Hi P Sharma,
Please find my replies in bold below :
Will this linearity of increased turnover and capex change going forward? With the common infrastructure of the Gujrat plant already ready, would a 1cr additional capex translate into 3 crs of additional turnover? I think this is very important to understand.
Business model of Pi is surely an asset-heavy business model wherein assets need to be build in advance and revenues and profits follow afterwards. However, this is not much of a concern at the present stage where PI’s CSM business has reached today. Today, almost entire expansion is backed by firm orders which was not the case before 2009 when entire Panoli project was built…These orders have an inherent clause of ‘Take-or-Pay’ which makes the current business model fairly derisked.
Now, on your other point asto will incremental capex result in more revenues per penny incurred…look, you again need to understand the business model of this company well…to explain in brief, company will have to spend atleast 85-100 cr. per year even going forward as it will do its best to capitalise on the tax holiday of Jambusar facility as also to tap the humongous opportunity it is sitting at by already gaining expertise and trust in patented assignments…in the latest PL report on PI published yesterday, i was delighted to see that in their interaction with the management, management has set an internal target ofenhancing cntribution of non-agrochemical segment to CSM revenues to ~50 % over next 5-6 years
( _donald…this point needs to be quizzed in your management Q&A as its crucial _)…
today, Pi derives alomst 85-90 % of CSM revenues from agrochemical space and if pharma assignments come PI’s way over coming years, it will mean incremental revenues at higher profitability…
Getting back to your query, it takes time for multiproduct CSM plants to stabilise and improve utilisation but once that is done, its capacity/revenues generation can be enhanced by just adding few stabilising equipments…This is the reason why you are seeing Panoli contributing much higher revenues than anticipated over last few quarters…Jambusar will be on a similar stage but 5-6 years down the line so don’t expect great per penny revenue generation atleast till FY17 on incremental capex…but, profitability is set to improve on incremental capex and thats for sure…
Also, the beauty will be if entire capex gets funded via internal accruals for next few years which will take the co. on verge of debt-free status…however, what I will look for is tapping of opportunity in front of PI in CSM space in the most effective way possible evenif it means keeping the debt at reasonable levels and even diluting some more equity…PI has just scratched the tip of the iceberg in CSM space and its focus on patented assignments is going to make it very rich…
Besides operational efficiency owing to higher volume or reduction in interest payout or lower tax out go due to the Sterling SEZ, do you forsee margin expansion due to price increases? Does PI have the pricing power in both the businesses?
If you want to assess the efficiency and pricing power of any business always focus on company’s EBITDA margins and not net margins…this is not to say that net margins are not important, they ofcourse are, as they determine the valuation that the company will command on the bourses…
PAT margins the way you are looking at in present tense, I am looking at w.r.t. historical margins…Till FY08 this company was operating at less than 2 % PAT margins which got enahnced to 5 % in FY09 and further to present level of 9 % odd…Till FY08 EBITDA margin was 10 % odd consistently which got enhanced to 13.9 % in FY09 to present level of 16.5 % odd…Now. here you just notice the difference, improvement in EBITDA margin is to the tune of ~65 % over FY08 till today whereas improvement in PAT margins is to the tune of 350 % over the same period…EBITDA margin’s improvement over last many years can be largely attributed to higher contribution from CSM segment as also success of Nominee whereas improvement in PAT margins is exceptional management of growth by not just focussing on destructive expansion but focussing on profitable expansion…
Rgdg. your query on pricing power, for CSM business, the higher the risk company takes higher will be the pricing power and therefore margins…however, company has choosen to play on least risk possible so its EBITDA margin will be that much reasonable since all the risks except delivery are pass-through…real improvement in margins for CSM will come from changing product profile because of which company has went slow on booking orders aggressively…if company is able to build good patented pharma assignments (for which it is trying very hard) then its margins will substantially improve but thats a very long term guess and not even a medium term scenario…
In domestic agri segment, the pricing power of PI is at par with its peers…frankly speaking, the company is having a limited product portfolio to offer and unless it gets into seeds orsome high-margin product like Osheen turns blockbuster, its margins for this segment will be stagnant and surely lower than Rallis…so far, margin improvement of PI’s agri segment is mainly driven by one product Nominee, and for all the other products launced including osheen, it will take time for sales to gather pace…at the same time co. is planning to launch two in-licensed products every year over next few years which will take that much more expenditure on education, promotion and activation…hence, don’t expect a significant improvement in margins for agri-segment over medium term but what we need to check is the focus on innovation by the company which will let it gain good pricing power going forward…for the time being, its pricing power is similar to its peers in the segment…
Overall, you need to take the direction rather than be specific as businesses take time to evolve…one can expect improving EBITDA & PAT margins gong forward from the company and its incremental capex is surely going to come with better profitability…
Feel free to get back to me in case of any query.
Rgda.
