PI Industries - Superior Business Model

PI Ind.'s Q4FY13 results scheduled to be declared next week on 18th May 2013...Providing below my estimates....



Q4FY13e

Q4FY12




Revenue


Agri-Inputs

CSM

308 â 320


116-122

192-198

241


105

136




EBITDA

52.5 â 54.7

37.3




PAT

28.3 â 30.1

21.78







FY13e

FY12




Revenue


Agri-Inputs

CSM

1126 â 1138


564-570

562-568

877


503

374




EBITDA

190.75 â 192.95

147.85




Pure PAT

( without Exceptional One-time Gains )

101.55 â 103.35

77.92





Q4 Results out…

Top line ahead of estimates at 330 cr.

Ebitda below estimates at 44 cr. probably because of shift towards generics in domestic agri input markets

Pat at 23.09 cr.

Press release is awaited…breakup between Csm & Agri will be key monitorable

Management’s commentary in the concall especially with Rgds. to guidance of Fy14 will be very important.

Maintain my positive view on the stock.

Rgds.

stock correcting today on the back of subdued margin performance in q4…press release and concall should clear the concern…

added some qty. today at 127…

Rgds.

Citigroup buys further 0.06 % stake (~77,000 shares) in PI Industries on 16th May 2013 at ~INR 133 (16 % premium to its previous avg. holding rate) to take its stake above 5 % to 5.04 %.

http://www.bseindia.com/xml-data/corpfiling/AttachHis/PI_Industries_Ltd_200513_SAST.pdf

Rgds.

Press Release out…

http://www.piindustries.com/sites/default/files/Press%20Release%20FY%20March%2013.pdf

Rgds.

Description: Description: cid:50F97F70C48C422788980AB5CC4BE714@CDR.COM

Inspired by Science

Details of PI Industries Q4 & FY2013 conference call

Wednesday, May 22, 2013 at 01:00 pm IST



Gurgaon, Monday, May 20, 2013:

The management team of PI Industries â one of Indiaâs leading Agri-input and Custom Synthesis companies, will participate in a conference call for analysts and investors on Wednesday, May 22, 2013 at 01:00 pm IST.

The call will commence with a brief management discussion on the Q4 & FY2013 performance followed by an interactive Question & Answer session.

Mr. Mayank Singhal, Managing Director & Group CEO and Mr. Rajnish Sarna, Executive Director, PI Industries Limited, will represent the management team on the conference call.

Details of the conference call are as follows:

Timing

:

01:00 pm IST on Wednesday, May 22, 2013

Conference dial-in Primary number

:

+91 22 3065 0122/ +91 22 6629 0309

India Local access Number

:

6000 1221 / 3940 3977 (Accessible from all major carriers except BSNL/MTNL)

Hong Kong Local Access Number

:

800 964 448

Singapore Local Access Number

:

800 101 2045

UK Local Access Number

:

0 808 101 1573

USA Local Access Number

:

1 866 746 2133

Reading between the lines from Press Release issued :

(1) CSM revenues for Q4FY13 at ~220 cr. a YoY increase of 61.7 %

(2) Agri-Input revenues for Q4FY13 at ~110 cr. a YoY increase of 4.7 %.

(3) For FY13 CSM revenues at ~590 cr. a YoY increase of 58 %

(4) For FY13 Agri-Input revenues at ~560 cr. a YoY increase of 11 %

(5) Main reason cited for subdued margins is initial operational costs of new CSM Jambusar facility wherein capacity utilisation is low in initial phase.

View post Press Release…

For the first time, CSM revenues have surpassed Agri-input revenues on a yearly basis which insulates PI from domestic weather gyrations and enables it to command a valuation in-line with established CSM players rather than pure crop-protection players…

It will be interesting to note in the concall the contribution of Jambusar facility to CSM revenues in Q4FY13 as it will clear the picture of subdued margins to a great extent. It is a natural phenomenon observed when such mega plants are set-up which house 5 times the current manufacturing capacity to affect margins in their initial phase of operation. However, I believe, apart from this, downtrading in domestic agri-input segment has also played a role in affecting the margins to a great extent.

Q1FY13 should be very good as far as margins are concerned as majority of high-margin Nominee sales happen in Q1 and that is the reason why Q1 has historically been the best margin-performance quarter for PI.

Management guidance for FY14, especially for CSM segment, will be key monitorable. Anything above 25 % YoY for CSM will be great as FY14 will have dual benefits â first, because of improving utilisation at new facility, costs will rationalise which will improve EBITDA margins, – and, second, because of Tax benefits of contribution from new Jambusar facility, PAT margins will significantly improve.

Will update of more details post concall tomorrow.

Rgds.

Key Takeaways from PI Industries concal held today :

(1) For Q4FY13, Agri-Input revenues stood at 105 cr. a flat YoY performance. For FY13, Agri- Input revenues stood at 553 cr., a YoY growth of 9.95 %.

(2) For Q4FY13, CSM revenues stood at 225 cr. a YoY growth of 65.4 %. For FY13, CSM revenues stood at 595 cr., a YoY growth of 59.09 %.

(3) Jambusar facility contributed only 15 cr. to Q4FY13 revenues and is expected to contribute ~100 cr. in revenues in FY14.

(4) Company has guided for a 25 % YoY growth for its CSM segment and 20 % YoY growth for Agri- Input segment for FY14.

(5) Management has the visibility of atleast 25-30 % yearly growth in CSM segment for the next 3 years based on only the current order book.

(6) EBITDA margins for Q4FY13 took a hit of ~265 basis points because of ‘starting-up’ expenses of Jambusar facility which commenced commercial production in January’2013. These expenses are projected to rationalise in FY14 with rising contribution from Jambusar facility to company’s total revenues.

(7) For FY14, management is confident of a 100-125 basis points improvement in consolidated EBITDA margins.

(8) CSM Order-book at the end of FY13 is at USD 305 mn.

(9) Company is planning to implement the second phase at Jambusar facility by December’2013 for which negotiations with a global innovator are at an advanced stage.

(10) Company is planning a CAPEX of 100 cr. in FY14 which will be met completely by internal accruals. This CAPEX includes CAPEX towards second phase at Jambusar facility.

(11) Company retired ~30-35 cr. high cost debt in Q4FY13 out of the proceeds received from 117 cr. QIP issue raised during February’2013.

(12) Inlicensed products contributed ~50 % to the domestic Agri-Input revenues in FY13 up from 40 % in FY12.

(13) Company is planning to launch one novel insecticide and one broad-spectrum fungicide in domestic Agri-Input space during 2HFY14.

View post Concall :


Jambusar facility, which turned out only half of the anticipated revenues, was the main culprit of lower EBITDA margins during Q4FY13. The second reason was ~300-350 basis points overall degrowth in yearly margins in domestic Agri-Input space during FY13 (our ground checks had already indicated this fact) because of bad monsoons. Both these factors should recede to a great extent in FY14 as ~100 cr. revenue (lower than our anticipated 120 cr.) from Jambusar facility should take care of the associated costs as well as a likely better monsoon this year should bring back the margins in domestic Agri-Input space.



Even with such dismal turnout from Jambusar facility, to our surprise, CSM segment recorded robust growth of ~65 % on YoY basis in Q4FY13 which is very comforting and signifies that committed deliveries that were likely to be deilivered from Jambusar facility are delivered intime from Panoli plant which augurs well for the future of CSM segment. Once Jambusar facility stabilises by Q2FY14, this should mean a consistent higher quarterly run-rate from CSM segment for PI.



For the first time since inception, CSM segment revenues surpassed Agri-Input segment (595 cr. from CSM v/s 553 cr. from Agri-Input). This is a very healthy sign as barring temporary hiccups like Jambusar-commercialisation costs, margin scenario for CSM should be robust starting 2HFY14 as delivery assignments are all patented molecules. Hence, management's projection of 100-125 basis points improvement in consolidated (blended) EBITDA margins in FY14 is prudent and on a conservative side.



Provided the monsoons turn out good, management has projected a 20 % growth in domestic Agri-Input space during FY14. We feel its better to be conservative and assume an easily reachable 12-15 % growth in Agri-Input segment with slightly better margins as margins are unlikely to scale-up fast because of losses suffered by farmers last year.



Hence, on a consolidated basis, we expect PI Ind. to end FY14 with CSM revenues at 750 cr. and Agri-Input revenues at 630 cr. translating to a consolidated revenue figure of 1380 cr.. We expect PI's consolidated FY14 EBITDA margins at minimum 16.8 % which translates to EBITDA of 232 cr.. After adjusting for higher depreciation costs because of new Jambusar facility and stable finance costs with 30 % Tax Rate, PAT for FY14 should stand at minimum 129 cr. which translates into an EPS of 9.51.



If we extrapolate further onto FY15, then, PI's CSM revenues should stand at minimum 960 cr. (assuming nil revenues from second phase of Jambusar facility which is likely to be commissioned by 1HFY15) while PI's Agri-Input revenues should stand at minimum 710 cr. (assuming most conservative 10-12 % growth even for FY15). Hence, consolidated revenues for PI in FY15 should come at minimum 1670 cr. with atleast 17.5 % EBITDA margins meaning an EBITDA of 292 cr.. After adjusting for depreciation, finance costs and assuming flat 30 % Tax Rate (without incorporating much benefit of Tax Holiday of Jambusar facility), PAT for FY15 should come at 170 cr. translating into an EPS of 12.55 as there is not likely to be any equity dilution till FY15.





FY14e

FY15e




Revenue


Agri-Inputs

CSM

1380


630

750

1670


710

960




EBITDA

232

292




PAT

129

170





EPS

9.51

12.55




Now comes the crucial aspect â the Valuations â at which PI Ind. is trading at present which could determine whether its prudent to Hold on to our holdings, Add on to our Holdings or Exit from our Holdings in PI at current market price (CMP). CMP assumed here is INR 125 and based on it the crucial valuation parameters are provided below :




FY14e

FY15e




Price-to-Earning

(P/E)

13.14

9.96




EV/Sales

1.35

1.11




EV/EBITDA

8.03

6.38




Mcap/Sales

1.22

1.01






At a price of 125 a share, PI Ind. is trading at one of historically lowest traded multiples. Hence, Exit is completely out of question. Now, comes the second possibility of Hold â a definite Yes as a shareholder of PI having invested in the company from a long term point of view current rate is not atall a right price to Sell the current holding when the company is on verge of entering into its significant phase of growth. Lastly, the possibility of Add on to the current holding at CMP â a Safe strategy on SIP basis as the company is likely to move on to higher and higher trading range after passing of each quarterly results.



Although we always respect the markets and feel market forces are wisest to assign right valuations to any stock at any particular point of time -- but -- aberrations happen in case of thinly traded shares and that is what is happening to PI Ind. at present. Because of lower than anticipated one quarter margin performance and significant rise in relative free (public) float because of split in face value from INR 5 to INR 1, the share price is facing undue pressure which has made the current valuations an attractive investment proposition. Once the current selling lot is absorbed, PI should soon stabilise in a trading range of 132-140 before declaration of Q1FY14 results post which new trading range can be arrived at.




Quant Capital PI Industries Q4FY13 Update :

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PI Industries: normal Monsoon and strong CSM pipeline to drive earnings growth; reiterate BUY____

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(PI IN, BUY, CMP: Rs124, PT: Rs153)____

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â** PI Industries (PI IN) reported an adjusted PAT of Rs205 mn (Consensus: Rs283 mn, quant: Rs256 mn), flat y-y, given domestic margin pressures and under absorption of costs in the recently commissioned Jambusar facility.____**

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â** Revenue was higher than expectations at Rs3.3 bn, up 40% y-y, driven by a 68% y-y growth in custom synthesis (CSM) exports.____**

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â** EBITDA margin declined 340bp y-y to 12.5%, given a muted demand environment for domestic agrochemicals and higher fixed cost for Jambusar.____**

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â** We reduce our EPS by 2% and 4% for FY14E and FY15E, respectively, to factor in lower contribution from the high margin CSM business and strong Monsoon-led growth in the domestic business. ____**

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â** We reiterate our BUY rating but lower our PT to Rs153 from Rs159 based on 12x (unchanged) FY15E earnings. ____**

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CSM growth of 68% y-y drives overall revenue growth of 40% y-y: CSM maintained strong revenue traction in 4Q, with the company ramping up 14 commercialized products in the CSM segment in addition to one product added from the Jambusar SEZ. The domestic business saw a muted performance, with volume under pressure across the industry. With an orderboook of US$305 mn in CSM, 25 products in pipeline and Jambusar capacity to ramp up with 1-2 product additions in FY14, we expect a 23% revenue CAGR in CSM over FY13-15E after a 58% y-y rise in FY13. In the domestic business, a good Monsoon and strong response to four launches in FY13 is expected to drive a 18% revenue CAGR over FY13-15E after rising 11% y-y in FY13.____

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Higher fixed cost of the Jambusar plant and weak domestic demand drive 340bp y-y margin decline: EBITDA losses of Rs90 mn from the Jambusar capacity commissioned in January 2013 in addition to a 300bp y-y decline in domestic margin due to poor demand conditions led to a 340bp y-y margin fall to 12.5%. Other income was higher while interest cost was lower, given repayment of Rs350 mn of high cost debt using the QIP proceeds of Rs1.2 bn recently. But we expect margin to improve by 150bp over FY13-15E, driven by higher utilization of the Jambusar plant in the CSM space, a better sales mix in the domestic business in addition to the recent price hikes taken to pass on cost increases in FY13. ____

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**Balance sheet to remain strong despite aggressive capex: **PI is looking to expand aggressively with an annual capex of Rs1 bn, primarily on setting up additional units in Jambusar with an expected asset turnover of 2-2.5x. It has also negotiated with suppliers for better credit terms to improve its WC cycle, resulting in better cash generation. We expect a gradual increase in ROCE from 24.7% in FY13 to 27.5% in FY15E, given FCF generation of Rs1.1 bn over FY14-15E. ____

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**Valuation: **We reiterate our BUY rating but lower our PT to Rs153 from Rs159 based on 12x (unchanged) FY15E earnings. We like the stock, given improving growth visibility in the CSM space, strong product pipeline in domestic agrochemicals and expected margin expansion after the Jambusar capacity expansion. ____

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**Risks: **Adverse weather conditions, slower-than-expected adoption of new molecules, competition from pharmaceutical CRAMS firms and significant currency fluctuations remain key risks to our call and estimates.____

Edelweiss Q4FY13 Update on PI Industries

Maintains Buy with a Price Target of Rs. 160

PI Industries (PI) reported robust sales growth of 40.4% YoY, driven by

custom synthesis business. However, EBITDA margin stood at 12.5% vs.

expected 16.6% primarily on account of under-absorption of cost in the

newly commissioned Jambusar plant and a change in product mix of

domestic agri business. The company guided for 20% and 25% YoY

growth in domestic agri and custom synthesis businesses respectively

along with improvement in EBITDA margin by 100-150bps YoY during

FY14. Custom synthesis business is expected to show strong growth on

the back of a robust order book and commissioning of Jambusar plant.

Maintain âBUYâ.

Custom synthesis drives growth

During Q4FY13, PIâs sales grew 40.4% YoY primarily on account of ~70% YoY growth in

custom synthesis business. However, domestic agri business reported flat growth on

YoY basis, impacted by adverse market conditions. The newly commissioned Jambusar

plant contributed ~INR150mn to top line. EBITDA margin fell 340bps YoY to 12.5%.

Under-absorption of cost in Jambusar plant led to a negative impact of INR90-95mn in

EBITDA (margin impact ~300bps). Adjusted PAT stood at INR0.21bn vs. estimated

INR0.29bn. PIâs forex gain was INR37mn (net of taxâINR26mn). Hence, reported PAT

stood at INR0.23bn.

Key highlights

â Custom synthesis order book stood at USD305mn as on March 31, 2013.

â PI is expected to launch up to two products in domestic agri business in FY14.

â Jambusar plant is expected to have sales of INR1bn in FY14 (FY13 â INR0.2bn)

Outlook and valuations: Positive; maintain âBUYâ

We are positive on PIâs long term outlook due to a strong visibility in custom synthesis

order book and a robust pipeline of in-licensed products. However, we cut our

FY14E/FY15E EPS estimates by ~15%/~10% to factor in lower growth rate for custom

synthesis business and overall EBITDA margin in line with PIâs guidance. Maintain âBUYâ

with a target price of INR160 based on 12xFY15E EPS (factoring in discount to Rallis

India which is trading at ~13x FY15E EPS and we are valuing it at 15xFY15E EPS)

Nirmal Bang Q4FY13 Update on PI Industries :

Temporary Hitch! Long term Outlook Positive

On the face of the results looks much below expectations as PI Industries Limited (PIIL) reported EBITDA margins of 12.5% for Q4FY13 as compared to our expectations of 17.6%. However, Q4 included one-time expense of commencement of Jambusar Plant with skewed the margins (~10 cr extra other expenses and other depreciation). The company reported sales of Rs 331 cr (against our expectation of Rs 283 cr), driven by volume growth in CSM business which grew by 72% yoy.

For FY13 sales grew by 31% and EBITDA by 23.4%

Key Highlights

ï CSM: The Company expects growth of 25% in FY14 where in Jambusar plant is expected to contribute around Rs 100 cr of revenues (it contributed Rs 15 cr in Q4FY13). It has commercialized 14 products till now and expects to launch 1-2 more products in FY14. It has a pipeline of 25-27 products (average success rate is 40-45%). Current Order book of CSM stands at $305 mn. The company is under negotiation with a customer for commercialization of another product. If the deal goes through, then the company would set up second plant at Jambusar by end of FY14. Total capex spent on Jambusar is Rs 175 cr of which Rs 85-90 cr includes for common infrastructure and rest on first plant.

ï Agri: PI industries expects strong growth of 20% in agri business in FY14 on back of good monsoon and launch of two new products (including one 9(3)). Management expects increase in margins on back of favorable product mix in domestic business.

Full FY14 and FY15, the company expects to spend Rs 100 cr on capex.

Overall the company is expected to grow at 20-25% with 125-150 bps improvement in margins.

Valuation & Recommendation

We believe that with macro factors like low per-capita pesticides consumption in the country, increasing MSPs and increasing acceptance for the need of crop protection products make PI Industries a good long term bet while healthy order book of CSM, strong balance sheet and new product launches in Agri Input segment will drive near to medium term growth. At CMP, the stock trades at 12.1x FY14E and 8.6x FY15E. We maintain our BUY rating on the stock with price target of Rs 154 (15x on FY14E EPS)

Philip Capital Quarterly Update on PI :

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_PI_Ind_Q4FY13_Result_-_May_2013_20130529160050.pdf

Results in line:

PI Industries Q4FY13 results have been in line. After adjusting for un-absorption of cost at Jambusar plant (non-recurring) EBIDTA is almost in line with our estimates at Rs 492 mn. Higher growth in custom synthesis business overshadowed weak domestic agrochem business. Domestic agrochem business revenues degrew by about 1.2% in Q4; but however custom synthesis business revenues grew a strong 72% yoy and accounted for 60% of total revenues. EBIDTA margins yoy & qoq have declined by 122 bps & 87 bps respectively as a result of higher other which has gone up both yoy & qoq by 28% & 2.6% respectively. Although, PAT margins are down yoy by 18 pbs, it has risen by 63 bps qoq mainly due to rise in other income by 91% and fall in interest expenses qoq by 34% to Rs 47 mn, as company replaced the high cost debt with low cost debt____

CSM excels while domestic business suffers:

Led by good response for the commercialized products under CSM business, this segment revenues improved 72% yoy to Rs 2.25 bn, while for FY14E it is expected to improve by ~25% (as guide by management) on the back of potential of recently commercialized products and ramping of Jambusar plant. The revenues from domestic agrochem business in the weak demand environment degrew 1.2% yoy, while it is expected to grow ~20% for FY14E (also to be helped by favorable monsoon). Despite pressure from domestic agrochem business Adj. Ebitda yoy grew by ~31% to Rs 492 mn (+2% to our estimates) as a result of improved CSM business performance. Rise in depreciation cost negated the fall in interest cost following the Dahej capacity commissioning. Adj. PAT grew 38% yoy to Rs 300 mn, adjusted for forex gain of Rs 37 mn & non recurring loss at Jambusar of Rs 95 mn adj which has been above our and street estimate of Rs 280 mn.____

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Key takeways of the Q4FY13 concall____

  1. Jambusar facility added Rs ~150 mn to Q4FY13 revenues and going by the guidance this could account Rs ~1 bn to overall revenues up 2) Under absorption of cost to the tune of Rs 95 mn (non recurring) at Jambusar plant and unfavorable dynamics for domestic agrochem business led to lower margins 3) The custom synthesis business order book stands at USD ~305 mn, co., intends to launch 2-3 products and a ramp up of the same could happen over the next 2-3 years. Expects margins for this business to expand by ~150 bps to ~17.5%, mainly attributed to ramp up in capacity of Jambusar plant 4) Management have guided for ~25% & ~20% growth for custom synthesis & domestic agrochem business for FY14, 5) Jambusar plant is currently producing 1 product and it is expected to add 2nd product in near future 6) The FY14 guidance for Agrochem domestic business stands at ~20% provided better monsoon, also they are looking to launch two products in rabi season of current fiscal 7) Gross debt stands at Rs 1.87 bn ( Long term- Rs 0.85 bn, Short term Rs 1.02 bn), overall interest cost have lowered down due to repayment of high cost debt____

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**Valuation & Target Price:**Backed by better product mix in agrochemicals and a strong order book (USD 305 mn) in custom synthesis business offers better prospects, we expect earnings to compound by 32% during FY13-FY15E. On FY14E the stock is trading at undemanding PER of 12x, we value the fair PT at Rs 150 (15x FY14E EPS of Rs 10). Tweak estimates somewhat, maintain Buy.

As per sources close to the management, Mr. Kikkeri Divakar, a veteran Research Scientist, who was instrumental in setting up Syngenta’s R&T Centre in Goa and who uptill now was director, Research of Syngenta India has joined PI Ind. to channelise PI’s CSM segment’s next phase of growth…This is a good sign as Mr. Divakar enjoys a great reputation across varied communities and has deep contacts with MNC innovators which could prove instrumental in clinching big deals for PI’s CSM segment.

Rgds…

Paddy sowing sees a spurt across the country

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MET says eastern and southern regions which produce more than 80% of the country’s annual produce is expected to get normal rains

As the southwestmonsoonmakes stupendous progress across large parts of the country, reaching most areas a week to 10 days ahead of schedule, thesowingofpaddy, the most important foodgrain grown during the kharif season, has started on a brisk note.

According to the latest data by the department of agriculture, paddy had been sown in 0.79 million hectares till

June 13, just 1.25 per cent less than last year. According to experts, the pace of sowing will pick up as the monsoon advances over the remaining parts of the country. Till June 14, almost two-thirds of the country had been covered by the monsoon and the rest is expected to be covered by the end of June. July is the most important month for sowing of kharif crops and according to the latest prediction of the India Metereological Department, rains in July are expected to be normal.

aThough these are very early days and the major thrust in sowing will come around July, the initial signs are very encouraging,a a senior official from the department of agriculture said.

The Secretary of the Consortium of Indian Farmers Associations (Cifa), P Chengal Reddy said there was every possibility India might harvest 100 million tonnes ofricein 2013-14, if the monsoon remained on course. India produced 93 million tonnes of rice in the previous year.

aThe use of hybrid seeds has increased manifold across Uttar Pradesh, Bihar, West Bengal and Jharkhand, which will lead to higher productivity. Plus, the rains have been really good so far,a Reddy said.

He said the big problem will arise in marketing and procurement of this bumper harvest and the government should immediately start taking measures so farmers are not distressed when the actual crop starts hitting the market. Among the major paddy producing states, sowing is more in Uttar Pradesh, West Bengal and Karnataka, compared to the same period last year.

Paddy is sown in about 39 million hectares during the entire kharif season.

In its latest weekly update for the monsoon, the met department said overall rain was 28 percent above normal till June 13. Almost all regions, barring Haryana and Chandigarh, received above the normal rain during the same period.

Going forward, the met office said rain over the eastern and southern parts of the country, which produce 80 per cent of the countryas total annual paddy, are expected to be normal in 2013. Eastern India is expected to get rains equivalent to 98 per cent of Long Period Average, the well within the normal range.

Data from the department of agriculture show oilseeds were sown in 157,000 hectares till June 13, marginally more than last yearas corresponding period. Cotton has been planted in 1.58 million hectares, 0.6 per cent more than last yearas.

The only laggard has been sugarcane planted in 4.20 million hectares till Thursday, 10.06 per cent less than during the corresponding period last year.

aThe drop in sugarcane estimate is mainly due to large-scale drought in parts of Maharashtra, Gujarat and Karnataka this year,a another official said.

Officials said sugarproductionin 2013-14 is estimated to fall 10 per cent to 22 million tonnes because of lower sowing.

In total, crops have been sown in eight million hectares till June 13 out of 75 million hectares of land on which kharif crops are sown

Rains improve outlook for agrochemical firms

With early rains in some parts of India this year, sales of agrochemicals are expected to pick up from June

**Updated:**Fri, Jun 21 2013. 12 34 AM IST

The monsoon has bought good tidings for the shares of agrochemical companies. As rains gathered pace, shares ofRallis India LtdandPI Industries Ltdhave gained in the past two weeks. To be sure, there is no direct correlation between agrochemical sales and rains. What timely and adequate rains do though is give a fillip to the farmers.

A good monsoon leads to normal sowing. This gives visibility on crop output and induces the farmers to spend more on agrochemicals like insecticides, fungicides and herbicides. Unlike last year, when planting was delayed due to erratic rains, sowing in the current season is reportedly progressing well.

On 14 June, sowing crossed 7.5 million hectares, the agriculture ministry says. Normal sowing would usually have improved the sales outlook for all agriculture inputs providers. But unlike fertilizer firms, agrochemical companies are not facing problems like excess channel inventories. Inventories were high in 2012. Production discipline by companies has lowered them. A channel check by analysts atEdelweiss Securities Ltdin Maharashtra found inventories at distributors and retailers had reached normal levels. Inventories were twice the normal levels around this time last fiscal year, says the securities house.

A preliminary survey of some agrochemical companies by Sharekhan Ltd, meanwhile, shows the timely rains have kick-started agrochemical sales on a healthy note. aSales from dealer shelves have been quite good as planting of kharif crops progresses in all states of the country. We have talked to a few agro-chemical manufacturers who believe that the inventory levels are diminishing on the back of a healthy demand which will also improve their revenue and cash flows in H1FY2014,a Sharekhan Ltd said in a note.

Usually, agrochemicals sales gain momentum from mid-July. But with rains coming early in some parts of the country this year, Sharekhan expects sales to pick up from June. Also, according to the broking firm, the recent floods in the northern parts of the country may have limited impact on sales as these areas have higher acreage of pulses, which contribute only 5% of the total sales of agrochemicals firms.

Overall, 2013-14 is promising to be a better year for these companies. Both Rallis India and PI Industries are expected to better last yearas performance. Rallis India, which is focussing more on seeds, is expected to benefit the most as high crop acreage can increase demand.

With southern and western India (where the company has a wide presence) receiving good rains, analysts expect Rallis India to report more than 15% sales growth in the current fiscal year. PI Industries, which increased its revenue from the domestic agriculture inputs business by a modest 11% in the last financial year, is expecting to grow by 20% this year.

Edelweiss Sector Update - Demand surge to boost agrochemicals

Jun 14, 2013

We recently visited agri-input (seeds, agrochemicals,fertilisers) distributors and retailers in and around Pune (Maharashtra) to take ground level update on the market. From our interactions, we surmise that arrival of the monsoon on time has spurred agri-input demand since the last week.

Agrochemicals: Prices hiked; inventories at normal level

The industry has effected average price hike of 8-10% in agrochemicals since March; in some cases, the hike was 20-25%âtechnical Glyphosateâs MRP has increased from INR260-280/litre to INR310-330/litre, depending upon players. Post monsoon last week, agrochemicals demand has picked up. Distributors highlighted that inventory is at normal level as of now versus ~2x of normal around this time in FY13, which we believe is a positive.

Non urea fertiliser prices cut; off-take to speed up

In line with expectation and government notification, players have cut prices of non urea fertilisers 6-8% recentlyâdi-ammonium phosphateâs MRP has been slashed from INR1,260/50kg bag in FY13 to INR1,170-1,184/50kg bag. Urea prices have remained at INR284/50kg bag. Fertiliser demand has surged post rains last week. Considering adverse market conditions, non urea players have increased distributor margin from INR15/50kg bag to INR30-40/50kg bag during FY13. As distributors we interacted with usually do not carry much fertiliser inventories, we were not able to judge the prevailing concern on excessive inventory.

Outlook: Agrochemicals to do better; non urea fertilisers challenging

We believe that the agrochemicals industry will perform well in the near term considering better demand and pricing. In our view, the recent price hikes were primarily to pass on higher raw material costs.

We believe, short-term challenges persist for the Indian non urea fertiliser industry due to excessive channel inventory. However, we anticipate traded volume to take a bigger hit and manufactured volume to pick up. Normal monsoon is key risk in the near term. We are positive on Rallis India (BUY) and PI Industries (BUY) in the agrochemical space, and on Coromandel International (BUY) in the fertiliser space

Edelweiss held its annual agri conference in mumbai on 21st June 2013. Overall feedback for agri sector as a whole and agrochemical industry in particular was fairly positive. PI Industries was also a presenting company in the conference and feedback turned out to be very good one for the company from the esteemed investors present.

Attaching the ‘Post Conference Notes’ on PI Industries from Edelweiss.

Rgds.

The agrochemical industry is expected to perform well in FY14 on back of a good

monsoon. PI Industries (PI) is focusing on higher contribution of inâlicencing products

going forward which is a higher margin segment. The company expects 20% YoY

growth in the domestic agri input business during FY14. It is expected to launch up to

two products in FY14 (versus five in FY13) during rabi crop; the products are at

registration stage currently. The company as well as industry hiked prices of

agrochemical products by 5%â10% in Q1FY14. PIâs key product âNomineegoldâ is not

facing any competition at present. However, few companies have filed for registation.

Custom synthesis (CSM) order book stood at USD305mn as on March 31, 2013, and PI

is expected to commercialise two new molecules over the coming months in this

business. The company expects 25% YoY growth in CSM during FY14. Further, better

contribution of newly commissioned Jambusar plant will also support CSM growth.

This plant is expected to post sales of INR1bn in FY14 (FY13: INR0.2bn).

PI expects 100â150bps YoY improvement in EBITDA margin during FY14E. This is

primarily on account of higher inâlicenced products in the domestic agri business,

normal monsoon and better opearting leverage in the custom synthesis business. PI is

expected to spend INR1bn p.a. during FY14/15 for capex.

Investment conclusion

PI is expected to deliver strong revenue and profit CAGR of 21% and 36%, respectively,

alongâwith robust RoE of more than 20% over FY13â15E. It is a preferred partner for

global MNCs for custom synthesis on account of its competencies in process research

and manufacturing, coupled with its nonâcompete and IPâdriven business model. The

company has built a strong order book of USD300â325mn to be executed within the

next threeâfour years. EBITDA margin is likely to expand owing to improving product

mix and higher operating leverage.

Key risks

Agrochemical industry faces risks of seasonal weather. Growth and acceptance of GM

crops may have an adverse effect on PIâs business.

Hi Mahesh,
Have been reading your acutely detailed analysis & updates on PI Industries.Thanks for that.The company looks like a very good long term investment given the points you have mentioned right through.
Do you think this is the right time to buy the stock?

Hi Sagar,

Every investor should build his/her own conviction before buying a stock…There are varied monitorable aspects and I try my best to address each and every one of them and post analysis and updates as soon as they are available for PI Ind. and for that matter any stock I cover actively and feel that its having a good long term potential to be a good wealth creator.

PI Ind. long term story is great as it has one of the most credible management and sound de-risked business model which offers a good atleast 3-4 years growth visibility…Q1FY14 and Q2FY14 will be key monitorable…In case of any good positive surprise as we had experienced with rgds. to revenue growth of CSM in Q3 and Q4FY13, the stock should immediately shift its base from current 12x FY14e to 15x FY14e which should move gradually to 18x FY14e by Q4FY14…

However, the thing to look for will be announcement of roadmap for 2nd phase of Jambusar project which should accompany a mega order-win (as company always invests in CSm business backed by firm orders) or some inorganic move which is long pending…any of this much awaited announcement should see the stock really rerate as it had done in 2011…

Unless there is some nasty negative surprise, downsides seem limited as management is capable enough to handle any eventuality…but, always invest in any stock for long-term, i.e. minimum 2-3 years…

I have holding in PI so my views have to be taken in that regard. I had added some quantities of PI in its recent fall to 120-123.

Feel free to get back to me in case of any query.

Rgds.