PI Industries - Superior Business Model

The most interesting aspect that they have worked on is introducing analytics and using Technology to improve the efficiency of the plant. With the same MPP(Multi-Product Plant) they have improved the output/throughput by 20%. The output they were getting at 85-90% utilization can now be achieved at 65-70% utilization. Thereby, improving the capital efficiency and effectively ROCE and lesser capex (2.5x asset turns are the revised norm vs 1.8x to 2x earlier) going ahead.

Disclosure: invested and biased


PI Industries is in active talks with Ind Swift Labs for promoter stake buyout.

Jefferies is said to be the advisor to this transaction. ET NOW queries sent to PI Ind & Ind Swift Labs went unanswered.


I was looking through the financials of PI and notice that there is barely any cash flow generation in the core business, pretty much any operating cash flow is consumed in capex and finance costs, which seems a continuous and recurring feature essential to growth with no sign of operating leverage, cash flow or capacity wise.

Going through investor calls from the past, the company doesn’t have a v consistent answer as to why its capex cycle always scales proportionately to growth, or when it would scale to the point of generating true free cash flow. They also never give any clear guidance on how they plan for capex, beyond growing the guidance each year. The stated reason for this is they have multi product plants with different products for different clients, and as such the capacity utilization across the product mix is not strictly comparable, and that plants can be single product or multi product as required. There are also various other reasons for capex that come up, such as for backward integration, technology upgradation, debottlenecking etc. While this may make sense, its also conveniently vague on how capex outlays are laid out.



They make the same case for utilization, that product mix makes having a common standard for utilization difficult, yet guide in FY19 that many assets are at 90%+ capacity utilization, while the recent QIP document states otherwise



At different points, they guide that capex is planned as per the existing order book, and at another that capex is planned over and above the order book (for which capacity always exists), to account for future order flow and / or one off opportunities.



On the plant asset itself, they guide a plant may have 8-10 years of life, and a peak turns of 1.5x times investment (they clarify this is not total capex, but only the actual plant assets) building up over a 4-5 year period from commissioning. There also seems to be significant upgradation and maintenance capex, besides for debottlenecking the existing plants and for ancillary parts to these plants, so together this doesn’t look terribly efficient.



My interpretation after this is that the multi product nature of the business would make the plants rather difficult and complicated to run, which limits meaningful ability to create operating leverage through scale and specialisation. They also seem to have a product pipeline that keeps growing by 4-5 molecules a year, and at least some of these keep requiring new facilities, while the others add to the operating complexity of existing plants, requiring upgradations, debottlenecking and more tech. Besides this, they also set up one off capacities in niche molecules not based off the order book for more experimental growth. This all adds up to v large cash consumption that scales with business growth and I imagine gets more complex as the base grows. To add to this, they are now entering M&A actively and also investing into the plants they’re acquiring. The silver lining is that management has raised 2000 cr of equity via QIP rather than leverage excessively, and they are looking for pharma acquisitions which hopefully will improve cash flow substantially over the core business. Given that the capex is so recurring and consistent, it must be noted that when added to the income statement, it completely wipes out all profitability and margins. I would expect to see a few things here going ahead: earning compression as depreciation piles up, leverage build up after the QIP funds are used up in 1-1.5 years from acquisitions and capex, with further compression of earnings through increased interest cost. The positive could be a good acquisition that helps improve the cash flow profile and maybe divestment of some of the more onerous assets once their order books are done with. At current valuations, find PI Industries too richly rewarded, for earnings that I don’t feel accurately reflect the cost base of the business. Feedback from others more knowledgeable on the segment / company welcome.

Disc: not invested.


When checked the asset turn over ratio of PI Vs others, i see trend( decreasing trend or low turn ratio) is same in several companies like Divis, Aarti, UPL, Navin, Vinati etc.
Looks most of these build capacity which would only be utilized 100% in a span of 8-10 years. then only their asset turn will be good (1.25 - 1.5 or more). As long as company growing aggressively may be this problem exists.

some companies are doing better on this like Atul, Astec, Deepak Nitrite.


Not taking into account the recent acquisitions, their ROCE’s were also not so premium as their valuations.
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = ₹8.0b ÷ (₹70b - ₹14b) (Based on the trailing twelve months to December 2020).

Thus, PI Industries had an ROCE of 14%.

The trend of ROCE doesn’t look fantastic because it’s fallen from 31% five years ago, while the business’s capital employed increased by 379%. That being said, PI Industries raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed.
So Am I willing to pay such premiums for a decent long term view(5-6 years) where current investments would start giving results ? Probably this cycle would keep on continuing as they reinvest most of their profits.

Disc: Not invested


Another incredible set of results, FY21 showed 36% sales growth and 62% profit growth. FY21 EPS ~ 50. Strong cashflows. Guides for 15% sales growth in FY22. Here are my notes from their presentation.

  • 4 CSM products commercialized, 7 new customer relationships established and received >40 enquiries in FY21. FY22 should see commercialization of 5-6 new molecules
  • CSM order book of $1.5bn provides visibility for the next 3-4 years
  • In domestic business, cotton crop protection portfolio grew by >40%. Awkira (wheat herbicide) grew 5x. There will be 5 new product launches in FY22 (to strengthen rice, cotton and horticulture portfolio)
  • Jivagro: 25% sales growth, commercialized 5 products, capacity utilization stands at 75% and expect 3 products to be commercialized in FY22. Aim is to grow at >25% CAGR for next 4-5 years
  • Fixed asset turns ~ 1.95, capex ~ 459 cr., Net cash position of 2070 cr.
  • 90% of CSM revenues comes from patented molecules and >60% of domestic revenues comes from in-licensed molecules

Looking forward to tomorrow’s concall.

Disclosure: Invested (position size here)


Adding one point: Growth guidance lowered from 20% to 15% in FY22 due to Covid impact. Softening of gross margins due to product mix&Meis withdrawl and degrowth on QoQ basis+ One more MPP is going to kick in Q2FY22.

Disclosure:invested. This business has taught me the power of Investing in a great co and with a great management when things go temporarily wrong (2016-2019 stocking issue). Eager to see whether they can diversify beyond Agchem into pharma. Deccan Fine Chemicals is the perfect case study to see what Pi can do if they acquire well. Vital to expand the size of opportunity at these Valuations. At current asset base, assuming 2.5x turnover. They can do close 6000 crore sales+Another MPP is coming up in Q2FY22.


Free cash flow generation has been above 300 crores this time+Roce is at 26% if we exclude the QIP cash on the balance sheet. Before they undertook the Fixed asset base expansion. They used to report 30%+ Roce. As the utilization increases, Roce will likely revert to mean in the agchem segment.

You’ve made a very good point in terms of MPP plants. Just laying out the difference for fellow investors to understand here:

-Dedicated plants have better operating leverage. As there is no change over time. Then why does a CDMO put up a MPP facility where due to changeover time you can never hit more than 85-90% utilization. (Some can only do 80%)

MPPs in some cases are like optionalities. Eg: Navin setting up a MPP for new agchem molecules. If out of 5 molecules, some become a major hit. Often they can be converted into Dedicated plants. Some other businesses like what Oriental Aromatics is doing, for some products you just don’t have high volume requirements. Going via MPP helps you to manufacture high value but low volume products.

Depends upon the nature of the business and the aggressiveness of the management. Pi is extremely well placed. If they diversify successfully in Pharma Intermediates/Adjacencies. Could enter the league of Divis (let’s see)

Disclosure: invested in Pi, Navin from lower levels. Actively tracking Oriental Aromatics.


Latest management interview (link) and the conference call yesterday addressed some important points about why gross margins were lower by ~4.7%.

• Changes in product mix (more domestic share in this quarter contributed 1.25-1.3% + Isagro product portfolio is lower margin)
• Withdrawal of MEIS benefits (1.5-1.6% impact)
• Lower yield on the commissioning of new plant. This is resolved now and will not be reflected in Q1FY22
• Expenses on new projects and new products (3 new CSM products; startup costs were higher). This has also be resolved now

The next point was about lower guidance of 15% sales growth. Management said that they wanted to be a bit conservative because of covid’s impact on operations of PI.


Q4FY21 and FY21 Updates - Another strong quarter and year. Next clear trigger will be their inorganic growth - acquisition of a pharma asset.


QFY21 Results

And this news shared by @Worldlywiseinvestors

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The parties have agreed that the enterprise value of the API business division on a debt free and cash free basis shall be INR 1530 crs. The agreed enterprise value shall be subject to adjustments on account of working capital, dues of lenders and unfunded employee liabilities.

Again looks like a very efficient capital allocation, below snapshot for standalone biz last few year performance for ind-swift, a decent operating margin biz getting hard hit by debt servivicing etc.

Given PI is buying asset at debt free status, it would be acquiring a business with 850 Cr+ revenue, 21% op margin , EBIDTA 202 Cr, without debt it can do 120 cr PBT / 100Cr PAT. ( per press release purchase is at debt free consideration)

That’s <2X sales, 7X EBDITA, 15X profit. Ind-swift current gross block is approx 1350 cr, well run API businesses can deliver 1.5X asset turnover ( experts can comment here) , hence potential of 2000 cr + revenue, 21% Op margins( upside exists on margins) and 300cr PAT once stabilized - we have seen PI delivering on Isagro turn around and efficiency improvements - very efficient and accretive capital allocation.

Currently PI is at 4700 cr revenue, 22% Op margin and 800 cr on TTM.

Combined we are looking at potential of 8000 cr+ sales and 1200cr+ in profit in 1-2 years( organic growth of 20% + stabilized API biz) , at current valuations 70000+ cr mkt cap from current 44K cr market cap.

Above is only back of envelope calculations. Good API businesses have much superior operating margins such as Divi’s etc at 40%.

All in all looks like a good asset at excellent valuations, going by history we can surely count on PI mgmt to deliver.



Yes, they seem to have got a good bargain. The current valuation already factors in this purchase though. So extrapolating it to Rs.70,000 crore would amount to double counting.


I was going through annual report of Ind Swift Lab available on its website (Annual Report of 2020). Almost 1000 cr is working capital. Inventory 340 Cr, Trade receivables of 400 Cr ( 60% from related parties).Capital advance of 55 cr is from related party, Loans given to Related party of 55 Cr.
Ind swift will get 1500 Cr and roughly 1000 cr is borrowing. So they left with 500 cr out of which they have to pay 350 cr in respect of trade receivables and other loans and advances. So there is 150 cr left with promoter of Ind Swift vs current market cap of 650 cr.

By going through Ind Swift annual report I am not sure whether we have to take there gross block and revenue on Face value.

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I think receivables, inventory and WIP are all cash item. Final transaction figure should be greater than 1000 Cr.

1530Cr - ( Debt + Trade Payables + other liabilities + employee liabilities)
+ (Receivables + inventory + wip)

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Press release on acquisition

  • The target undertaking is planned to be acquired through PI’s Fully owned subsidiary.
  • The purchase consideration will be paid in all-cash and funded from the proceeds of
    the completed Qualified Institutional Placement (QIP) and internal accruals. The
    transaction is expected to be earnings accretive with immediate effect.

While it’s too early but one possibility of acquisition through subsidiary will mean ability to decouple at appropriate times and second order value unlocking , given current scope of work for Indo-swift appears more on Mfg - API & Intermediate, multiple times emphasis on R&D, Technology, Process Innovation - combined entity will have resources to get into CDMO space given PI CSM unparalleled success.

As is the case with quality management - it’s a foundation step for next vertical of growth, interesting times ahead for investors!!


IDirect_PIIndustries_Q1FY22.pdf (567.6 KB)

While near term triggers are absorbed in current valuations, the way IMO next 6-8 quarters unfolds, it will create foundation for next multi year growth and corresponding valuations uplift

  1. CSM biz - continues double digit growth( 18-20% YoY) with sizable order backlog of $1.5B
  2. Agro Domestic - low teens growth, new launches and Jivagro integration ( Isagro) maturing
  3. Pharma biz - Integration success and transition of assets and client relationships to PI by Q2 /Q3 - quality of integration and commentary on future trajectory of growth and focus areas
  4. Q4 22 - Core Agchem PI biz trajectory in auto pilot mode and visible initial greenshoots in Pharma vertical performance
  5. Consol margin performance to improve much before full integration success( as is IS biz is higher margins hence accretive from day one, as a grwing overall mix high margins segment contribution will lead to better product mix)
  6. PI by design will have multiple self sustaining assets Agro , CSM, Pharma ( API & CRAMS in longer term) Opportunity size is no more an issue

To watch out for

  1. Leadership for Pharma vertical( existing PI leaders who are identified from PI pool + market hires in leadership roles)
  2. Roadmap clarity on milestones and plans on Pharma vertical, any disruption in growth as focus is realigned
  3. Emphasis and success on regulatory compliance that comes with Pharma as added risk
  4. Geo diversification - PI mfg base is completely in India as of now and as they grow bigger some de-risking steps may be likely



IMHO We can have debt as 100% value Trade payable plus than 100% as there might be interest cost you never know whereas the inventory receivable should be taken with some cut may be 30 to 40% less as there might be account which cant be 100% recoverable and in inventory there might be some bad inventory or high valued inventory ( the cost may be less )