Spray and grow rich!
Hi Guys
PI Industries Management Q&A revised and updated in full, after a concall today.
You may be interested especially to check out the answers on additional questions on ECB loan forex liabilities, Co-branded vs In-licensed innovative molecusles, and those marked TBD (missed asking these on 21 Nov).
Now, where are the natural skeptics? There seems to be a dearth of them suddenly!
Biju, Siddharth, Ninad, Neeraj - show us the holes???
Rgds
Donald
Some comments rather than questions:
Overall - the company has a differentiated business model.
While the agri -inputs business is a decent business itâs the CSM side -where the companyâs business model may shine.
On the agri-input side: Itâs not easy for a new comer to come and build the breadth of network, channels, reputation in a short while. However, there is competition from established local players. Continuously building a portfolio of good products (through in-licensing) will be the key to monitor.
The key risks in the agri-input business: dependency on the weather (impacting quarterly sales), competition (impacting margins) & changing products (impacts ability to deliver smooth numbers).
On the **CSM **side it will not be easy to build a creditable business for a new comer â i.e. build a strong customer base with long term contracts. Management network, early investments, reputation, existing contracts based on trust & results are key strengths. The companyâs chemistry skills, manufacturing and process improvement skills are key differentiators.
The key risks in the CSM side of the business: long gestation period, capital intensive in nature, dependency on MNC & their growth plans & potential dilution in the future.
Overall it seems to answer mostly âyesâ to the following questions:
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Is it a good business? (high roe, margins, demand)
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Is the business sustainable? (over 5-10 years)
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Is the business scalable?
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Is the business model differentiated i.e. with a moat?
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Does the company have quality management?
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Can management reinvest at high ROE?
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Does the company have a good balance sheet? (Itâs not squeaky clean because of the debt part)
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Is it available at reasonable valuations?
Thanks DeepInsight.
Great insightful summary. Its a pleasure to have senior folks like you enriching the efforts and energy that ValuePickr collaborative team brings in in-depth study. Hope we can get you to participate more frequently;)
The discussion is moving in the direction of - what is your Conviction Rating (CR) and Valuation Rating (VR) on PI on a scale of 10.
In current conditions, I am finding it tough to prop up another worthy contender against PI in the small & midcap space. The scope of the opportunity before PI and with it its (potential) ability to scale-up (business model, moat, BS, Mgmt) looks unparalleled.
I can’t honestly throw up an equally promising, or better candidate. Can you? Anyone??
Thanks DeepInsight.
Donald: I am positive on PI Industries for the immediate future - but I honestly cannot predict how the longer term looks like (after say 2-3 years).
We will have to wait for a few quarters/years to see if it turns out to be good investment or if it turns into an outstanding investment. The difference (between good to outstanding) is quite material for our own returns.
If the company keepsstrengtheningits business model & keeps on delivering on key parameters without making serious mistakes - it will be a real pleasure to see this unfold as vested partners.
Hi Donald,
Promising candidates are many thanks to the market correction but an equally promising candidate like PI and that too of the scale and safety that PI offers are rare.
On the rating scale of 10, below are my Conviction Rating (CR) and Valuation Rating (VR) for PI in the present scenario :
Conviction Rating (CR) – 9 out of 10
Valuation Rating (VR) – 7 out of 10.
Rgds.
keepsstrengtheningits
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Hi deepinsight,
Agree with you but with each passing quarter as the company keeps on meeting the expectations, its commanded valuation will rise and once FY12 is (positively) through, the commanded valuations should atleast rise to 15 forward p/e multiple in line with promising midcaps.
Rgds.
Salil Singhal interview on NDTV Profit:http://www.ndtv.com/video/player/news/pi-industries-looking-to-outsource-fine-chemical-manufacturing/217292
Rgds.
Thanks Manish. Nice to hear the Chairman speak on the company’s strengths.
Latest report on P.I.Industries by IDFC. Mahesh, Donald, Hitesh Bhai would like your views.
Rgds,
Manish.
PI-Industries-Nov11.pdf (28.2 KB)
The above file is not able to download, hence providing another LINK:
Some of my own perspectives:
1). If I am to assume that the given business conditions will stay as it is[growth economics I mean], then where is the moat of the company?
)- the moat in my opinion comes from a very strong working relationship with global majors. How robust this moat is, is anyone’s guess, but I can hazard my neck out, and say, that human behaviour works and feels comfortable with the known more than the unknown. So until unless a company comes forward and puts a proposition which is extensively win win for global majors, the cost of switching looks low enough.
)- the second moat is, I feel the strong molecule pipeline it has. Itsmonetizing a molecule every 2-3 months[if I am not wrong], so this can improve the defences of this company.
2). Any high growth company with good business economics is at the most risk of disruptions and competitions. Given the business P I Industries is in, the basic threat to this company comes from the GM crops. Management has allayed the fear over GM crops to a huge extent[atleast mine personally], but as they say, “Never say never”. We dont know what challenge is lurking, and its possible that something totally different and unthought of can challenge its existence.
3). Incentives: P I Industries face two major situations in front of it, which I dont think, is being thought of well by possible investors. Ironically, there is a bull story as well as bear story to each of the situations.
This winter session ,the pet bill of NAC- Food Security Bill is going to be passed. This is nothing but a death knell to the individual farmers, not today, not tomorrow but over a long haul[and ironically this long haul need not be that long at all]. Providing cheap products when a private sector does is called predatory pricing, but when government does its passed on as social work. But we are not seeing the tremendous amount of incentive misalignation which will take place for individual farmers. When the prices are kept artificially low, the very incentive to produce the same product decreases exponentially. Government’s need to support its poors, byselling ever increasing amount of foodstock at low prices will create a fiscal deficit[which will directly impact the level of $$ spent on agri-infra] and indirectly create a pressure on procurers to procure the same foodstock for ever low prices. This will in turn skew the economics of farming[ adding to already what it is]. So when the economics get skewed, a farmer will make even less incremental investment to improve production. Negative for P I Industries
The positive policy action, which at all if passes is FDI in retail. Well, looks like only the retail shopkeepers are going to get helped or harmed, but if it passes then the biggest beneficiary will be the food producer, cutting the middlemen and incentivising agricultural quality, thus helping production. Positive for P I Industries.
My hunch is FSB will have to be shelved after 3-4 years of its existence, but I am afraid if by then it will be too late.
Last but not the least, Growth drivers are going to come from, an increasing trend towards more free-er agriculture and growing population.
Soham
Soham,
Nice food for thought:)
a) I wanted to be clear - you meant low cost of switching, or high cost of switching? meaning Moat exists, or doesn’t? And I am assuming you refer to the CSM business
b) Monetising molecules - if you refer to Agri - their pipeline is 7-8 innovatives for which they have signed agreements with MNCs. Their outlook is launching 1 such molecule a year. FY12 has so far not seen any innovative molecule launched. 1 may get launched by FY12 end or early FY13. Co-branding molecules, they may be able to launch 2-3 a year as already seen in FY12.
If you refer to CSM< )- only 1 new molecule in FY12. All growth coming from ramp up in production for existing molecules
No one can predict the long-term these days. But a 2-3 year visibility is good enough for most of us to invest in.
On that basis would you say PI has enough visibility both on the Agri & CSM segments. Do you see the company scaling up to grab the opportunities before it in these 2-3 years? Do you see anyone -competition/other market forces dislodging the company from its position of strength today? and do you see enough management BW to handle challenges before it?
Apart from the FSB - can we see anything else spoiling the party? What can go wrong??
-Donald
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)- Itsmonetizing
In addition to these, you are missingthree points Soham, first, its an asset-heavy business with returns of 2-2.5 times asset… hence, no entrant will risk spending huge capex on building assets without firm coomitments of orders and for such firm commitments the innovator cos. need track record… so, its a viscious circle which makes entry barriers to CSM business quite high…
Second point is the focus on patented molecules with nil contribution from generics (in CSM) which is a model that can’r get replicated by any indian company as it requires years and years of trust building… Also, the positive of this model is that PI is the critical supplier so if anything goes wrong with regards to delivery execution innovators are huge sufferers as they spend billions of $ for patented campaigns and hence they ensure and in turn assist in any hiccups on the way…
Thirdly, the huge distribution network that PI has built over last many decades which can’t be built in few years and so PI will be huge beneficiary of rise in consumption of agrochemicals which is lowest in India (even lower than pakistan)… hence, entry barriers for this space are also high which insulates PI somewhat from competition.
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Yes… you are partially right on this front and this is true for any company and not specifically PI… But, with rgds. to GM crops, i think management is right in his saying and based on my analysis, I personally don’t think such unexpected negative can come from GM crops.
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3). byselling
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India has to produce more to satisfy its ever increasing population and no specific bill or legislation that is posing hindrance to rising production will ultimately be modified as a falling food production is not only detrimental to India but to the world and developed world will not allow this to happen…
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FDI looks far away but even with it coming… there will not be immediate improvement in production as first focus will be on reducing wastage which is extremely high at more than 40 %… Yes middlemen elimination will benefit consumers i.e. us hugely but not the farmers per se as they will not get much higher price than they are getting right now as MNCs want scale and for that they need to pass on entire benefits to consumers… However, FDI in retail will be overall beneficial to innovative cos. like PI.
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Overall story for Pi is the foundation the company has built over last decade starting bearing fruits and FY13 will be crucial decider in this journey… So far all ingredients point to a great story ahead…
Rgds.
Have seen this. It only re-inforces our findings. Nothing notable that I remember from the Note that is any significant addition…save some outsourcing trends to lend credence.
-Donald
Link: http://www.mediafire.com/?hdgw02ynvdh0382 http://www.mediafire.com/?hdgw02ynvdh0382 Link: http://www.mediafire.com/?hdgw02ynvdh0382
Foodsecuritybill, even if it is passed, will not make any meaningful difference. It will be similar to the right to education bill. The govt neither has the funds nor the manpower to implement such schemes on the ground. So, they end up being enablinglegislationsat best.
@Mahesh Shah
A moat is as strong as the person attacking it is weak. In other words, the strength of moat is not decided by, if 100 people are breach it or not, but even if 1 person is able to breach it, its weak.
Moats quality is defined as “if I had enormous amount of money at hand, will I be able to create a dent ?” To believe that P I Industries is saved by high asset turnover, is essentially bs- what if I had 100bn $ at my disposal armed with a truly disruptive business model (and if you think, I need not really even compete with it directly- Google’s Android has rendered Nokia’s mobiles useless in India. Nobody could have thought about it 5 years back, but it has happened. A Search Company has rendered a Mobile Company’s cash cow useless. Need more? Even 6 years back, Bollywood never thought it will have to face meaningful competition from Cricket But now, IPL and Bollywood both offer entertainment- in packs of 3 hours. People can walk in, get entertained for 3 hours and walk out)
So P I Industries’ advantage is not high amount of fixed asset sweating. Microsoft had infinite FA turnover, still its struggling to find relevance.
Its advantage P I for now, as the cost of switching for any external client is high. Added with it the good “Reach”.
Mahesh- one thing we should remember, physical growth need not mean share price growth- our mobile subscription base has grown the fastest in Asia, yet take a look at the amount of value destruction which has taken place for RCOM- and it has put forward good amount of subscribers addition.So to quote we have an “excess market capacity” is a good necessity, but doesnt rank that high in my list, purely because the nature of markets can change with time.
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India has to produce more to satisfy its ever increasing population and no specific bill or legislation that is posing hindrance to rising production will ultimately be modified as a falling food production is not only detrimental to India but to the world and developed world will not allow this to happen…
What you mentioned is neither a news, nor something material. The very fact that FSB is going to be passed flies straight on its face. To believe that a bunch of resolute politicians who are threatened with credibility of lack of policymaking will not resort to passing harebrained policies, is daydreaming at worst and wishing at best.
Its happening, just as MNREGA happened. To think one step ahead is the only weapon we have.
I am still not sure, what this point of yours intends to convey- but to think in terms of “India can’t afford, India should do” etc is pure bunkum as people’s actions are moved by their incentives and incentives are aligned by policymaking.
Today, we dont have 7 star hotels in India, purely because government has made hotelling business as one involved in endless red tapism and licensing. So if you increase the risks in a business, you attract less competition. And thus less quality. Just as an example.
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If you think FDI is far fetched, then well, I cant contend it, except for the fact, that P I loses a growth driver.
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My criticality shouldnt be mistaken as a mark of bearishness(well you can, but there is no point)- but my job is to think for myself and think ahead so that I fully know what I am getting into before wading into the water. Howmuchever the short term stories look sexy, I dont give a damn about it. Realty and Power also had beautiful fairy tales going for them
Soham
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we have been discussing PI based on research reports/management interactions etc,i liked peter lynch’s book one up on wall street,where he picks up stocks based on his experiece with the product/services the company offers,im not sure if any of us is into the agri field here,if there is somebody here who could give a view or if there is a way we could interact with customers/retailers selling their products.Maybe the fmcg/consumer goods sector/banks are easier picks as we see/experience the services /products on a daily basis
Hi Soham,
I think my counter points to your posting are taken in wrong spirit by you… They were just meant to highlight the other side of coin that your posting was missing…
On FA front, I was just highlighting the fact that the entry barriers for tough competition to arise are high which gives credence to the medium-term positive outlook for CSM segment for which almost doubling of capacity is coming up…
On FSB, I was just pointing to the fact that if anyone thinks that except weather, something else like legislation/bill can reduce the production of food-inputs then its impossible as India with such huge population will not afford as well as allow to do so as otherwise we will have sky-rocketing prices of the basic necessity which will immediately oust the ruling govt. and bring sanity…
We are talking about the medium-to-long-term story here which is not immune to temporary shocks but such temporary shocks are not visibly offering any threat to medium to long term story.
One needs to be aware of the realty that the entry barriers to both the operational segments of PI are quite high and its just a case of a business starting bearing fruits after a long gestation period… I was just trying to make this point in my reply to yours which was otherwise missing.
Rgds.
@Mahesh Shah
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