When checked the asset turn over ratio of PI Vs others, i see trend( decreasing trend or low turn ratio) is same in several companies like Divis, Aarti, UPL, Navin, Vinati etc.
Looks most of these build capacity which would only be utilized 100% in a span of 8-10 years. then only their asset turn will be good (1.25 - 1.5 or more). As long as company growing aggressively may be this problem exists.
some companies are doing better on this like Atul, Astec, Deepak Nitrite.
Not taking into account the recent acquisitions, their ROCE’s were also not so premium as their valuations.
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = ₹8.0b ÷ (₹70b - ₹14b) (Based on the trailing twelve months to December 2020).
Thus, PI Industries had an ROCE of 14%.
The trend of ROCE doesn’t look fantastic because it’s fallen from 31% five years ago, while the business’s capital employed increased by 379%. That being said, PI Industries raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed.
So Am I willing to pay such premiums for a decent long term view(5-6 years) where current investments would start giving results ? Probably this cycle would keep on continuing as they reinvest most of their profits.
Disc: Not invested
Another incredible set of results, FY21 showed 36% sales growth and 62% profit growth. FY21 EPS ~ 50. Strong cashflows. Guides for 15% sales growth in FY22. Here are my notes from their presentation.
Looking forward to tomorrow’s concall.
Disclosure: Invested (position size here)
Adding one point: Growth guidance lowered from 20% to 15% in FY22 due to Covid impact. Softening of gross margins due to product mix&Meis withdrawl and degrowth on QoQ basis+ One more MPP is going to kick in Q2FY22.
Disclosure:invested. This business has taught me the power of Investing in a great co and with a great management when things go temporarily wrong (2016-2019 stocking issue). Eager to see whether they can diversify beyond Agchem into pharma. Deccan Fine Chemicals is the perfect case study to see what Pi can do if they acquire well. Vital to expand the size of opportunity at these Valuations. At current asset base, assuming 2.5x turnover. They can do close 6000 crore sales+Another MPP is coming up in Q2FY22.
Free cash flow generation has been above 300 crores this time+Roce is at 26% if we exclude the QIP cash on the balance sheet. Before they undertook the Fixed asset base expansion. They used to report 30%+ Roce. As the utilization increases, Roce will likely revert to mean in the agchem segment.
You’ve made a very good point in terms of MPP plants. Just laying out the difference for fellow investors to understand here:
-Dedicated plants have better operating leverage. As there is no change over time. Then why does a CDMO put up a MPP facility where due to changeover time you can never hit more than 85-90% utilization. (Some can only do 80%)
MPPs in some cases are like optionalities. Eg: Navin setting up a MPP for new agchem molecules. If out of 5 molecules, some become a major hit. Often they can be converted into Dedicated plants. Some other businesses like what Oriental Aromatics is doing, for some products you just don’t have high volume requirements. Going via MPP helps you to manufacture high value but low volume products.
Depends upon the nature of the business and the aggressiveness of the management. Pi is extremely well placed. If they diversify successfully in Pharma Intermediates/Adjacencies. Could enter the league of Divis (let’s see)
Disclosure: invested in Pi, Navin from lower levels. Actively tracking Oriental Aromatics.
Latest management interview (link) and the conference call yesterday addressed some important points about why gross margins were lower by ~4.7%.
• Changes in product mix (more domestic share in this quarter contributed 1.25-1.3% + Isagro product portfolio is lower margin)
• Withdrawal of MEIS benefits (1.5-1.6% impact)
• Lower yield on the commissioning of new plant. This is resolved now and will not be reflected in Q1FY22
• Expenses on new projects and new products (3 new CSM products; startup costs were higher). This has also be resolved now
The next point was about lower guidance of 15% sales growth. Management said that they wanted to be a bit conservative because of covid’s impact on operations of PI.
Q4FY21 and FY21 Updates - Another strong quarter and year. Next clear trigger will be their inorganic growth - acquisition of a pharma asset.
The parties have agreed that the enterprise value of the API business division on a debt free and cash free basis shall be INR 1530 crs. The agreed enterprise value shall be subject to adjustments on account of working capital, dues of lenders and unfunded employee liabilities.
Again looks like a very efficient capital allocation, below snapshot for standalone biz last few year performance for ind-swift, a decent operating margin biz getting hard hit by debt servivicing etc.
Given PI is buying asset at debt free status, it would be acquiring a business with 850 Cr+ revenue, 21% op margin , EBIDTA 202 Cr, without debt it can do 120 cr PBT / 100Cr PAT. ( per press release purchase is at debt free consideration)
That’s <2X sales, 7X EBDITA, 15X profit. Ind-swift current gross block is approx 1350 cr, well run API businesses can deliver 1.5X asset turnover ( experts can comment here) , hence potential of 2000 cr + revenue, 21% Op margins( upside exists on margins) and 300cr PAT once stabilized - we have seen PI delivering on Isagro turn around and efficiency improvements - very efficient and accretive capital allocation.
Currently PI is at 4700 cr revenue, 22% Op margin and 800 cr on TTM.
Combined we are looking at potential of 8000 cr+ sales and 1200cr+ in profit in 1-2 years( organic growth of 20% + stabilized API biz) , at current valuations 70000+ cr mkt cap from current 44K cr market cap.
Above is only back of envelope calculations. Good API businesses have much superior operating margins such as Divi’s etc at 40%.
All in all looks like a good asset at excellent valuations, going by history we can surely count on PI mgmt to deliver.
Invested
Yes, they seem to have got a good bargain. The current valuation already factors in this purchase though. So extrapolating it to Rs.70,000 crore would amount to double counting.
I was going through annual report of Ind Swift Lab available on its website (Annual Report of 2020). Almost 1000 cr is working capital. Inventory 340 Cr, Trade receivables of 400 Cr ( 60% from related parties).Capital advance of 55 cr is from related party, Loans given to Related party of 55 Cr.
Ind swift will get 1500 Cr and roughly 1000 cr is borrowing. So they left with 500 cr out of which they have to pay 350 cr in respect of trade receivables and other loans and advances. So there is 150 cr left with promoter of Ind Swift vs current market cap of 650 cr.
By going through Ind Swift annual report I am not sure whether we have to take there gross block and revenue on Face value.
I think receivables, inventory and WIP are all cash item. Final transaction figure should be greater than 1000 Cr.
1530Cr - ( Debt + Trade Payables + other liabilities + employee liabilities)
+ (Receivables + inventory + wip)
Press release on acquisition
While it’s too early but one possibility of acquisition through subsidiary will mean ability to decouple at appropriate times and second order value unlocking , given current scope of work for Indo-swift appears more on Mfg - API & Intermediate, multiple times emphasis on R&D, Technology, Process Innovation - combined entity will have resources to get into CDMO space given PI CSM unparalleled success.
As is the case with quality management - it’s a foundation step for next vertical of growth, interesting times ahead for investors!!
IDirect_PIIndustries_Q1FY22.pdf (567.6 KB)
While near term triggers are absorbed in current valuations, the way IMO next 6-8 quarters unfolds, it will create foundation for next multi year growth and corresponding valuations uplift
To watch out for
Invested
IMHO We can have debt as 100% value Trade payable plus than 100% as there might be interest cost you never know whereas the inventory receivable should be taken with some cut may be 30 to 40% less as there might be account which cant be 100% recoverable and in inventory there might be some bad inventory or high valued inventory ( the cost may be less )
regards
Dark past. I guess Shree cement had similar issues. One wonders if there was no capital market listing and stock price increase, these companies will ever give their due to minority shareholders.
In its Q1FY22 analyst call, the management gave a guidance of 15% organic growth for the current year. The company also said the order book is more than $ 1.5 billion (Rs.10,000 crores plus) and sees “robust growth in the coming years from new commercialisations”. Elsewhere, Joint MD Mr. Rajnish Sarna is reported to have said “inorganic growth is the way forward” (click here). Most brokerages are factoring in 24 – 25 % growth for the company going ahead.
Let us try to join the dots.
Over the last six years, PI Industries has grown its revenue at 17% CAGR, from Rs.2,096 crore in FY16 to Rs.4,577 crore in FY21 – an absolute increase of Rs.2,481 crore (all figures Consolidated).
To meet expectations of 24% revenue growth over say the next 5 years, the company would need to clock revenues of Rs.13,418 crore by FY26E – an absolute increase of Rs.8,841 crore from the current level.
In other words, PI needs to add almost two more PI Industries to itself in 5 years. Organically, this may simply not be possible physically even if PI has the money. The export CSM business, which constitutes 3/4th of the turnover is a capex intensive business. Acquiring land, building capacities and scaling them up takes time. That is why the inorganic strategy comes in. Inorganic brings down the asset turnover and return ratios initially but helps to buy time. PI purchased Isagro at around 1X the sales and Ind Swift assets at more than 1.5X.
From the table below, we can see that the organic route costs much less with asset turns of around 2X.
I expect PI will manage an asset turnover of 2X going ahead on its 15% organic growth. Further I assume Ind Swift assets would contribute around Rs.250 crore this year (one quarter), Rs.1,000 crore in FY23 and grow 20% thereafter. This is how all of this looks:
From these two, PI can reach a revenue of Rs.11,000 approx. by FY26E. This still leaves around Rs.2,500 crore gap to be filled (Rs.13,418 minus Rs.10,934 crore) in order to achieve 24% CAGR from the current level. This gap will be bridged through the inorganic route.
Let us look at the cash position now. As of 31-Mar-2021, PI had cash balance of Rs.2,000 crore. Annual cash generation last two years has been around Rs.700 crore. Based on past trends, I assume PI will manage a CFO 20% of revenue. Of this, part of the cash would be spent on organic capex (which gives asset turnover 2X). And Rs.1,530 crore is going into Ind Swift acquisition.
Putting all of this together, we get:
Essentially, company will have around Rs.5,500-6,000 crore cash left which can be used to make acquisitions. This should generate revenue of around Rs.2,500 crore, thus meeting the expectations of 24% growth over the next five years. Therefore, a minimum 24-25% growth seems easily achievable without any further equity dilution or taking on external debt. I have ignored dividend and interest payments which are relatively small and don’t make a difference. It needs to find good acquisition candidates though, that is the main challenge.
(Disc.: Invested)
Didn’t think PI will go through such setbacks and would have a thorough due diligence before announcement, that’s market for us…acquisition of Ind swift is called off. Result dates were moved to Mid Nov, everything happens for a reason.
Possibility of result of current Qtr to be soft like industry peers with RM pressure, add that with this news, could give a meaningful dip.
Invested
