Life of this PI is custom synthesis

Monday, 24 December 2012 - 3:00am IST | Agency: DNA
The fine chemical business unit is involved in the custom synthesis and contract research and manufacturing services (CRAMS) of chemicals for use inagrochemicals, pharma, electronics, imaging sectors and various other niche fine chemical areas.

PI Industries is primarily into agri-input and fine chemical business in India and worldwide. Its agri input business unit provides plant protection and nutrition products which include agrochemicals such as insecticides, fungicides and herbicides, plant nutrients, specialty fertilisers and hybrid seeds. The fine chemical business unit is involved in the custom synthesis and contract research and manufacturing services (CRAMS) of chemicals for use inagrochemicals, pharma, electronics, imaging sectors and various other niche fine chemical areas.

Investment rationale
On the domestic side, the demand for crop protection and nutrition products would continue to be driven by a rising population, changing dietary habits, a declining arable land per capita, low productivity and lower consumption of pesticides versus global standards. This is likely to benefit PI Industries, which is among the top five domestic agri-chem companies with strong brands.

In its custom synthesis (CSM) segment, the rising popularity of India as an outsourcing hub due to its strong research capabilities, qualified talent pool, world-class manufacturing facilities and moderate R&D and manufacturing costs are likely to aid stronger growth. The company currently has a strong order book of $318 million to be executed over the next 3-4 years. Furthermore, the company’s new CSM facility at Jambusar is likely to start commercial production by this quarter. The company expects its CSM segment to report a revenue growth of around 30-35% per year with focus on patented products with longer life cycles.

The company, over the years, has maintained a decent return on equity of nearly 30% and has also improved its financial leverage from 0.73x last fiscal to 0.65x (as of now) on the back of a strong profit show.

Concerns
PI faces industry-specific risks on climatic factors, lower budgetary allocation by the government for the agri segment, foreign currency and input costs, and failure in developing or commercialising new molecules. Its plan to raise `150 crore through equity-related instruments is likely to impact the earnings per share by up to 11-12%.

Valuations
Driven by strong growth and rising share of custom synthesis, PI’s sales are expected to grow at a compounded rate of around 25% over the next two fiscals. The adjusted profits are expected to grow at over 28% during the same period, aided by higher operating margin due to shifting product mix towards high margin CSM segment and lower tax outgo on revenues from its new plant. At current price of `589.80, the stock trades at 13.79 times and 11.87 times (considering additional equity infusion) its expected EPS for fiscal 2013 and 2014, respectively. Investors with medium- to long-term perspective can buy the stock on declines around `525-550.

Disclaimer: The writer does not hold any shares in the company
nitin.shrivastava@dnaindia.net


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