PI Industries - Superior Business Model

[Dev_S]

Valid points @Worldlywiseinvestors , adding some more pointers/inferences from management interactions thus far

@Worldlywiseinvestors

My only Pushback against their Pharma vertical:

1. Take any other company, whether its Navin, Neuland, Laurus etc. It takes time to seed the cdmo business in pharma. Navin took nearly a decade inspite of acquiring Manchester organics early in 2011.

Does size, capabilities scale , credentials matter and help expedite journey? Neuland and Laurus ( few years back) were relatively smaller when incubating CDMO - it was all organic and thus no of years and yet to show a sizable consistent performance.
Also PI will likely have four phases broadly speaking

• 1. BUY asset and transition,
• 2. STABILIZE and build/enhance CDMO for generics.
• 3. SCALE and cost leadership and marketshare molecule wise
• 4. INNOVATION driven value chain unmove with innovators, patented molecule etc

Each of it 1- 2 years depending on execution so yes a journey but given PI has traversed value chain for molecules in Agchem in last decade, with learnings can do in shorter span for pharma(pace to be seen). Once they are past 1&2 stage , has potential to go Divis path given science capabilities.

Also CDMO as sector itself is more fertile now compared to earlier, growing and has tailwinds, believe smart latecomers with size and credentials may benefit from shorter curve IMO.

2. Seems journey will start by being a generics focused api player and eventually go towards the higher margin business. One has to taper the expectations of a fast scale up in the latter, given pipeline takes time to scale up and eventually deliver.

Agreed, identity will be Generics API for good initial part of journey of few years - lower margin around 20%+ and decent growth , Given it will be a phased approach, which we expect PI to share in due course ( confidence builds up with the fact that they have intermediate under validation and commercial ready - thus Organically in a ready state as soon as asset comes in) - point being team, GTM strategy, molecule are somewhat in place - production asset is what they are after.

3. Acquiring a Pharma asset is to mainly get access to customers. PI has strong relationships within agri but it is yet to be seen whether they can do it in Pharma or not. They scaled up Agri CDMO at a time when other competitors weren’t interested in the business due to various reasons (eg:- Rallis focusing on formulations etc). They might find it challenging to scale Pharma cdmo.

Views: invested and contemplating.

This one is tricky definitely as relationships and customer acquisition has no shortcuts - unless there is a way to cross leverage current customer base - which doesn’t seem to be the case though credentials will help.
A logical assumption would be evaluating synergy during acquisition on due diligence of asset ( customer quality, molecule capabilities, cdmo potential of acquired customer base, and so on) - this one is a leap of faith on mgmt track record such as Isagro acquisition turn around etc, though bit shaken at moment given abrupt Indswift deal fall out, hopefully wiser with that.

We will get answers to these in near future, though thesis could be long term, wise to keep an eye on pharma asset play and sector dynamics in short term to revisit if needed.