PI Industries' Q3FY18 results (Outperforer) - Set to recover

Q3FY18 result highlights

• PI Industries reported revenue growth below our expectations. Revenues increased 10% yoy to Rs5.37bn (est: Rs6.1bn) led by ~14% yoy growth in the CSM business, while domestic business registered subdued growth of ~3%.
• Gross margins declined by 95bps to 47.5% due to higher raw material  prices and unfavourable product mix. This combined with higher other expenses (up 24% yoy ) led to 171bps decline in EBITDA margins to 19.5%. EBITDA stood at Rs1.05bn (est:Rs1.2bn), up 1.4%
• PAT declined by 14.2% to Rs806m (Rs970m) due to higher depreciation (up15.8% yoy) and higher tax rate (18% vs 3% in Q3FY17).

Key positives: Signs of pick up in export revenues

Key negatives: Subdued domestic revenues

Impact on financials: EPS of FY18E/19E/20E cut by 9.2%/9.8%/8.4% respectively to factor in subdued growth during 9MFY18

Valuations & view

PI’s performance for the quarter was impacted by subdued domestic business owing to erratic rainfall, while its export business resumed growth with beginning of delivery schedules. In the near term, with new product launches for domestic business and gradual pick up of demand in the global agrochemical industry, we expect PI to trend back to its growth trajectory.  In the long term, PI has strengthened its domestic business with the agreements with BASF for co-marketing of new products and JV with Mitsui for registration of new pesticides products in India.In the export business, strong order book position (~USD1.15bn, 5x FY17 CSM revenue) and steady pipeline of products commercialisation will continue to drive the growth in the CSM business. Further, PI‘s foray into non-agrochemical CSM could result in the stock substantially re-rating in the medium term.Also, large scale consolidations in the global agrochemical industry, coupled with uncertainties in China will open up significant growth avenues for PI. Recovery in revenue growth, success in initiatives to drive non-agrochemicals category business in exports, managing risk arising from the increased competition in Nominee Gold and maintaining the new product launch momentum in the domestic business will be the key triggers for the stock price.  We maintain our outperformer recommendation considering the long term prospects of PI’s innovation led business model.