PI Industries - Superior Business Model

hi

I think too much is being made out of the price of PI Inds. When stocks have gone up a lot as PI has from levels of 500 in Feb 2016 to 960 in Feb 2017, they often tend to take a pause. A correction to 750 levels should be considered a normal and healthy corrrection.

What is interesting is the fundamental picture emerging for the co.
Some positives that come across are:

  1. Tie ups with global majors like Kumiai, BASF, Mitsui etc which should help in strenghthening their relationship and provide cross selling opportunities in the CSM segment as well.

  2. Big order book of 1 Billion USD of CSM segment inspite of consistent growth shown in past few years. This shows that the segment is gaining a lot of traction. There will of course be some bumps along the road but overall the trajectory looks up.

  3. Clean balance sheet and management declaration of capex of close to 370 crores. Now as seen from past this is not a management to fritter away money after needless expansion. If they are confident about doing capex as mentioned above, we as investors need to be confident about business.

  4. Good ongoing monsoon. This should provide a fillip to the agrochem sales.

The overhang on the stock is higher tax rates and the management commentary about soft H1.

What the management commentary has done is to take out any froth from the stock price. In the shorter term of course the price will be dictated by what kind of results it posts in q1, but if one takes a longer term view then the company seems well placed for next few years.

Ideal thing would be to stop looking at and bothering about short term price movements and think about business prospects.

I too am invested in the co but since I dont want to sell in near future, I dont bother about the prices.

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@hitesh2710

You are spot on Mr. Hitesh, on all 4 fronts that you mentioned. And too much looking at the price, generally forces us to take wrong decisions, especially when the bigger picture is only getting better from here. But since we are all human here , hence fallible at some point, at some stage in life, the jitters come naturally at times. Thanks for reaffirming the faith in PI.

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I am totally in sync with @hitesh2710 views. Some how we have to have a bird’s eye view of the company and it’s direction; at the same time decipher the management reporting prudently!

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Discl: I have been adding PI in this correction!

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Excellent analysis as always, Hitesh !

It’s interesting to observe market participants behaviour and reaction when they are focussed too much on short term price movements and perceived negative events which might be Ignorables in majority of the instances.

I do remember last year, when PI promoters sold some of their stake for personal philanthropy goals, market termed it a very negative event and there was a panic among investors (see the messages way above) in this thread. The stock price declined to below 500 levels in Feb 2016.

My take away’s:

  1. If business fundamentals are intact or improving, the short term perceived negative events (like promoter selling, soft/bad quarter results) provide an excellent opportunity to buy or accumulate more.
  2. For most of the investors, it is very hard to tolerate a price under performance in a bull market when every tom and jerry is giving multibagger returns.
  3. I see very few people questioning when a stock price is appreciated substantially not backed with an improvement in business fundamentals or growth. However, once stock price start a short term declining trend, you see faith and conviction starts shaking.
  4. As rightly pointed, stop looking at and bothering about short term price movements and think about business prospects.
  5. It is not often that quality businesses are available at reasonable valuations in a raging bull market.
  6. I try to exploit such situations. My favourite when a quality business is going through a rough phase, soft/weak quarterly numbers and there you have a chance to load up.

Disc: Invested and added more in recent correction.

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hi @hitesh2710 i remember reading one of your beautiful posts on using the market behavior. ie stock not going up on good news or not falling on bad news. ( I can relate to some recent experiences. torrent not moving despite good numbers. agree its a one off and not comparable but still the reaction was something one should have paid attention to). what makes you think that pattern is not applicable to PI in the current market?. some points. 1) its not that it was at a very high pe to begin with. current pe is only 22. ( i do understand its slightly misleading due to the tax benefits). 2) look at some of the peers valuation 3) its a bull market with every junk hitting all time high. 4) i know it could be because of week h1 guidance. but if i am not wrong, they said things would improve. why is it not discounted?. if you look at the b2c consumer companies, market knows about the short term demonetization, gst impact. but most of them trading at 50+ pe
Note: I do understand its a great business with great track record. I hate discussing stock price movement. I just thought of applying your behavioral pattern here. :slight_smile:

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gautham,

The instance of torrent was when torrent pharma delivered much better than expected earnings on the back of abilify opportunity. There was a very muted reaction to such a wonderful result. I think similar thing happened in Alembic pharma also and many a times on approvals of many drugs by USFDA approvals. That should have told us markets knew more than what we thought.

In case of PI there has never been great results in past quarter. I consider topline extremely important in these kind of companies and topline increased from 584 to 605 crores in March 16 vs March 17 quarter. Op profit and net profit did increase but for me as I mentioned earlier topline remains very important unless I have definite reason to believe that the muted topline is a one off. Even in earlier Dec quarter comparision u can see that topline growth was muted.

So a correction because of lacklustre results is something which is expected and there’s nothing new in it for me. This kind of lacklustre topline growth can continue for a couple of quarters more but at a certain price all these concerns would be considered to be priced in. What is that price is a very subjective decision. But as I mentioned in my previous post if the future looks good for next 3-5 years, I would be okay holding.

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thanks a lot @hitesh2710 . i didn’t mean to compare it with torrent case. i understand the past year top line was not great. i was referring to a case of so so result, and stock undergoing a slow price + time correction, despite not so high valuation (in pe terms) in a raging bull market. anyways i get your points.

@hitesh2710

In this post, you sound like the fundamental analyst , Charles Allmon, who did believe that sales are the primary driver of stock value. In his words, " I consider company sales more important than profits when searching for stock market values. Common sense says that in the long run no company can grow faster than its sales. There is a finite limit to expanding profit margins. I would guess that 98 percent of investors focus on profits, with nary a glance at the revenue stream, the life blood of every company".

All that you said in PIs case, in this post, juxtaposes accurately with Mr. Allmon’ s belief here. In fact, to be exact top line growth for Pi started dwindling from March 2014 qtr, though the down side in topline was not consistent. No doubt profit margins kept improving year after year, but it is the top line growth that needs a fillip. Rest all is in place.

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Apart from business reasons mentioned by hitesh jee, usually once old set of big long term investors make an exit (for many other reasons than poor business performance ) due to various relative reasons(there have been few in this case) n stock has run up n there are no immediate triggers or better to say momentum feelings,stock consolidated for sometime till other biggies take position or big triggers play or some momentum news comes . I think here too similar things happening . Valuation n prospect decision should be independent of price .And if by someone’s view , our faith comes back or gets shaken ,then , it may be a very serious situation demanding immediate attention to this overall investment process until and unless those factors were not covered while building investment hypothesis and are new to us. Even in that case , if it is too many misses or highly important miss on many stocks or even for a single stock for highly concentrated investors ,it should be considered as a reality check .

Lot of bets on farming sector. Irrigation, seeds, agrochemical, tractors should do well

A quote fro Kennet Andrade “I think there is a very large opportunity in rural India. There are a lot of place in that economy. I think fertiliser is probably the largest consumed product out there. You have got agrochemicals at one end and you got seeds at the other end but more importantly 50% of the entire farmer’s expense goes into labour and if the stated intent by the government is to double the per capita of the farmer by 2022, you are going to see a lot of wage inflation down there.

This is for Honda SIEL, but talks about Agriculture as an opportunity.

I was looking for any new products/chemicals registered and patented by pi industries in Indian patent journal. Search didn’t yield any result but I could find many chemical patent applications by sony/bayer/basf/dupoint who are pi clients.
The journal gets updated on every Friday with new patent applications and granted patents. Is there any better way to track these?

My understanding is the molecule owner ,like the names you mentioned would own the patent. This is a misunderstanding i had when i bought Kaveri seeds also. The patent was owned by Monsanto and they call the shots. I doubt if there was any pathbreaking R&D, PI, Kaveri have the marketing strength and connectivity to the farmers for which the agro or seed majors are dependent on.
Correct me if iam wrong

PIIND doesn’t invent any product/molecule…it invents the most effective processes that go into manufacture of such molecules. This we are talking about custom synthesis part…on domestic agri-input side, hardly any Indian company is an innovator…all Indian companies either sell generics or enter into in-licensing and other arrangements to sell MNC innovator molecules in India.

Hence, product patents will be registered in original innovator name but, it’s supply comes from companies like PIIND who manufacture such patented products for innovators. In initial stage of any product, normally, there are only two or maximum three manufacturers an innovator works with for manufacture and supply of its patented product.

Rgds.

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PI has started there New Chemical Entity (NCE) R&D for finding new crop protective agents (Herbicide, Fungicide and Insecticide) in Udiapur.

**Target Discovery**

** Molecule Design**
** Library Synthesis**
** Lead Optimization**
** Biological Evaluation**
** Route Synthesis**

Most of these projects are Joint projects with European and Japanese innovator companies.(I hope in this model the expenses/ risk/ revenue will be shared)

They have also set up a Agro Research Station

Evaluation & Trials

** CIB Intimation / RTT application / Sample import**
** Bio - efficacy Studies**
** Residue Studies**
** Toxicity Studies**
** Packaging Specifications Development**

They are helping MNCs to generate the field trial data of new compounds for innovator and also help in filling for the Registration of their products. ( PI will probably get marketing rights for these innovator products)

Registration India

** Geography Specific Bio-Efficacy Studies**
** Evaluation & Trials Data Compilation**
** Inclusion in the Schedule**
** Dossier Preparation & Submission**

From NCE ====> Active Ingredient (Crop protective agents) journey takes around 8-10 years and success rate is quite low risk are like Pharma NCE development

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@malthankar

I stand corrected to my previous post on PF allocation, that I removed recently. I’m going to strictly adhere to allocating not more than 10% to any one stock, no matter what.

I would have saved my self a LOT of agony over PIIND.

Dilemma in PI - Is it at a level to be greedy or does the market know something that we don’t know. It is seems so simple and easy when I read Buffet - we should be greedy when others are fearful. But so hard to implement

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Sometimes its a leap of faith based on what you know :slight_smile:

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My 2 cents -

The thing is that we are in a qoq market! One good qtr and stock rockets 30-50% in 3 months. One bad qtr or a relatively soft qtr with mgmt guidance moderating could result in stock hammering up to 30-50% in 3 months. 3 - 6 months is long term, and 1 week is short term :wink: Trading is the new investment in bull market. Not many care about the long term visibility. What everyone cares about is what will happen in next 6 months. I know it is bad, but this is what we as investors will have to deal with. Opportunity cost can be big in this market. Imagine, some housing finance stock are up 200% in last 2-3 qtrs, whereas stalwarts like PI are down 30%. So, momentum is everything in market. Very difficult to identify the bottom. PI is a very good company, we all agree, but is it a great stock depends on the momentum and short term visibility.

Disclaimer: I have take a small position at 700. I know there can be more downside, but i am betting on long term visibility.

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When everything is priced to perfection, investment horizons shrink. PI in my opinion is worth 600 rs per share. Of course everyone has their own notion of fair value.

When management says H1 will be soft what I hear is “we know H1 will be bad, and we have no idea how H2 will be, but we will let you know at the end of H1”. And this is from a company that has just completed a big capex so naturally the expectation was a strong year not a soft one. PI from what I know, has long term CS contracts so a soft H1 makes me wonder if I understand this company correctly or not. May be I should wait to see how things pan out in next 1 to 2 quarters and then decide. Any way the stock does not have a lot of upside given its high valuation. May be a dead cat bounce will be there but that’s it.

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