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


(Mridul) #870

@Deepali - This is just a mental model to evaluate if it merits investment at the current price. One can compare p/e to bottomline, but there is a problem here. Bottomline here from last 2 years is not being reflected ‘accurately’ due to lower tax outgo. This year they have paid just 9% tax. Last year as well, it was pretty low than the average they have been paying from last 5-7 years. Average tax rate for PI is close to 28%.

So considering if we extrapolate, PI has been growing their bottomline around 19-20% in last 2 years. Not 47-48%.

One can say that eventually it all comes down to earning. But, there is a limit as to how much a company can improve on its margins, which are already quite high (24%). So, i like to take into account both topline and bottomline growth to merit an investment. From last 2 years, topline is growing at 8%. So the question.


(deepali.kumar) #871

@ Mridul

Understood as follows:-

“This is just a mental model to evaluate if it merits investment at the current price. One can compare p/e to bottomline, but there is a problem here. Bottomline here from last 2 years is not being reflected ‘accurately’ due to lower tax outgo.”

a. Agreed.

"This year they have paid just 9% tax. Last year as well, it was pretty low than the average they have been paying from last 5-7 years. Average tax rate for PI is close to 28%.

So considering if we extrapolate, PI has been growing their bottomline around 19-20% in last 2 years. Not 47-48%."

b. Agreed.

“One can say that eventually it all comes down to earning. But, there is a limit as to how much a company can improve on its margins, which are already quite high (24%).”

The management did say in the Concall. that 23-24% Margin is doable for next 2-3 years, so we shouldn’t worry on that part, I suppose.

" So, i like to take into account both topline and bottomline growth to merit an investment. From last 2 years, topline is growing at 8%. So the question."

Volume growth sure is a key concern here. It has been much lesser for PI than for its peers. But, due to its product mix, PI has been able to have the best margins in the industry. And going forward, if we are to believe, what the management has to say, Volume growth should improve going forward.

I got your point of view, and concern about the topline growth part and it is important too.


(Niranjan Shetty) #872

(Mahesh Shah) #873

Provided below are some statistics for members’ reference :

PIIND CSM Segment last 12 Years’ Analysis :

PIIND Domestic Agri Segment last 12 Years’ Analysis (past data adjusted for IndAS) :

Last 10 Years’ as well as 5 Years’ Revenue & EBITDA CAGR analysis as well as OCF Analysis of all listed Agrochemical companies :

**Now, there are three main concerns with regards to PIIND atpresent : **

(1) PIIND Domestic Agri segment has grown in single digits since last two years and it is underperforming peers.

(2) Nominee Gold has lost its exclusivity and its realisations could suffer going forward.

(3) CSM segment is showing muted growth since last two years.


Regarding first concern, we need to understand the segment and its operation itself to judge whether this concern holds ground. In domestic agri segment, key is your reach and your ground network. Second most important aspect is your product selection. Third aspect is your marketing and distribution strategies. Now, even if a company is strong in all, still, you will find in some years its peers outperforming and in others the company outperforming its peers.

This is because in one or few particular year(s), some factors are more favorable to products and reach of a particular company than others. What we need to check is whether a company is consistently underperforming its peers. If this is the case we need to assume that there is some structural issue with the company and company is on verge of losing its marketshare considerably.

If we look at the factual data posted above, we find that whereas PIIND has slightly underperformed some peers on 10 Years’ CAGR basis, if we look at last 5 Years’ CAGR, company is the fastest growing entity. Here, we need to exclude Bharat Rasayan and Astec Life as both of these players are majorly B2B players and if we want to compare their revenue CAGR then we need to compare it with PIIND CSM segment revenue CAGR which stands at 38.32 % for 10 Years and 30.39 % for 5 Years.



Regarding second concern, yes. This is a valid concern as Nominee contributes ~250 cr. to PIIND revenues. However, here, if only realisations are going to suffer with its reach remaining intact, then, that can be compensated by other products but, if competitors completely eat up Nominee’s marketshare then there could be a problem. PIIND management doesn’t seem to be fool enough to let the competition do this easily as in any case, if its only price differentiation on which competitors are playing on then that can be very well matched by PIIND. Only time can tell how the things will unfold but logically, at worst there could be a cut of maximum 70-80 cr. to the topline because of this that’s what my study makes me believe.



Regarding third concern, we are looking at 10-11 % p.a. growth of CSM segment in last two years but are not looking at one critical aspect i.e. order-book. Why clients booked orders even when they were under pressure and globally industry was suffering ?? If one looks closely at the data posted above, one will find that for no fiscal uptill now, PIIND CSM segment has missed posting revenues which are derived based on dividing order–book by 4 years (the average tenure of execution of order-book). Based on this, FY18e CSM segment revenue comes to 1676 cr. v/s 1550 cr. as guided by management. Let’s see what happens.

Company has 20 commercialised molecules and 25 molecules in R&D pipeline. If revival comes as expected, what happens is there is increased offtake of commercialised molecules and such increase is not covered in order-book but is normally booked under fresh annual contracts. In addition, company plans to commercialise 2 molecules in FY18 too. So, what happens is the size of order-book provides stability in the form of muted growth in bad times and in good times, aggressive growth could also revive quickly (not at a historical pace ofcourse because of higher base).




Last critical aspect we all seem to be ignoring is cash generation that is likely to happen over coming years that could be used to fuel aggressive growth even on current higher base. Again, refer to ‘Operating Cash Flow’ analysis data posted above. Company has converted 64.17 % of EBITDA generated over last 10 years to operating cash which increases to 68.04 % of EBITDA if we consider only last 5 years. Now, if we remain conservative and assume a 60 % EBITDA to Operating Cash generation over next 5 years then also the company will be generating 2293 cr. cash which is almost equivalent to current topline of the company.

What I did is a simple rough work of coming 5 years financials based on following assumptions :

(1) A 10 % p.a. topline growth for next two years in CSM segment which will increase to 15 % p.a. growth for 3 years after.

(2) A 5 % growth in domestic agri segment in FY18 considering the fact that competition will heat up for Nominee as also products from BASF tie-up will be launched. A 10 % growth in FY19 and 15 % p.a. growth for FY20 and FY21 as newly launched products will gain traction by then. Assumed again a muted 5 % growth in last FY22 to factor-in any deviation in between.

(3) We have assumed reduction in EBITDA margin (as opposed to management guidance of stable margin) to 22.5 % in FY18 and a further reduction to 22 % in FY19 to factor-in expenses related to aggressive product launch in tie-up with BASF (as per industry sources, one of the product to be launched via this tie-up is a very promising innovative product like Nominee and management will be going all out to create market for this product). From FY20 we have assumed slight expansion in EBITDA margin every year.

(4) We have assumed 60 % conversion of EBITDA to OCF v/s 64.17 % of 10 Years (FY07-FY16) and 68.04 % of 5 Years(FY12-FY16).

Last notable point is, over last 10 years, PIIND has done a CAPEX of 1056 cr. and generated incremental revenues at 1.74x CAPEX done. Also, last 10 years’ average Sales/GB has been 1.97x.

Rgds.

Discl. - Invested in PIIND

Note - These statistical data are only for study purpose and nothing else. One should not consider this as any recommendation of any kind. This is only part of a general discussion.


(hazariwalapu) #874

Really helpful,Mahesh
Thanks


(zulfiqar) #875

Sir current prices discounts10% growth, volatility withstanding


(Ashish) #876

PI planning to appoint PwC as Auditors

Dear Sir/Madam, In continuation to our submission on outcome of Board Meeting held today i.e. 16th May, 2017, and in compliance of Regulation 30 of the SEBI (Listing Obligations & Disclosure Requirements), Regulations, 2015, we would further like to inform you that the Board has also recommended the appointment of M/s Price Waterhouse, Chartered Accountants, LLP, (FRN 012754N/N500016) as Statutory Auditors of the Company to the shareholders of the Company at the forthcoming Annual General Meeting scheduled to be held on 9th August, 2017. Brief profile of M/s Price Waterhouse, Chartered Accountants, LLP is attached.

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/f378640f-7908-462f-95d8-e7c81ec147d1.pdf


(Growth_without Debt) #877

Auditor charges might be higher.
PwC has black dot of Satyam scam​:joy::joy:


(Abhishek Basumallick) #878

This is definitely a good governance posture. Having a big 4 auditor enhances credibility of book of accounts especially for foreign investors.


(Mahesh Shah) #879

And is very handy in possible foreign acquisition(s) and/or fund raising in coming two fiscals.

Rgds.


(smehta) #880

PI Ind concall:

  • The company has reported an 8.4 growth in the top line number for FY17 with a robust increment of 300 bps on account of multiple sectors, the business continues to support healthy cash generation and thus being in a position to support our growth initiatives.

  • Full operation of Jambusar Unit with four new molecules

  • Full final operations of our units, which have been commissioned at Jambusar with four new molecules. The cyclical moderation in the global agrochemical industry is resolving and we will see more positive developments in the year 2018. We’ll continue our investments in technologies to deliver the technologies and enhance the product. I’m further glad to say that PI has recently entered strategic partnerships with BASF to offer farmers of India a broad portfolio of crop protection solutions.

  • Entered into strategic partnership with BASF. Under this agreement, PI will market BASF’s latest innovative fungicides and new herbicide. These product introductions will happen, planned in the year '18. Over the past decades, we have nurtured and grown the relationship with global innovators and the consent of our role as a leading part that the global innovators and intend to contribute to collaboration and we’ll continue to focus on strategic alliances.

  • In the financial year 2017, our total revenues grew by 8% (sic) to INR2,383 crores, while EBITDA stood at INR551 crore, higher by 28% year-on-year. EBITDA margin came in at 23.1%, an increase of about 350 basis points year-on-year, backed by strong product mix gains and better operating efficiencies.

  • Profit after tax stood at INR457 crores, as compared to INR310 crores in the corresponding period last year, representing an increase of 48% year-on-year. Benefits of lower tax incidents contributed to augmenting the post-tax. Debt to equity position stood at 0.05x.
    Q & A:
    Set of numbers would you like to set aside for the growth side on exports front because?

  • We have done close to 10% kind of growth on exports front and we expect that on an annual basis, we still be able to kind of maintain that. Of course, in next couple of quarters, there might be some slowdown, but on a annual basis, we should be achieving around that kind of growth.
    And on the margins front, it’s really pleasant surprise you know that especially in this quarter, I think one of the highest so far. So any outlook on that that whether it would be sustainable going ahead or there is further scope for improvement?

  • The margin in quarterly results varies versus the product mix, particularly in that quarter and the margins, we had little better margins because of the product mix and the leverage that we got and in coming quarters also, we would like to maintain that sort of margin.
    Around 23 is something that’s where we are currently.
    The Jambusar facility, sweat out is yet to happen right at that facility what would be the utilization?

  • So currently the utilization is close to 70%, 65% to 70%.
    Improved order book position, any number would you like to quantify?

  • it’s little lower $1 billion mark now.
    what was that last quarter or maybe six months ago?

  • We were around $800 million.
    The taxation front, the current year tax rate was way, way, lower than the last year. So what could be the reason and going ahead what is the outlook?

  • SEZ operations, where the profits are taxed zero percentage for the first five years. Secondly, there is tax concessions of the tax incentives that you get on spending on R&D, whether it is capital expenditure or revenue expenditure. Thirdly, the investment allowance on the plant and machinery or the equipment that we had installed. All those three during the year contributed to earn much lower tax rate.

  • We are expecting an ETR of around 20 odd percentage. Effective tax rate will be 20% which will start in the numbers to come.
    On BASF strategic partnership on herbicide and fungicides. So, we would be sole distributor for those products in India or BASF is already distributing that product, I mean, if you can throw more color on that?

  • In these products, we will be co-marketing along with BASF we have added products where we just exclude the co-marketing between the two companies. And the idea is that PI is very strong in the – in certain segments, so BASF is not present to create that impact.
    Which is PI will be the exclusive partner, leveraging us in terms of geographies where we have stronger presence in these products are altogether new in India or already in the existing part?
    can throw a bit more color on the four molecules that you’re working with BASF, I mean, how much of this would be 93 molecules and a bit more color on what kind of crops are we going to target over here? What is the kind of market, probably the addressable market size, and is there a possibility that one of the four could probably be a potential next Nominee Gold, a bit more color on this, sir?

  • Clearly, the four molecules announced are going to be in the crop segments of rice that PI trends and also one or two of them is in the maize segment as stated earlier and some are in the horticulture segment. And we have good potential, but it’s the beginning of the launch of this year, so we’ll be taking them over the next few years.
    this year or would it be more of have we bottomed out as far as the commodity prices are concerned, and do we see some kind of a revival happening in the later end of the year? What are the triggers that probably one should be looking at and how do you think things are going to move up, scale up there?

  • If we see for the last three, four years have been kind of declining. The trend was always every year going down, but again, the feeling is that, they seem to have bottomed out and couple of crops, there is the revival trends in commodity prices also.

  • The other key aspect is the inventory and the assessment is that the inventory in the channel with the companies, when I’m talking, this data I’m talking at global scale seem to be also kind of reduced over a period of time and now it’s the time for replenishing this. And this is the reason that what is expected by these – even by these global companies says that their budgeting schedules or the volumes would slightly be increasing by the next campaign, which should be sometime early next year or late next year, I mean, second half of 2018 or something. And that is giving a hope that the industry should rebound by 2018. These are the few trigger, the inventory in the channel, inventory with the companies and also commodity prices.
    For the industry per se, would there be is kind of a jump in the overall technical prices across the board and would there be an issue as far as availability of technical is concerned, especially the ones that are from China, what is the kind of production and kind of demand situation over there?

  • I mean, that’s product expressive phase. So certain product, yes, either, I mean, AIs or the intermediates, the prices are sort up from 20% to 50%, but that’s not the situation across the board for all the products are – that’s not the situation. And this kind of situation has emerged because of some of these companies, our manufacturers in China got closer or some sort of demand consolidation in some of these products in South America. So these are the reasons because the demand has short-up, and so the supply prices have gone up. But this is certainly not the general across the whole situation.
    But I think during the opening commentary today the opening – the better operating leverage term was not used, and it was better operating efficiencies. Could you be more specific, are we talking about better operating leverage or better operating efficiencies for margin expansion?

  • As you know, this year the Jambusar plant has scaled up, and therefore you do see the efficiencies also kicking in, so it is a combination. And more importantly the product mix has been pretty rich.

  • “jambusar plant started off”
    And when we talk about product mix, are we talking about the ratio of CRAMS business or the export business versus domestic or within the segment itself the high margin product have been doing good?

  • Segments, we are seeing that high margin products relatively compared to the last year.
    The order book, which got quantified around $1 billion, how many molecules we would be referring to the particular order book?

  • There are eight to nine molecules in there.

  • “capex outlook fy18 = 200 Cr”
    Further bifurcation of this 200?

  • There is going to be some investment in one of the MPPs that is currently in progress. We are also looking at some repurposing of the earlier assets, some expenditure is also going to happen towards ETP related matters.
    And also in R&D and some of these kilo plant and pilot plant scale ups, so basically investment and technology.
    “200cr investment”
    Yes. So I would say it would be almost 50% is towards revenue generation, and again, these are broad percentages. And close to 25%, 30% would be in technology upgradations, and rest is all the infrastructure upgrades and all.
    Our export business keeping in mind the INR appreciation that has happened, do we need to renegotiate a contract or how does the pricing get revised in such a scenario?

  • Yes, yes, so it’s generally is the process that every time when new contracts or new purchase orders are discussed and finalized, all these aspects are considered.
    any other launches apart from these two?

  • The products of BASF is what we are referring to as launches for the current year.
    are we seeing any pricing pressure in the upcoming season or pricing is still holding steady despite competition?

  • “no pricing power as of now but can be seen”

  • our business model is that of a non-conflict partnership approach. So, whichever structural stage the molecule of the product is at, doesn’t matter if you can take it without creating a conflict to our business interest. I mean, at the same time, we do believe even these large companies has huge scales of generic revenues in their pie.
    My question was pertaining to the trade payables. So they seem to have gone down on a Y-o-Y basis from 366 crores to 288 crores. So is there any reason for the decline?

  • One is a better price negotiation that our teams were able to do. And the second thing is, we were also able to utilize our cash position working through some vendor discounting schemes.

  • Yes. So we are considering some investment in creating capacities for new products during this financial year. And then yes the second tranche of investment will follow depending on the negotiations and the success of our negotiations with some of these contracts that we have currently discussing. The next tranche of investment may come in next couple of years.

  • The export cycles are less so they would relatively have lesser working capital requirement.
    Second half of FY18 in terms of your delivery schedule and all that, or is it more as a news flow from your clients or from the global images?

  • Well, at this point as I was explaining earlier, I mean, there are several factors, which are entering towards this recovery. It’s commodity prices the – also the inventory levels and what happens that inventory levels then triggers the discussion for the next campaigns and the subsequent campaigns. And that kind of hint we are – we are getting or rather we are now clearly seeing on the ground, some of the discussions and some of the communications are happening in that line.

  • “Significant revenue potential with the tie ups with BASF”
    I just wanted to know the consolidated revenue breakup between exports and domestic for both the FY17 and FY16?

  • FY16 first, 1,273 crores of exports and 924 crores of domestic, in FY17, it is 1,410 crores and 973 crores.
    Another question, regarding the new clients addition, have we seen any new clients addition, and if you can just share the top five clients contributing to the exports revenue?

  • The customer numbers are not that significant, you will have some 17, 18 customer at commercial scale, so top five are contributing more than 50%.

  • Top 10 of our production costs contribute more than 60% of our revenues.
    Sir, we have done roughly 5% growth in domestic business in this year, while the industry growth is – seems to be higher than that close to 8% to 10%, given the results of across the companies. Now this lower growth of 5%, is it because of a product specific reason like drop in sales of Nominee Gold or there some other reasons are related to that?

  • No, I think the lower sales growth based on the idea that we’ve not tried to push inventories into the market, we’re looking at the present market situation. So Nominee is not something which has reduced from our existing plan – as per the plans.
    Well, as of now, the global industry, I think the global industry has been very much present in India. Co-marketing and in-licensing models have been relevant and prevalent still. So not all the global companies are here in India. On the other hand, co-marketing pieces, companies are expanding to grow faster from the new initiatives?
    Sir, just small clarification and information I was looking that – appointment of additional Director Mr. Bal ganesh. What could be his role and value addition to the company given his profile more on a pharma side and very good track record. So what sort of synergies and advantage we are looking at from him?

  • As you would have seen, we’ve also said that we’re also looking at building certain technological capabilities. And there’s quite a similarity between the pharm and ag sector, and his great knowledge in that area of chemistry and microbiological areas of interest to leverage to build the capability to the company.


(deepali.kumar) #881

@Mahesh

Hi Mahesh,

Needed a small reconfirmation from you, since you are also , invested in PI , since long, I presume…

This recent update about, a member of the Board of Directors at PI, Mr. Narayan Seshadri, Pledging 0.41% of his 0.56% holding in PI, on 19/05/2017, at BSE.

I reckon Pledging isn’t always bad, and this point percentage is inconsequential. But do you have any thing to add to this event?


(Mahesh Shah) #882

@deeann

It seems to be probably a nonevent for an investor/shareholder as the person concerned is neither promoter nor an executive director. Apart from playing an advisory role to the management of Piind, he has his own business/personal interests which are infact bigger than the role he plays on Pi board and for such interests he could be requiring funds because of which pledging could have taken place. However, Pi has today progressed well and reached a stage where such event might not matter much.

Rgds.


(deepali.kumar) #883

Thanks Mahesh. I presumed the same. But, a reconfirmation from a fellow investor, sure is reassuring.

There’s this lingering doubt , I have regarding PI’ s venture into pharma. Ideally it should be a value addition to the company, but with so much pricing pressure that pharma sector is facing currently, what’s your take on this?

Regards

Deepali


(Mahesh Shah) #884

@deeann

Regarding pharma venture, only once the deal is through or some sort of concrete info is available with rgds to segment/product profile PIINd is targeting, we will be able to ascertain its future implication on the company. However, company seems to be in a sweet spot as far as timing of its foray is concerned as it can choose appropriately and avoid mistakes. Also if we have a close look at the background/profile of senior level persons recruited over last one year by the company as also management commentary in recent meets held with analysts, company seems to be eyeing again a niche in pharma space as otherwise it’s ebitda margin profile would not have been close to 30 %. Secondly, it seems to be wisely avoiding USFDA controversies as its foray in the initial phase atleast is going to require only client audits and no USFDA inspections.

Rgds.


(deepali.kumar) #885

@Mahesh

Thankyou for your response. Understood as follows:-

“Regarding pharma venture, only once the deal is through or some sort of concrete info is available with rgds to segment/product profile PIINd is targeting, we will be able to ascertain its future implication on the company.”

True.

“However, company seems to be in a sweet spot as far as timing of its foray is concerned as it can choose appropriately and avoid mistakes.”

This I am not sure if I understood . What do you mean by,

a) 'Company seems to be in a sweet spot as far as ‘timing’ is concerned".

b) Also, when you say,“it can choose wisely and avoid mistakes”, what mistakes are you hinting at and what do you mean by ‘choose wisely’?

“Also if we have a close look at the background/profile of senior level persons recruited over last one year by the company as also management commentary in recent meets held with analysts, company seems to be eyeing again a niche in pharma space as otherwise it’s ebitda margin profile would not have been close to 30 %.”

True indeed. This was one of the reason that had attracted me towards investing in PIIND. PI has the best margins, in the industry, if I am not wrong.

"Secondly, it seems to be wisely avoiding USFDA controversies as its foray in the initial phase atleast is going to require only client audits and no USFDA inspections. "

I do hope so, as I would hate the uncertainty of USFDA controversies lurking on any of my holdings.Which seems to be quite commonly heard these days than in the past.

But, despite so many positive things going in favor of the Company,both inside and outside, I must unwillingly admit, PIIND, has given very unimpressive returns in the past two years. And unfortunately this is the biggest holding in my PF, the one with the strongest BS, and the others that I own, like Kajaria, Berger, etc. etc have shown dismal results, but their returns have been pretty good. In fact they are ruling at PE that I believe are totally unjust when compared to their earnings growth. There is not a single negative, on fundamental basis, that I can , at present point out for PI, that should force me to sell, except that stock is going nowhere for a very very long time.

Regards


(Neerav Paliwal) #886

Most of the things you mentioned about PIIND are well known and so the price reflects most of the positives. To get good returns not only you need to pick good business, you need to pick it at good valuation as well. A brilliant business like Page or Eicher may not have given great return in past couple of years owing to their already high valuation compared to many mediocre business which have outperformed these 2 in terms of returns because they were priced very low.
It is periods like these where you have to be really patient. If you think that the business is good and there is a good probability that the current steps taken by management might result in good future growth then you can stay put. If you think otherwise that the opportunity size is not that great and the valuation are running far ahead then you can pare down.

Disc - Invested.


(deepali.kumar) #887

@Neerav

I beg to differ here. I don’t think the price of PIIND reflects most of the positives, especially the tangible forward looking ones.Plus PI has the best ratios, RoE, margins, etc in the industry. PI at present is not at a high valuation, I feel . If we do not take tax exemption into account, the earnings growth is at around 48%, but that won’t be an appropriate consideration. Even if we exclude tax exemption , PI is a 24% grower, almost. So with a PE of 24, it certainly does not have a ridiculously high PE. In fact, its a fair price, if not a bargain.

Well, Eicher is a brilliant business(given good returns even in past couple of years),and deserves the PE that it has but not Page. But that’s not the point of discussion here.

I do think that steps taken by management are in the right direction, (barring the pharma venture that makes me uncomfortable). Its not the opportunity size, but opportunity cost that is unnerving for me.

As my other holdings like Rane brakes and Navin Flourine etc. are doing fine but the percentage allotted to them is not anywhere near what has been allotted to PI in my PF.

But, one cannot expect everything to go well all at the same time.


(Rudra Chowdhury) #888

Try answering one simple question :

What is the real competition in the CSM Space ?


(deepali.kumar) #889

@Prdnt_investor

Although, the question is not directed towards me, it got me thinking.

In agri input companies, is there, any single listed company that has an integrated CSM service, like PIIND boasts to have? Pardon my ignorance, but I don’t know of any.

By “real competition is CSM space”, do you mean,

a. Companies, old or new, that can pose a threat to PI’s CSM business?

b. Or, the CSM space itself, is threatened by any substitute, which is highly improbable/impractical for companies to make molecules in-house.

I reckon, PI Ind, is an outlier in what it does, it has a niche (CSM space), which is a key growth driver too.