth expectations over next 5 years? Or, higher?
CSM - Factors
Agrochem CSM market size US $5-6 Bn growing 5% annually - Addressable segment? PI Market share
Addressable Market expansion from non-agrichem presence - Fine Chemicals, Imaging, Electronic chemicals?? US $20 Bn
Positioning/Competitive Strategy vis-a-vis Saltigo? What about Lonza or SDM - these don’t look like direct competitors? Whom do you benchmark yourselves by for achieving a full-service CSM provider capabilities?
Long duration contract negotiations? Especially for large capex investments?
20 molecules under active production
Non-agrochem molecules pipeline? 30%??
Enquiry growth rates at current juncture - offering visibility for growth coming back?
Schedule of 2-3 new patented commercial molecules every year - visibility?
future capital expenditure- planned only against contracts which have either been signed or are being negotiated?
Orderbook/Revenue ratio - changes? Deliberate? $850 Mn orderbook >3yr visibility
Jambusar III 2 new dedicated plants to individual molecules - 300 Cr investment - Peak Asset Turns of 2.5x? - contract-manufacturing visibility of 7-10 years??
Revenue share from non-agrochem molecules (early stage pharma intermediates, imaging chemicals, electronic chemicals, etc) - upto 25% over the next 5 years?.
PCBM/Negolyte -13000 T??
Average revenue realisation for CSM molecules ~500/kg, but PCBM/Negolyte electronic chemicals much higher at 1000-1500/kg??
200 strong R&D - 120 Scientists
SONY JV finally producing results? Any Intellectual property (Patents) commercialisation benefits from there?
Increasing Product enquiries - led by China Increasing Cost pressures -20% escalation? Environmental issues in China too??
25-30% plus segment growth expectations in CSM over next 5 years?
Jambusar brownfield expansion space left? Out of 88000 sq mts
Why won’t the same happen in India?? Soon enough?
Knowledge/Execution services across Agrochem Value Chain
JV for Agrochemical registration in India with Mitsui? Why did it need a JV - big scale, exclusivity??
Why does it not cannibalise potential PI in-license introductions from Mitsui in Indian market?
Margin/Cash Flow Expansion - Factors
From 16% in FY10 to 22% in FY17 - both segment mix changes, and product mix changes within segment; also consistent margin improvements season on season
CSM seg enjoying 4-5% points higher margins than Domestic? Implies as CSM segment contrib keeps increasing, margins are set to trend higher up in coming years?
Share of hugely commercially successful products (2 new plants) scale up should provide further margin cushions?
Increasing Share of non agrichem CSM molecules in next 5 years will shore up margins by another 3-5%?
Working Capital cycle improvement? 90 days to 68 days Reasons? Further scope?
Operating Leverage at play from FY14 onwards - EBIT increasing by 1.5 to 2x for every Rupee increase in Sales? Looks to be sustained over net 2-3 years - over next 400 cr investment cycle??
Expected Incremental Fixed Capital investment rate - closer to 10 yr avg 40%??
Expected Incremental Working Capital investment rate - closer to 5 yr avg 16%??
Positive free Cash flow generation spiral to easily continue??
Subsidiary Roles - how much of a factor are they?
PI Japan - only marketing activities (agrichem)?
PI Life Sciences - only custom synthesis, no manufacturing?
Management - Factors
Introduction of 2nd level professional management
Expansion of Senior Management Talent/Bandwidth - focus?
Global Talent entry/exit on Board?
Risk - Factors
Margin erosion for largest brand Nominee Gold - generics challenge
In-licensing model under threat? - data exclusivity reduced to 3 years; and as Japanese/Other MNCs enter Indian market. Nihon acquiring Hyderabad Chemicals; IFFCO and Mitsubishi JV; Sumitomo-Excel Crop care acquisition (60% share; 45%+15% Nufam shares)? Insecticides India JV with OAT Agrico; Dhnuka with Nissan Chemical Industries
High inventory levels in domestic agrichem channels/chinese generics
Deferment of CSM off-takes
Tightening Pollution Control norms
First/Second Supplier CSM position
Global agro chemical sector going through challenging environment. Saltigo experiencing declining sales (despite higher selling prices in 2016)
What proportion of CSM today is CRO (not related to front-end sales of Innovator clients)?, and what proportion is CMO (related to front-end sales)?
What is the genesis of the Globally challenging environment - Inventory/Stocking levels at Distributors?
This is the 3rd year of slowdown. Once destocking gets over in FY18, will see proper revival? FY16 and FY17 CSM growths - are probably bottoming out?
Pharma chemicals presence beyond intermediates - leading to USFDA inspections? Or, strategically you are not getting into APis but sticking to Intermediates only
Global M&A consolidation in Agrochem space - e.g Bayer (existing customer) acquiring Monsanto - being seen as a big opportunity for PI to harness. It could also work in the reverse?
Those curious about the Investing craft may find it instructive to "parse" above information base for clues on the changing picture?