PI Industries - Superior Business Model

(Yogesh Sane) #983

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.

(richdreamz) #984

It is sad to see some comments from senior members providing the worth of a share without a cogent rationale.

Moreover, it is unfortunate to see the aspersions on the ‘honestness’ of a promoter in the times where most managements trumpet above 40% growth and then deliver a dud while saying it’s a one off or some other reason. While I may be wrong but with the past track record of the promoter I have nothing concrete to believe the management is making fun of minority shareholders. Out of context may be, but if you were to listen to NRN’s commentary during Infy’s heydays, you would not have held onto the company for long. He was conservative but was growing at 40%. I’m not equating both the companies here though.

We need to understand how much commitment it takes to create wealth that PI Industries has created over the many years and during this long term wealth creation there will be times where the growth engine hits speed bumps and this is COMPLETELY natural and therefore should be expected. It is only during this period management differentiates itself from the rest of their ilk. The SAME problem but of different magnitude based on the sector specific issues was plaguing companies like Page. Strong managements come out successfully and during this period the returns will be below normal sometimes frustrating so because of opportunity cost while during this period the ‘hot’ sector of the season makes the merry.

Now, coming to the PI Industries stock price per se, though last year’s EPS was ~ 33.5, I would like to consider it as 30 in order to account for the lower tax rate. I believe PI might end with 34 thereabouts for FY18E and FY19E should be around 40 with global agri-chemicals sector turning around along with the domestic business uptick + the CAPEX contributing to the revenues by FY 19 + possibility of new areas fructifying by then and contributing small share to the EPS. So PI would be a 15% EPS grower and add 1% for dividend yield.

So, what PE would I attribute to PI? (now, this is more subjective part of the analysis).

  1. 16 times FY18E EPS is straight forward answer to make it PEG=1. (I don’t believe in this PEG stuff much, though).

  2. I personally would give a premium valuation based on the below points -

    • No or little debt
    • Superb return ratios (RoCE and RoE)
    • More than 6-7 decades of history, promoter integrity
    • Capex based on internal accruals
    • Marquee partnerships with global names like BASF etc. and revenue visibility in CSM
    • Long runway of agriculture yields improvement story in India where PI has an important role to play.
  3. While the pricing pressure in its Nominee gold product which forms 20% of the revenue might be a risk, but given PI’s history it has the ability of bringing new molecules to compensate for the business loss but there might be delays in the interim.

  4. USD INR rate inching 63 is going to risk the exports revenue, no? I have not read if PI has any forex hedging policy or not to nullify this as this is secondary to the business.

Now, carefully weigh the risks vs. rewards and give a valuation you are comfortable with while taking into account the opportunity cost of investing in hot sectors and how much heart burn you might have? With respect to this point, PORTFOLIO ALLOCATION comes into picture. I certainly have exposure to NBFCs but I cannot have 100% allocation to NBFCs and metals, right? In this context, companies like PI deserve an allocation that is commensurate with your risk profile.

Disclosure: I hold PI in my portfolio and I may sell for reasons that may or may not be stated above as and when my opinion and facts change and my perception to those facts.

(Yogesh Sane) #985

My valuation is based on a detailed DCF model.

Equity Valuation - PI Industries.xls (170 KB)

I have also explained my model here.

My whole point is when a company is selling at 23 times earnings, even small hichups matter. Table below shows various fundamental statistics for PI.

Source: Capitaline

PI has produced a CAGR of 49% over 5 years but 5 years ago its PE ratio was a reasonable 17. Once the PE ratio reached as high as 39 two years ago, stock returned only 3% in next 2 years despite producing a 36% CAGR in terms of EPS. Many investors here ignore the valuation risk and focus too much on fundamental risk. All I want to highlight is valuations do matter and especially when fundamentals may not look as good as the past.

(Hitesh Patel) #987

Regarding the doubts cast about management commentary and the review post h1 about how h2 would pan out, I totally disagree with the view. As said before it takes a lot of management efforts and smarts to build a business of the scale and stature of a PI Inds. We can very easily write two lines and pass a judgement based on our limited knowledge and understanding of the business and management. Last year’s June quarter was one of the best quarters reported by the company if one follows the company closely and would be difficult to match. The key thing to watch out for is how much of that is priced in at cmp.

Stock prices are dictated by two parameters EPS and PE. While u can get all your deductions about EPS, the PE part remains a conundrum which is why most of the excel sheet calculations fail. If excel sheet calculations were the holy grail to investment, then only guys expert in such mundane skills would be the billionaires of this world.

Thankfully for us mortals who dont apply too much of excel sheets there are other avenues to investment success and that is to follow the story and suffer the temporary hiccups the investment journey offers.

And about Yogesh’s comments about capex being done, I would point out that the capex is currently ongoing and not complete. And if the CSM business keeps rolling there might be other capexes too.

I dont want to repeat my investment arguments in PI as that would be just a repetition and wont add any value.

But as investors we need to develop temperament for weathering short term underperformances in a story which we consider to be a multi year story. Buffett mentions many times that he is happy when the prices of a stock he likes drops so he can load more of the same.

The price of a stock means something only when u buy and only when u sell. If u are holding the stock with a long term view, the temporary swings may not mean much except the agony or bragging rights it provides us.

The risks ennumerated earlier do exist for the company which is poor quarterly nos, higher tax rates etc which would normalise in a few quarters. Some unforeseen risks in terms of regulatory risks, weather uncertainties globally leading to reduced usage of company’s products, delay in expansion plans due to execution or regulatory problems etc need to be watched.

(Abhishek Basumallick) #988

I think a major disconnect in people’s mind is in their time horizon of investment and their investment temperament. If one has a short term (<1 yr) view, then PI may not look very attractive, because right now earnings or stock price momentum is not on its side. For those who have a longer time horizon (3-5 years +), there could be not much doubt about the quality of the PI business and the management competence. It is also not very disputable that the company does have a long runaway ahead of it, in both CRAMS and the herbicide segments.

So, at the end of the day, you could look at the current situation in one of two ways:

  1. Under-performance for some time, so better look elsewhere for better use of capital
  2. Time given by the market to accumulate shares of a excellent business by SIPing into it.

To each his own :slight_smile:

(Mahesh Shah) #989

It is indeed good to see some hightened activity in PIIND thread but it is an unfortunate part that discussion is largelly revolving around price performance/underperformance rather than actual business dynamics and how they are shaping up on ground.

– Is the basis which supported exceptional wealth creation so far for PIIND is challenged ??

– Is there something which is challenging the exceptional de-risked business model that management has built over last two decades ??

– Are there any visible signs that company is going to be a laggard in domestic Agri space ??

– Is CSM space showing any signs of saturation which could hamper growth over medium term ??

– Is the company which has so far built everything organically, showing any signs of organic growth tapering off and company incapable of taking any corrective inorganic moves on first signs of anything like that happening ??

If answer to above questions is a clear NO then should short term price volatility matter to a genuine long term investor ?? Then the question arises, as is widely discussed recently in this thread, that if all the fundamental basis are intact then why share price is depreciating the way it has seldom depreciated in company’s entire trading history. Afterall we all are aware of a truth that ‘Market is Always Right’ and it discounts many things in advance which might be beyond sight of many of us atpresent. However, we need to understtand that this is true in the long run and 1-2 months is not a long term indeed. I see that some are raising questions on commentry of a soft H1 even when order-book of CSM is 1 bn. USD ; its a order-book which gets translated into actual revenue when actual delivery happens and its the product-offtake that is going to get postponed because of high inventory in the system atpresent.

Every segment goes through a cycle and this is that stage of cycle wherein markets which were filled with high inventory are slowly getting into shape and by 2019 again a stage might come wherein refilling into the system might become a necessity. Now, why this thing is not discussed that on a larger and much stronger base (relative to 2009-10), when such thing happens, how large beneficiary PIIND CSM segment will be ?? Its a habit of market and market participants to justify appreciation/depreciation of share price of a company by touting many theories. When PIIND share price reached 900+ theories for 1100 price came about and it is no surprise that when PIIND share price has reached 700- theories for 600- price are coming about.

This is not to say that any of the theories that are or were wrong at that particular time but the question is that, for a genuine analyser and investor who thoroughly researches a company, its business, its management, does such theories really matter ?? If conviction of an investor gets challenged by such theories in a wealth destruction phase or gets swayed by such theories in wealth creation stage, was that conviction a real conviction at first place ??

No doubt every analyser/investor has to be alert and keep his ears on ground to constantly reassess the basis he has made at the time of investment asto whether the story is going on right track as expected by him in the beginning or not and such contradictory moves of share price underperformance in a general outperformining maket is a perfect time for alertness. However, we need to look for real answers to our real questions rather than only looking for answers for share price depreciation thats what I feel.

Having said all these, I must admit that I have no argument to make on certain minor concerns as raised by some genuine market participants (who smell a facilitated stake transfer/sale) like why AGM was delayed after announcing the same on a particular date, why Annual Report is still not out even when less than one month is remaining, etc. However, evenif such concerns were genuine then also it doesn’t affect the long term basis and such moves are widely adopted by many high caliber managements also.

Let’s see how today’s Q1 results shape up.


Discl. - Invested in PIIND

(Abhishek Basumallick) #990

Q1 Results are out - http://www.bseindia.com/xml-data/corpfiling/AttachLive/0aedba67-d02a-4b7c-9787-462f849aa227.pdf

(zulfiqar) #991

Results are out topline down 18% let’s c how much more down side v have in stock price , or how much is discounted in numbers

(deepali.kumar) #992

Is this the worst quarter so far? I think, SEP 2014 qtr was worse as topline to bottom line both were in negative. But this qtr. Surpasses that qtr in losses.

(Mahesh Shah) #993

Q1 results are weak as expected…breakup needs to be watched…concall commentary will be key monitorable…whether they are sticking to earlier given growth guidance will be interesting to note.


(zulfiqar) #994

How p/e defeating will be there from here on needs to be seen, contemplating sell in this pi Ind which has given zero return from last 2 years, bad judgement on my part, there are many growth stories around which can be invested , I think stock be published on Monday , hope it gives me reasonable level to exit at a manageable loss. Disclosure: significant investment :frowning:

(deepali.kumar) #995

Significant investment in my case too…I’m contemplating the same, not sure though…take a hit on the chin and move on, deploy it in good growth stocks, that might be available at a bargain, in this on going Midcap, small cap carnage. These numbers are not " muted", they are dismal. And any improvement in the numbers will take place in or after the second half.

(jshah17umd) #996

Good to see operating margins have not contracted too much. 200 bps contraction due to higher employee benefits.

(jshah17umd) #997

Questions to ask

Does the company have long runway ? Yes
Is the management competent ? Yes
Is the business financially strong? Yes

Can anyone predict growth accurately? No

My father bought Pidilite in 2001, it was expensive stock at that time quoting at 15 P/E, the stock didn’t move for 3 years but he didn’t sell and today it has been massive wealth creator.

On sidelines, I believe in colors and names.
See Pidilite, the colors are white, blue and yellow.
See PI industries, the colors are white, blue and yellow.

See Asian Paints…AP
See Ajanta Pharma…AP…even the symbols are very similar.

See HDFC bank, red blue and white.
See Kotak bank, red blue and white.
See Cholamandalam, red blue and white.

(gautham1) #998

PI and a few other similar patterns got me thinking. Two approaches

  1. Get out on the first sign of slowdown : Problems with this approach. a) Difficult to judge if its a one off b) Not easy when the portfolio size is reasonably large. ( not because of liquidity. but more of a mindset) c) Difficult to find a stock (with same quality) to replace with
  2. Stay with the stock and give more time because we all know all businesses go through such phases. And they say good businesses always find ways to get back to growth: Possible flaws in this theory: a) No matter what, high base effect will always be a challenge. b) In most of the discovered high quality names, the PE will go way beyond the fair PE. So even after a long time and price correction, the result may be mediocre.
    I personally feel option 1) is better for lesser mortals. If we cant find a better idea, it would be better to move to liquid funds. Compounding at 7% is better than losing the money.

(amolk) #999

I am not able to understand one thing. Order book was $1 BN. Which is approximately 2.5x fy 17 revenue. Why degrowth in sales when they have such a high order book??


Hi Yogesh,
DCF models are good only one when you get the numbers correctly and as you are aware there are so many unknown variables. We are not Warren Buffets here as he has got access to all the info and personally sits with the management so many times to get the numbers crunched properly.

We have a proprietary model where we pick good businesses at reasonable valuations. It is not complicated like DCF .Recent example Balakrishna, Vinati,AIA. We have identified now Bata and PI is one of them.

On Valuation, if they maintain last year sales of Rs 2400 cr their EPS will be Rs 33 which gives a pe of 21

As per our model, it is in a single digit percentage. We dont look at p/e to a larger extent.

Please ask yourself whether EBITDA margin will go down.


(Mahesh Shah) #1001

1 bn. USD order book is executable over a 4-5 year period. These are largely take-or-pay contracts wherein delivery times might vary as per demand but revenues are in general assured over the executable period. Hence there might be phases wherein one can see muted growth or degrowth in particular quarters or year but the same might get compensated by aggressive growth in subsequent year(s).

(zulfiqar) #1002

Please throw more light on the numbers , how come numbers are so pathetic, p/e derating started

(amolk) #1003

Is revenue down because of GST de-stocking for their domestic business? Monsoon were good otherwise