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


(reacher) #849

is 2017 monsoon expected to be below par ?


(Saji John) #850

Predictors are not sure…heard predictions on both sides…here’s the latest one! https://www.bloombergquint.com/markets/2017/03/08/el-nino-seen-arriving-too-late-to-hurt-india-s-monsoon-rains


(varun88) #851

Hi, is there any official estimate of the size of global CSM/contract manufacturing opportunity, Do let me know in case there is any report that can help. Thanks


(Donald Francis) #852

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?


(Saji John) #853

Another positive development http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/58476202-c637-45ac-8b36-8dc47268a0b9.pdf


(Chemist) #854

PI Industries partners with Germany’s BASF for crop protection solutions


(MHS) #855

Q4 Fy17 Results:

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/3295de51-1d58-49f1-a034-08fc82309107.pdf

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/d710bf3c-7b73-4d1e-bdd4-9d7919e187eb.pdf


(Ananth) #856

My notes form conference call:

  • 8.4% growth topline in fy17 and - healthy cash generation

CSM:
Expect global agrochem industry to rebound by second half of 2018.
Exports grew 10% in FY17 - expect fy18 10% exports growth mainly in second half
Order book 1b $ with 8-9 molecules
expect global agrochem industy to revive

  • commodity price may be revival
  • inventory in channel with companies in global has reduced, time for replenishing this will come soon as last two years inventory has been reducing
  • purchasing schedules and volumes increasing by 2hfy18 - industry will rebound by 2018- clearly seeing hints in this
    There are several new client additions to r&d pipeline
    agrochem has 17-18 customers totally.Top 5 have more than 50% revenue share.
    Creating capacities for new products based on negotiation with customers
    Next tranche of investments in next couple of years, enough land in jambusar for 5-6 plants
    Exports have lesser working capital requirements mainly due to less receivables

Margins, capex, tax rate:
Margins - 23% maintainable
Jambusar 65-70% capacity utilisation
Much lower tax in fy17, Fy18 - 20 odd % tax rate
200cr capex in fy18
INR appreciation - every new purchase cycle renegotiated - very less impact of INR appreciation

Domestic:
PI signed comarketing agreement with BASF - PI will be exclusive partner for these two products.

  • 4 molecules in 9(3) - mainly used in rice horticulture maize - have good potential
  • Not seeing increased intensity in nominee gold in fy18
    Significant revenue potential in BASF products for next 3-4 years
    domestic growth around 10% in fy18

Business model:
Business model is non conflicting with innovator. Do not want to get into generics etc currently.
Cash flow to be invested back in business instead of returning back to share holders.
Due diligence in on pharma ongoing, soon will be concluding on this proposition. Premature to talk now.
Farmers trust PI brands
Trust with global agrochem companies for their IPs

Guidance:
export and domestic both around 10% for fy18
Medium term mid high teens - based on agrochem and other fine chemicals and getting into pharma will secure those kind of projections

Buidling capability in pharma - Bala Ganesh appointed as director will be the technical person in board for science and technology company
http://www.cmmacs.ernet.in/cmmacs/Personnel/balganesh/


(Mahesh Shah) #857

Nice summary Ananth…company seems to be taking all the right steps to ensure scale up from a higher base. BASF tie-up is really interesting and order book crossing 1 bn. USD is heartening. Pharma segment acquisition will be key monitorable as considering history of management, it might be an interesting step forward.

Rgds.

Discl. - Invested in PIIND


(hazariwalapu) #858

Hi,

Do anyone has idea how this order book works? If we consider it as 1 billion dollars it comes to be around Rs.6500 crs.

Thanks

Prashant


(Mahesh Shah) #859

@hazariwalapu

Its an order-book executable over a 4-5 years period. Majority of the orders have take-or-pay clause.

Rgds.


(Mridul) #860

Mahesh Bhai… Is it worthwhile to buy/hold a 10% grower at 25 times trailing? Numbers look visibly good as they are not paying taxes. As they have said that from now on they will be paying around 20% as tax…there will be a visible impact on bottom line.

It is a good business due to the visibility and longetivity without doubt but what about the valuation…as they will not be growing as they were in past.


(Mahesh Shah) #861

@Mridul

I can’t comment on individual investment/divestment decision and any of my comment should not be taken like that. Since I have tracked this company for long, I feel time is ripe for next wealth creating opportunity to unfold here as many factors seem to point towards that :

– Increase of CSM order-book to 1 bn. USD is key notable as it only comprises of 60-70 % of the orders to be executed and other 30-40 % comes from Annual Contracts related to order-book but are not strictly covered in order-book. This provides exceptional visibility for CSM segment for next 4 years even on current higher base. Now, there aren’t many companies who, even on only current order-book, have 1600 cr. p.a. revenue visibility with decent margins (24 %+).

– BASF tie-up for domestic segment seems a very good one as it will combine strength of both companies — high-potential products of BASF and marketing and demand creation strategies of PIIND. Over next few years this tie-up might bring in considerable revenues to the company with good margins.

– Recent appointment of Dr. Balganesh on board signifies seriousness of the management to expand meaningfully in non-agri-CSM space. It is to be noted that Dr. Balganesh was the key person because of whom Astrazeneca was able to set-up and build a robust R&D centre in India and was therefore made VP- Discovery & R&D and Executive Director of the Centre. After him moving on to CSIR, Astrazeneca closed the said centre.

Whereas 10 % growth seems to be in a situation when global as well as domestic agchem industry itself is struggling, in case of a rebound, which is widely expected in next 2 years, company might be a major beneficiary and return to growth path. CSM order-book enhancing by 20 % even in current bad times is heartening. It will be improper to value a company only on one valuation multiple basis. However, even on pure P/E basis, Rallis is trading at 26.93x, Bayer is trading at 45.76x, UPL is trading at 24.08x, Excel Crop is trading at 25.42x, Insecticides India is trading at 24.52x, Dhanuka is trading at 33.12x, Astec Life is trading at 61.34x, Bharat Rasayan is trading at 23.42x, Syngene is trading at 33.88x and Dishman is trading at 33.18x. All these companies have some sort of business that can be compared to PIIND. As opposed to this PIIND at CMP of INR 820 per share is trading at 24.67x and if we take Tax Rate @20 % then its trading at 27.68x.

Don’t interpret this as my comment on valuation of specifically PIIND or any company v/s others, but, I just pointed out the facts in response. There seem to be many triggers inplace in FY18 for PIIND that’s what I believe and if in FY18 it can manage even a 10 % topline growth with 23 %+ EBITDA then it will be a good launch-pad for FY19-FY20 when all 5 plants of Jambusar facility will be working in full swing and pharma initiative must have taken shape.

Rgds.


(sanjay agarwal) #862

and market does see future and next year market may discount all the above


(zulfiqar) #863

Excellent point made,if I m not wrong u are the who followed or should I say invested from 2011, so u know more about the business dynamics than most of us , sir what could the margin in domestic agri space is 20 or above 20


(Mahesh Shah) #864

Domestic agri space margins should be in 16-18 % range.

Rgds.


(ishandutta2007) #865

By margin do you mean OPM ? or margin of one product?
Margin is equal to OPM only if working capital cycle is 365 days.


(Mahesh Shah) #866

@ishandutta2007

By margin I mean ebitda margin of the segment in question i.e. Domestic agri input segment.

Rgds.


(zulfiqar) #867

Considering tax rate @ 20% next year v might not c significant increase in net profit is my assessment correct or m I missing something


(ishandutta2007) #868

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