Company update: PI Industries (Outperformer) - CSM to drive growth

Post a challenging global environment, we expect PI Industries (PI) to bounce back to growth from H2FY18E, led by new product launches in the domestic business and commencing delivery schedules in the exports business. We have effected a 16.3% cut to our earnings estimates, as we expect 16.3% fall in FY18E PAT factoring in subdued performance in H1FY18. However, PI’s robust orderbook (US$1bn) and recovery in global markets will result in the company’s custom synthesis manufacturing (CSM) business (62% of revenues) posting higher growth versus the domestic agri-input business (38%). We estimate revenue and PAT CAGR of 12% and 6%, respectively, over FY17-20E, with significant FCF of Rs13bn over FY17-20E (Rs4bn over FY13-17E). We thus maintain Outperformer with a revised target price of Rs1085/share.

CSM business – Strong recovery expected: Management expects global agrochemicals industry to witness a gradual pickup in demand with inventory levels falling across products. We believe PI’s FY18E export growth will be back ended, with CSM revenues set to register 22% yoy growth in H2FY18E with the business posting 13% CAGR over FY17-20E on robust orderbook (US$1bn) and steady product launch pipeline.

Domestic business - healthy traction in products launched: PI launched 4 new products in partnership with BASF in H1FY18 and expects to launch 3 more in H2FY18E. New launches will help PI offer a broader portfolio of crop protection solutions to farmers, leveraging its strong distribution network across geographies. Once commercialised, few of these products will contribute Rs2-3bn revenues over 2-3 years, in our view.

Maintain Outperformer: PI’s unique business model focuses on innovation through introduction of new in-licensed domestic products and commercialisation of early stage molecules for innovator companies, which we believe will enable sustained growth. PI has an agreement with BASF to co-market new products and a JV with Mitsui to register new pesticide products in India - measures that the company has taken to strengthen its domestic business. In the CSM space, PI‘s foray into non-agrochemical CSM could result in the stock substantially re-rating in the medium term. Further, large scale consolidations in the global agrochemical industry, coupled with uncertainties in China will open up significant growth avenues for PI. We have introduced FY20E EPS of Rs39.8/sh and rolled over our target price to Rs1085/share on FY20E EPS of 27x (in line with peers).