PI Industries' Q2FY20 results (Outperformer) - Strong performance continues;guidance intact

Q2FY20 result highlight

• PI reported another quarter of healthy  revenue and EBITDA growth, ahead of our estimates, led by its CSM business
• Revenues grew by 26% yoy to Rs9bn (ahead of our est of Rs8.2bn). CSM business reported strong 52% yoy growth to Rs6.1bn on ramp up in demand of existing products and new product commercialisation, while domestic business revenues declined  by 12%yoy to Rs2.65bn owing to erratic rainfall and high channel inventory
• Gross margins declined marginally by 51bps yoy to 42.4% (est 44%) on  higher raw material prices procured from china
• Positive operating leverage led to 270bps improvement in EBITDA margins to 21.2% (ahead of est 19.5%).EBITDA increased by 43%yoy to Rs1.92bn (est :Rs1.6bn)
• Increase in depreciation costs (up 39% yoy) and higher tax rate of 27.2% vs 23.1% in Q2FY19 restricted further PAT growth. Reported PAT stood at Rs1.2bn (est: Rs1.08bn), up 30.4% yoy.

Key positives: Strong revenue growth led by CSM business

Key negatives: Weak domestic business performance, higher depreciation costs

Impact on financials: Cut EPS by 3.8% in FY20E to factor in higher depreciation cost and increase EPS by 4.6% in FY21E factoring in Isagro Asia acquisition and strong growth outlook

Valuations & view

PI’s performance has been improving significantly on the back of strong volume growth in the CSM business. However domestic sales were adversely impacted due to erratic monsoons.  Going forward management remains upbeat for CSM business growth outlook despite challenging global environment and expects recovery in the domestic business with favourable reservoir levels boosting prospects for Rabi.  In the near term, PI’s strong order book position (~USD1.4bn) backed up with a rapidly expanding pipeline of pre-commercialization projects will drive sustained growth in the CSM business. Differentiated product offerings boost up prospects for the domestic business. Moreover recently announced bolt-on acquisition of Isagro Asia seems to be a good strategic fit for PI’s business and should augment growth prospects for both CSM as well as domestic business. We maintain our outperformer recommendation considering the long term prospects of PI’s innovation led business model with target price of Rs1,473 (30x FY21E EPS)