PI Industries - Superior Business Model

Stock Opportunities Not-so-Hidden Gems
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Hiteshbhai,

You are almost a master at what I call the art side of stockpicking:) A hunch and good feel is enough. That’s what I admire most about you. This side is much more important in Capital allocation, than the science side of stockpicking.

I am still a student at the science side of stockpicking - that helps minimise adverse impacts. Art side refine hona abhi baki hai…lekin mein aa raha hoon! catch you soon:)

No reason why you should relax, by the way. Please contribute to questioning the sources of success of PI, sources of growth and the quality of that growth - that will point us better towards sustainability. Who knows you may allocate upto 40% or more in PI then!!

-Donald

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atall saying that you are Donald…I just want to put you in right direction towards your goal of understanding PI (or for that matter any company)…Once you are on that, you are a great digger (much better than me) as also carry a much greater understanding than I have…

_Since you were straightaway going for peer comparision, I thought (and I may be wrong) you will miss the direction as first you need to go deep and understand the agrochemical sector and then start analysing each and every cos. operational strategy and positioning in the sector… If you will do like this then only you will be able to perfectly assess what you want to assess… Only numbers doesn’t mean anything (whether its PI or even Rallis or UPL), its how the numbers are arrived which can only let us near-perfectly predict the numbers that will come… _

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I think, before many months when actually I started coverage of PI I must have mailed you the Jan2011 Agrochemical sector report… If i haven’t, please tell me I will send it to you… That report will make you understand the sector slightly well…

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Now, coming to your queries, please find my replies in bold…

Ans.- After understanding the sector and also if you have some ground-level contacts or contacts even with the analysts who track this sector closely with ground-level knowlegde, you will come to know that its not easy to build ground-level infrastructure to reach farmers in almost every corner of India… A network reach of more than 1500 distributors and 30,000 retailers takes years to build and consumes lots of resources… With Biovita or Vegfru, PI might not have got the growth (as is evident from initial years) but they were crucial as they helped company sustain and expand the network in the most crucial phase of the company…Once the network is built and the trust of farmers is won, the only thing company has to do is carefully pick selected products for launch by judging their success based on Indian conditions and farmers’ woes…

India.Its

Ans. - It enables the farmer to sow rice with less (around 30 %) water and also saves labour… If you go deep into the sector you will find that herbicides are consumed first, at the time of sowing (this might be one of the reasons why PI’s Q1FY12 sales were robust) to control weeds and Nominee does this function alongwith saving water and improving yield… PI is promoting this product with, what is known as Direct Sown Rice (DSR), because of which many farmers on ground have benefited a lot… PI is spending resources to educate as many farmers as possible and many of the NGOs are helping PI in this initiative as it is ultimately benefiting the farmers…Now, with regards to compettion on why they are not doing it, frankly speaking, I don’t know precisely, but, this might be one of the reasons why PI is not disclosing the contribution of Nominee to its revenue to keep competitors in dark rgdg. the potential market…Also, not many cos. in India except few MNCs and good ones like Rallis are professional enough to spend lots of resources and time on farmers (they rather choose to spend it on distributors and forging tie-up for generics) as also each co. has its focussed operational area… you see donald, the market is still nascent as India is still behind pakistan in using agrochemicals and so each player can grow very well even if it looses on one odd opportunity…

Ans.-As far as my knowledge goes,there is a three year exclusivity period for every new product launch in India in the sector…other things are replied before…

I hope I have replied to your satisfaction… feel free to ask any queries…

Rgds.

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Mahesh,

Thanks again for the growth numbers. I meant overall numbers, but don’t bother I am …

1 Like
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Hi Mahesh,

please send me**Jan2011 Agrochemical sector report also…@**

Sorry for giving you the pain…

Rgds

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Thanks Mahesh. Yes I have the 3 part Agro Chemical Sector report by Netscribes. I am moving on to that.

Anand I have shared the Reports on Acrobat.com and sent you an invite to the shared workspace. Anyone else who needs PI earlier years ARs and the Agro Sector Reports can ask for invites.

A caution : Please be careful with email IDs. Do not provide your email ID as is, on forums. These are open to spammers/crawler bots looking for email IDs …you can disclose if you want e.g. as anand dot bhushan4 at gmail dot com…i.e. still safer, but not foolproof.

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Thanks Donald for invitation…

I am not able to delete my email id…please delete it if you can…

Rgds

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From the Agrochemicals market report:

Unprotected Knowledge

â Currently, under the existing Insecticides Act, once a pesticide is registered in favor of an entity based on test data

(demonstrating its bio-efficacy and safety) generated by it, this information can be used to grant approval to others

wanting to market the same product

The âme-too’ registrant does not have to submit any fresh data for the purpose

â Such unprotection of data generated by multinationals as original registrants has proved to be a major disincentive for

them to not introduce newer products in India

âMoreover, this exempts the subsequent registrants from investing the required time and effort

Reverse engineering

â It is also found that once a manufacturer gets registration for a product, others too are given registration on the basis

of the test data generated by them

Since they are off-patent, Indian companies manage to reverse-engineer or source the technical (active ingredient) from China and

outsell the original registrant

â For e.g. âImidaclopridâ was originally registered in 1999 by Bayer India, however today there are many domestic manufacturers of it and as such its price has

come down to INR 700-800/litre from the initial price of INR 3,800/litre

Flaws in the registration process (2/2)

Source: JM Financial Services âSABERO ORGANICS GUJARAT Ltd.â; SBI Cap Securities âSabero Organics Gujarat Ltd.â, Mar 2010; Business Line âWhy MNCs are keen on data

protection for pesticides?â, May 2010

However, on the demand of multinationals functioning in India, The Pesticides Management Bill, 2008 (PMB) has been introducedbut not yet passed in Parliament which allows a 3 year period of exclusivity for the test data furnished by the original registrant ofany new pesticide molecule introduced into India

Mahesh - Any idea on the status of this Bill?

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Good point. This is the original article the slide refers to on the lack of data protection.

http://www.thehindubusinessline.com/todays-paper/tp-agri-biz-and-commodity/article992318.ece

Mahesh - PMB Bill is still not tabled/passed? What are the implications?? I guess this refers to off-patent molecules?

Nominee Gold Herbicide uses a patented molecule, right? So no one else can register that in India for 20 years?

But if PI registers any off-patent molecule in India for first-time, then Sabero ore Excel or Rallis or anyone else can quickly also get a registration. Is that right?

Thatswhy the stress on in-licensing patented molecules? The 7-8 such products being investigated. PI says a couple will be launched.

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Pesticide Management Bill is not passedand in absence of it Insecticides Act 1968 applies… Way back in 2007 or 2008 two amendments were issued to the Insecticides Act which are till now are in place to protect innovator cos. for their exclusivity of 3 years in line with that likely to be passed in PMB (in more recent form the eclusivity period is proposed to be extended to 5 years which is opposed by BJP and unlikely to pass).

Rgds.

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Except Pi, Bayer and Rallis all players main focus is generics…

Rgds.

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Link to latest 11th August Research Report on PI from Dalmia Securities…

http://www.scribd.com/doc/62156895

Rgds.

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Finally FII get interested in PI Industries… today COPTHALL MAURITIUS (belonging to Deutsche Bank) has taken a 2.5 % stake in PI at around Rs. 1075…

_The total value comes to around Rs. 33 cr. for a 2.5 % stake… more FII deals may follow soon to acquire the remaining 6 % odd stake of Rowanhill… Sign of some positive inorganic moves or other positive development on cards andour expectation of FY12 being the blockbuster year for PI might come true… _

Now the real rerating and valuation discovery phase (the scarcity premium) of PIwhich makes the current rate look history should start and it should be very fast if markets support… Remember Std. Chtd. PE will surely make an exit out of it in FY13 or FY14 and before that markets and market constituents need to get convinced of Pi story…

Rgds.

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Another Coverage on P.I. Ind By Dalmia Sec. Pvt Ltd, Views Invited.

Link.http://www.scribd.com/doc/62156895/PI-Industries-Ltd-Initiating-Coverage

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August 19 2011 has been fixed as the record date for stock split from rs 10 to rs 5. Expect some excitement associated with these events for the stock.

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Guys,

Finally the much promised PI Industries stock story.

[Sorry Mahesh, it took me so long:)] PI deserves much more attention

This is a truly remarkable story of a company successfully moving up the value chain and scaling up its business over the years. Witness a 22% 5yr CAGR in sales coupled with an astounding 77% 5yr CAGR in Net Profits. Operating and Net Margins have been steadily climbing up from under 10% in FY07 to ~21% in 1QFY12!

Entry Barriers are high. Earnings are projected to grow over 40% CAGR for the next couple of years!

Is this a high-quality business going cheap? Or most of the upsides already factored in, in recent run-ups, and CMP of 1065?? What are the RISKs???

Please take the discussions forward. We need more skeptics in our team to dig further on possible downsides!!

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Hi donald,

I went through the PI stock story. Great job again by you.

Coming to negatives first,

1). Agri chem business which is still going to contribute 60% revenues for fy 12 is largely dependent on progress of monsoon. Till now the progress of monsoon seems to be good but the last few days of monsoon need to be watched for final figures of the kind of monsoon we are expected to end up with.

2). for the custom synthesis business, the order book is to the tune of 340 Million USD and one has to think about the risk of order cancellations by the foreign parties.

3). Delay in starting new facility could impact growth in fy 13. This has been covered earlier as well as in stock story.

4). Poor liquidity-- this might be addressed post stock split from Rs 10 to Rs 5 post aug 19 to some extent.

5). High institutional holding— Standard chartered and other institutions hold a significant chunk of holding in this company and hence any panic selling by these people could trigger sharp price corrections. I guess one needs to monitor the financial health of especially Standard Chartered.

6). Valuations – Currently after run up the valuations fully reflect the fy 11 results. Whatever upsides are going to come are likely to be post definite fy 12 estimates. For this as mentioned earlier, q2 fy 12 seems to be a key monitorable event.

7). Raw material price-- part of raw material is linked to crude and any adverse movement in crude could impact margins somewhat. But with recent correction in crude prices, there is some more headroom for the management in this aspect. In fact this may help shoring up margins for the quarter because end product price hikes once implemented are not rolled back in a hurry while raw material prices go down.

Positives are aplenty and I guess I dont need to put them up. Biggest positive seems the clarity on the growth likely to be shown by the company and if that materialises as expected with improving margins and without any hitch, current market price also looks attractive.

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Stock has gone split today.

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There seems to be very high volumes again today. More selling by Rowanhill and lapping up by some fii?

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Deal Date Scrip Code Scrip Name Client Name Deal Type * Quantity Price
17/8/2011 523642 PI Inds IRONWOOD INVESTMENT HOLDINGS B 457703 528.85
17/8/2011 523642 PI Inds ROWANHILL INVESTMENTS LIMITED S 403000 526.02
12/8/2011 523642 PI Inds J P MORGAN SEC LTD A/C COPTHALL MAURITIUS INVEST LTD B 165541 1079.95
22/7/2011 523642 PI Inds ROWANHILL INVESTMENTS LIMITED S 114040 910.4

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Ironwood investments is an investment arm of Sequoia Capital.

rowanhill seems to be keen to get out of its holding in PI.

I think once these deals finish off the stock would be back to its tight price range with low volumes.

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**Sequoia Capital (via its arm Ironwood) acquires almost 2.5 % stake in PI Industries at Rs. 528-530 (pre split - Rs. 1056-1060) by spending almost 32 cr… **

An entry of a strong VC fund like Sequoia which has a glorious track record of picking right companies and attaining mulifold returns on its investments augurs very well for PI as a company as also its shareholders andto enterat this rate (Rs. 528 post split) signifies the gross undervaluation of PI vis-a-vis its prospect…

To reiterate, many positive developments seem round the corner for PI and FY12 seems to be a blockbuster year for PI as expected…Markets have now gradually started realising the potential of derisked business model of PI and once Rowanhill’s entire stake gets absorbed (3.5-4 % must be remaining) and the apetite doesen’t subside, there should be me-first attitude which should rerate PI to a significant level and make the current rate a history…

Rgds.