Motilal Oswal Financial Services

PI Industries

BSE Sensex

27,080

S&P CNX

8,190

Initiating Coverage

Sector: Agri

Industries

CMP: INR660

TP: INR800 (+21%)

Buy

Built on impeccable R&D track record and trust

Expect 26% EPS CAGR over FY15-17



Stock Info

Bloomberg

Equity Shares (m)

M.Cap. (INR b)/USD b)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

AvgVal. INR m/Vol‘000

Free float (%)

PI IN

136.1

89.8/1.4

786/372

-7/1/52

124/211

41.6



Financial Snapshot (INR b)

Y/E Mar

2015 2016E 2017E

Sales

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

19.4

3.7

2.5

18.0

30.3

65.6

30.9

39.9

36.7

10.1

23.7

4.6

2.9

21.5

19.5

29.0

39.4

30.7

8.0

29.4

5.9

3.9

28.5

32.5

30.2

42.5

23.1

6.2

PI boasts of a unique business model—a strong R&D-led custom synthesis

business (59% of revenues) built over the last two decades and an equally

compelling domestic agro-chemicals business (41% of revenues), largely built by

in-licensing arrangements with major global agro-chemicals innovators.

With a mere 10% penetration, we believe there is untapped growth potential in

PI’s largest product—Nominee Gold, which along with new products like Osheen,

Vibrant will continue to drive growth momentum for domestic agro-chemicals.

With a strong order book amounting to USD600m, the CSM business has robust

revenue visibility—book-to-bill of 3.1x; which will be complemented by upcoming

facilities in Jambusar. We believe the foray into new segments like

pharmaceuticals and electronics chemicals will be the next key growth drivers.

With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust

growth outlook—23% revenue CAGR and 26% PAT CAGR), we believe PI is one of

the best plays on India’s agri sector and CSM opportunities. Initiate coverage with

a Buy.

In-licensing—a key differentiator against rest of the peers

PI has managed exclusive tie-ups with patent originators, led by its track record

of respecting innovator’s IPR. The company’s focus on selected and patented

innovative products through in-licensing differentiates it from the rest of the

market participants, who sell largely generic products with little product

differentiation. PI currently has a product portfolio spanning 33 brands across

categories (herbicides, insecticides, fungicides and specialty chemicals),

including 5-6 products that are in-licensed and 10-12 products that are co-

marketed. With higher proportion of in-licensed and co-marketing revenues as

against generic products, PI enjoys industry-leading margins (16%) in the

domestic agro-chemicals division.

82.9 105.9

Shareholding pattern (%)

As on

Jun-15 Mar-15 Jun-14

Promoter

58.4

58.6

DII

8.5

8.6

6.4

FII

17.5

18.5

19.9

Others

15.7

14.5

15.1

FII Includes depository receipts

Stock Performance (1-year)

Nominee Gold growth to continue despite new competition

PI launched Nominee Gold in FY10 (as a tie up with Japan based innovator

Kumiai), which went on to become a blockbuster product—clocking highest

revenues and margins amongst its product portfolio. With likely easing of

registration process for 9 (4), we believe competitive intensity will increase

going forward and could result in some extent of price and margin erosion for

the product. However, with product penetration still very low (only 10% of the

area under rice cultivation covered by Nominee Gold as against potential for at

least 30%, with dosage being a fraction of the ideal dosage), we believe

Nominee Gold will continue to grow as the market expands. We believe the

fears around price, margin erosion and de-growth for the product are

unfounded.

10 October 2015

PI Industries

Osheeen—the second blockbuster product after Nominee Gold

In FY13, PI launched Osheen—an insecticide—through an in-licensing deal with

Japan’s Mitsui Chemicals. Just like PI’s other products, Osheen has proved to be

a runaway success with sales for the first two years reaching INR1b. Osheen

continues to be the second biggest product for PI after Nominee Gold. OSHEEN

has effectively managed the Brown Plant Hoppers in rice for a number of years

in the leading rice growing countries. PI spent nearly six years on Osheen’s

development. After rice, PI extended the product to cotton and is looking to

extend to vegetables as well.

Capabilities + Trust = Ideal choice for global innovators in CSM

Custom synthesis and manufacturing involves trust as it the most critical factor,

as it is an IPR-driven business and requires capabilities to scale up production

from lab scale work to dedicated plant. PI’s longstanding relationship with global

innovators in the agro-chemical space is a testament to capabilities and trust it

has built over the years. The company has been in the CSM business for the last

20 years and it will take long gestation period for any new entrant to acquire

knowledge, create strong R&D capabilities, infrastructure and build trust, which

acts as a major entry barrier. PI also participates in patented and early-stage life

cycle of the molecules, which again acts as an entry barrier as innovator

companies have only one or two suppliers due to the confidentiality involved.

Robust order book, complemented by upcoming Jambusar facility, will

convert into revenue CAGR of 27% in CSM

PI has an order book USD600mn (which is 3.1x its FY15 revenue USD187m) from

CSM exports on account of 18 molecules already commercialized in the past.

The company also intends to commercialize two more molecules in the next 2-3

months which will continue to add to order book in future. New Jambusar

facility, which is likely to be commissioned in the next 4-5months, is expected to

generate revenue of INR5b-6b at maturity and takes about 1-1.5 years to fully

scale the plant.

Leveraging existing capabilities to diversify beyond agro-chemicals

PI has created strong capabilities in R&D. The general nature of the

intermediates that it manufactures is such that they can be applied in other

verticals of chemicals sector (like pharmaceuticals or fine chemicals used in

electronics sector) with some modification; these verticals can be new growth

opportunities for PI and will in turn expand its customer base and geographical

reach.

Valuation and view

With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust

growth outlook (23% revenue CAGR and 26% PAT CAGR), we believe PI is one of

the best plays on India’s agri sector and CSM opportunities. We believe mix

change in favor of the R&D intensive CSM business would continue to drive re-

rating for the stock. PI trades at 31x and 23x FY16 and FY17 EPS. We initiate

coverage with a

Buy

with a target price of INR800, valuing the stock at 28x

FY17E earnings.

10 October 2015

PI Industries

Company overview

Unique mix of domestic agro-chemicals and CSM exports

Mr. Piyush Singhal founded PI Industries in 1947 as Mewar Oil and General Mills

Limited, which was predominantly into edible oils business. A decade later, the

company started selling agro-chemicals. The name was changed to PI Industries in

1990s. PI has two business activities:

Domestic Agri Inputs (41% of revenues)

offering plant protection products, and

specialty plant nutrient products and solutions. PI has a strong rural reach and

brand equity, with millions of Indian farmers duly backed by a robust pipeline of

products for sustained growth in the sector.

Custom Synthesis & Manufacturing (CSM) (59% of revenues)

for contract

research and production of agro-chemicals, intermediates and other niche fine

chemicals for global innovators. The business, backed with a strong R&D

support, works to develop and commercialize products based on newly

discovered chemistries with reputed MNC innovators.

Exhibit 1: CSM contributed 59% of revenues in FY15

Domestic agri-

inputs, 41%

CSM exports, 59%

Source: Company, MOSL

Exhibit 2: Share of CSM segments in revenues is gradually increasing

Domestic agri-inputs

39%

36%

42%

CSM exports

52%

58%

59%

62%

63%

61%

64%

58%

48%

42%

FY14

41%

FY15

38%

FY16E

37%

FY17E

FY10

FY11

FY12

FY13

Source: Company, MOSL

10 October 2015

PI Industries

Exhibit 3: Gist of activities that PI is involved in

Source: Company, MOSL

Exhibit 4: Timeline of PI’s journey

Source: Company, MOSL

10 October 2015

PI Industries

Higher share of in-licensing differentiates PI from peers

In licensing early-stage molecules gives PI an edge



PI’s focus on selected and patented innovative products through in-licensing

differentiates it from market participants, who sell largely generic products with little

product differentiation.

The business faces procedural entry barriers in India in the form of protracted

registration process and a three-year exclusive data protection for the product post

registration.

After India became TRIPS compliant in 2005 and started giving patent protection,

MNCs turned comfortable launching their patented products in India; Indian

companies, too, have been able to in-license many patented products from global

innovators in this better IP environment.

Unique business model of in-licensing

PI works on a unique model of in-licensing new molecules from global innovators

and nurturing the same into strong brand propositions in the Indian agro-chemical

market; these are high-performance, high potential, early-stage products over which

PI enjoys exclusive marketing rights. Some of the key brands include NOMINEE

GOLD, OSHEEN, KEEFUN, BIOVITA, KITAZIN, FORATOX, FOSMITE and ROKET.

Depending upon the agreement with the global innovator, PI either imports the

technical or bulk formulations or chooses to manufacture either of the two at its

owned factories in India. The agreements are typically formed with innovators for

early-stage patented molecules in a way that PI can realize the growth benefit

throughout the entire product life cycle. In-licensing products enjoy exclusivity and

market leadership and with ~60% of domestic agro-chemical revenues coming from

in-licensing, PI enjoys best-in-class margins in this segment over peers.

Exhibit 5: Product-focused approach by operating in select key brands

TRIPS—a game changer for patented products’ entry in India

Implementation of The Agreement on Trade-Related Aspects of Intellectual Property

Rights (TRIPS) in 2005 in India was a game changer for patented products’ entry in

the country. TRIPS is an international agreement administered by the World Trade

Organization (WTO) that sets down minimum standards for many forms of

intellectual property (IP) regulation as applied to nationals of other WTO member

countries. The agreement was negotiated at the end of the Uruguay Round of the

General Agreement on Tariffs and Trade (GATT) in 1994. With the implementation

of TRIPS, product patents were applicable instead of process patent—a major break-

through for global patent owners. In the era of process patents, Indians reverse

engineered the processes to arrive at the same product; thus circumventing the

patent law. After India became TRIPS compliant in 2005 and started giving patent

protection, MNCs turned comfortable launching their patented products in India;

Indian companies, too, have been able to in-license many patented products from

global innovators in this better IP environment.

10 October 2015

PI Industries

Non-compete model makes PI the preferred partner for innovators

Over the last 20 years, PI has won the trust of global innovators and remains their

preferred partner owing to its blemish-free record in terms of patent disputes and

litigations and its commitment to intellectual property right (IPR) protection.

In-licensing—a key differentiator for the company

PI has managed to have exclusive tie-ups with patent originators, led by its track

record of respecting innovators’ IPR. The company’s focus on selected and patented

innovative products through in-licensing differentiates it from the rest of the market

participants who sell largely generic products with little product differentiation. PI

currently has a product portfolio spanning 33 brands across categories (herbicides,

insecticides, fungicides and specialty chemicals), including 5-6 products that are in-

licensed and 10-12 products that are co-marketed. With higher proportion of in-

licensed and co-marketing revenues as against generic products, PI enjoys industry-

leading margins (16%) in the domestic agro-chemicals division.

Exhibit 6: Strong product portfolio—33 brands across categories

Category

Specialty chemicals

Technical Name

Ascophyllum nodosum

Particulars

It provides over 60 naturally occurring major and minor

nutrients and plant development substances in organic form

and contributes to greater microbial activity when applied

to soil, thus increasing the nutrient availability to plants.

Controls major insects and mites and checks infection and

spread of viral diseases by controlling vectors.

Kills insects on lower and upper surface of leaves due to

trans-laminar penetrating action, controls larvae, white flies,

mites and other sucking pests.

Launched in FY13, it manages the brown plant hoppers in

rice, targets pests which are not controlled by other

molecules.

Launched in FY10, Controls major grasses, sedges and broad

leaf weeds of rice.

Integrated weed management in wheat crop.

Foratox

Carina

Insecticide

Phorate 10 % CG

Profenofos 50% EC

Osheen

Nominee Gold

Melsa

Fosmite

Roket

Insecticide

Herbicide

Insecticide

Dinotefuran 20% SG

Bispyribac Sodium 10% SC

Pinoxaden 5.1% EC

Ethion 50% EC

Effective control of mites, scales, thrips, beetles and

lepidopterous larvae.

Protects against several insect pests (both chewing and

Profenofos 40%+Cypermethrin 4%EC

sucking types)

Source: Company, MOSL

Massive entry barriers make the business model exciting

PI has built its reputation over 20 years through innovative products, respect for IPs,

long-term relationships with global innovators and farmer acceptability. Any new

product by the company becomes immensely successful on the back of its

effectiveness, marketing, brand value, early-stage nature and acceptability to

farmers. Considerable time and costs are required for any company to replicate the

10 October 2015

PI Industries

success of PI. Besides, the business faces procedural entry barriers in India in the

form of protracted registration process and a three-year exclusive data protection

for the product post registration.

Strong product pipeline provides multi-year growth visibility

PI’s success is driven by the effectiveness of its products. At any given point of time,

the company has a niche pipeline of products under different stages of

registration—from which it introduces one or two products every year before Kharif

or Rabi season. Since the products are of early-stage patented molecules, the multi-

year growth potential is robust—with very high growth in the initial years of launch.

PI banks on its strategy of selective alliances to broaden product offerings and

strengthen market position. The company currently has 5-6 products in pipeline,

which will be launched over the next three years—with an annual target of 2-3

products.

Exhibit 8: New launches in domestic agri-inputs

Year

FY13

FY14

FY15

Product launched

Osheen (insecticide), Fluton (insecticide) and Cuprina (fungicide)

Melsa (herbicide)

Keefun (insecticide)

Source: Company, MOSL

Strong pan-India distribution network

PI has a wide distribution network, covering more than ~35,000 retail points,

~10,000 distributors/direct dealers and 29 branches across major agricultural areas

of India. The company has a strong reach in north, west and east of India, and is

gradually expanding its presence in the south. PI has a centralized SAP-based ERP

system, which provides an efficient last-mile connectivity through effective supply

chain management and inventory handling. PI provides delivery of products as per

the requirement through its just-in-time management of stocks, thereby avoiding

excess inventory.

10 October 2015

PI Industries

Nominee Gold growth to continue; scale-up of recent

launches, new products to maintain growth momentum

New products like Osheen, Vibrant to be the new growth drivers



Given the extremely low penetration levels for Nominee Gold (only 10% of the area

under rice cultivation covered as against potential for at least 30%, with with dosage

being a fraction of the ideal dosage), we believe it has tremendous headroom for

growth as the market expands. We believe the fears around price, margin erosion and

de-growth for the product are overdone.

Launched in FY13, OSHEEN is PI’s second largest product and is reputed to be the most

reliable solution to manage Brown Plant Hoppers in rice. An INR1b brand, we expect

OSHEEN to be the largest growth driver for PI over coming years.

PI recently launched Vibrant (Thiocyclam)—a broad-spectrum insecticide for rice

treatment and can attack two pests (stem borer and lepidopetra) in a single dose. The

addressable markets for Vibrant are Punjab, Haryana, Chattisgarh and AP, with a total

addressable market opportunity of INR6b.

Nominee Gold growth to continue despite new competition

PI launched Nominee Gold in FY10 (as a tie up with Japan-based innovator Kumiai),

which went on to become a blockbuster product—clocking highest revenues and

margins amongst its product portfolio. NOMINEE GOLD is a post-emergent, broad-

spectrum systemic herbicide for all types of rice cultivation—direct sown rice, rice

nursery and transplanted rice. The product has enjoyed exclusivity over the last five

years, with exclusivity till FY13 due to regulatory requirements and post that due to

a Gujarat High Court Ruling that delayed the process for 9 (4) registrations—thus

limiting the entry of new players and, thereby, competition.

However, with the likely easing of registration process for 9 (4), we believe

competition will increase going forward; this could erode the product’s price and

margin to some extent. However, given Nominee Gold’s low penetration, we believe

it will grow as the market expands. We believe the fears around price, margin

erosion and de-growth for the product are overdone.

Exhibit 9: Nominee Gold expected to remain highly successful in near future

Osheeen—the second blockbuster product after Nominee Gold

In FY13, PI launched Osheen—an insecticide—through an in-licensing deal with

Japan’s Mitsui Chemicals. Just like PI’s other products, Osheen has proved to be a

runaway success as the first two years of its launch saw sales reaching INR1b.

10 October 2015

PI Industries

Osheen continues to be the second biggest product for PI after Nominee Gold; it has

still not seen any price erosion and will enjoy exclusivity till the end of 1HFY17.

Osheen controls the brown plant hoppers in rice, targeting pests that are not

controlled by other molecules, owing to the unique action of the ingredient

Dinotefuran. OSHEEN has effectively managed the Brown Plant Hoppers in rice for

number of years in the leading rice growing countries. The product has also been

tested and recommended by leading agriculture research institutes of Govt. of India

for rice and cotton. PI spent nearly six years on Osheen’s development. After rice, PI

extended the product to cotton and is looking to extend to vegetables as well.

Exhibit 10: Osheen achieved revenues of INR1b in the first two years of launch

Vibrant—another promising product addressing the ~ INR6b market

PI will launch Vibrant (Thiocyclam) in November, 2015 — a broad-spectrum

insecticide for treatment of rice and can attack two pests (stem borer and

lepidopetra) in a single dose. Farmers currently use two insecticides—one for stem

borer and another for leaf folder. As a result, Vibrant will help farmers in the form of

savings of chemistry, cost of application and efforts. PI estimates that farmers are

using products worth INR6b on protecting their crops from pests. This product is

exclusive (registration u/s 9(3) of CIB) and has an in-licensing arrangement with a

Japanese MNC. The addressable markets are Punjab, Haryana, Chattisgarh and AP

and market size is INR6b. Also, the product doesn’t cannibalize any of PI’s existing

products.

Higher contribution from new products to keep growth momentum intact

Rice contributes nearly 40% to revenues, followed by vegetables, tea and chilies.

However, PI is a complete agro-chemicals player as it provides protection across

crop categories. Insecticides contribute ~50% to revenues, followed by herbicides

(~30%) and fungicides (~20%). PI’s top six products include Nominee Gold, Keefun,

Biovita, Foratox, Osheen, Kitazin. With a market share-focused approach, along with

top products, the management bundles generic products to drive scale and viability

at the dealer level.

Differentiated distribution strategy—to augur well for growth

PI is now targeting to enter and penetrate newer geographies, which will further

strengthen its position—considering the company’s product effectiveness and brand

value. While PI is already strong in Chhattisgarh, UP and Bihar, it now plans to enter

markets that are largely untapped (e.g., Maharashtra, where it has approvals in

10 October 2015

PI Industries

place and expects revenue traction from FY17). We believe the focus on market

share, emphasis on being the market leader, entering new geographies and smaller

farmers will keep growth momentum intact going forward.

Exhibit 11: Revenues in agro-chemicals to post a CAGR of 17 % over FY15-17

Revenues (INR m)

23%

22%

19%

14%

Growth (%)

20%

5,052

FY12

5,500

FY13

6,700

FY14

7,973

FY15

9,089

FY16E

10,907

FY17E

Source: MOSL, Company

Exhibit 12: EBITDA in agro-chemicals to post a CAGR of 19% over FY15-17

EBITDA (INR m)

16%

12%

16%

Margins (%)

15%

17%

783

FY12

664

FY13

1,039

FY14

1,276

FY15

1,363

FY16E

1,800

FY17E

Source: MOSL, Company

10 October 2015

PI Industries

Capabilities in CSM exports make PI an ideal choice

Robust order book of USD600m gives revenue visibility



IPR protection is vital criteria for global innovators to choose partners in the CSM

business and all Indian players are subject to TRIPS agreement, which provides IPR

protection. Additionally, economic competencies relative to China have also gradually

improved over the last few years. These factors make Indian players an economically

viable choice.

PI has exhibited strong scale-up and execution capabilities in CSM, which involves

complex activities, and has accreditation for GLP along with best-in-class support

infrastructure; this has led to longstanding relationship with global innovators in the

agro-chemical space and acts as major entry barrier for new entrants.

PI participates in early stage of molecule life cycle, which enables it to participate in

the growth phase of products. The company’s robust order book of USD600m provides

revenue visibility over the next two years and will be complemented by upcoming

facilities in Jambusar. PI is also looking beyond agro-chemicals for new growth

opportunities.

We expect CSM exports to post revenue CAGR of 27% over FY15-17, with EBITDA

margins improving by 100bp to 22%.

In CSM, Indian players being preferred over Chinese

Respect for IPR:

Global Innovators partnering Indian suppliers stand protected

under a stringent patent protection as India is a signatory to Trade Related

Intellectual Property Rights (TRIPS) agreement.

Competitive advantages over China:

China is the largest exporter of agro-

chemicals globally and is, thus, a primary competitor to India in this space. However,

over the years, China has been gradually losing its dominance in manufacturing on

the back of rising labor cost, stricter environmental and safety regulations, and weak

IPR policy. Further, India’s currency has been more competitive than the Chinese

Yuan against global currencies; thus making Indian companies economically

attractive. Agro-chemicals exports from India showed 15% CAGR over FY98-14.

The global fine chemical industry is estimated to be about USD300b with CSM

segment estimated to be ~USD85b; India’s share is currently ~5%, but it is growing

at a healthy pace of 12% due to its emergence as a preferred destination.

R&D capabilities, infrastructure and trust aspect make PI a preferred choice

In CSM exports, PI undertakes custom synthesis and contract manufacturing of

niche fine and specialty chemicals for process research and large-scale

manufacturing of newly discovered molecules by global innovators.

It is supported by high-end infrastructure, which includes R&D Lab, Kilo Lab, Pilot

Plant, and Flexible and Dedicated plants. PI has also created various reaction

capabilities and continuously adds to it to meet customer requirements.

PI Industries is also accredited for

‘Good Laboratory Practices’ (GLP).

Data

generated in the company’s laboratory is, hence, acceptable by registration

authorities (for agro-chemical, pharmaceuticals, etc.) in all the OECD regions such as

USA, Europe and Japan.

10 October 2015

PI Industries

CSM business involves a high level of trust, especially for companies like PI who are

involved in the development of early stage molecule.

Longstanding relationships

with global agro-chemical innovators is a testament to PI’s trust and reliability,

which are major entry barriers for any new entrant.

PI has reached this level over a period of 20 years and it will take a long gestation

period for a new entrant to acquire knowledge, create strong R&D capabilities,

infrastructure and built trust.

Exhibit 13: End-to-end process flow in custom synthesis and contract manufacturing

Source: Company

Exhibit 14: Custom synthesis—production technologies

Source: Company

10 October 2015

PI Industries

Focus on early stage molecules provides opportunity to participate over the

life of a product

As a part of its core strategy, PI focuses on manufacturing molecules— of

high/medium value and low volume—that are patented, in early stages of their life

cycle and involve complex chemistries. The contribution of early stage molecule to

the CSM exports business is ~90%; thus the company is able to participate through

the life of a product, which provides opportunity to be the first and second suppliers

of such molecules under global patents.

It takes around 3-5 years for a molecule to get commercialized post inquiry by a

customer; thereafter, it gives revenue visibility for 5-10 years until new molecule is

discovered or resistance to a particular product is developed.

Exhibit 15: Life cycle chart

SSource:

Industry

Exhibit 16: Example of CSM order flow

Dec '11

Feb '12

Mar '12

May '12

Jun '12

Aug '12

Nov '12

Apr '14

PI 011

Enquiry received

1st sample sent to customer

Sample approved by customer and agreement signed

Scale up study undertaken

First commercial order (5MT)

Second commercial order (57MT)

(Supply upto Mar '13)

Third commercial order (200MT)

(Supply upto Mar '14)

Fourth commercial order of 1500MT

(USD36m) for 3 years

Source:

Company

Key entry barriers:

Creating capabilities in process research and building strong infrastructure takes time.

Long gestation in creating client relationship and building trust.

Participating in patented and early stage of molecule life cycle. The client generally keeps only one

or two suppliers due to confidential data.

Robust order book gives revenue visibility over next two years

The latest order book stands at USD600mn, which is 3.1x its FY15 revenue

(USD187m) from CSM exports. The strong growth in order book is on account of

10 October 2015

PI Industries

new molecules that were commercialized in the last 3-4 years and comprises 5-7

molecules. Currently, the total number of molecules commercialized is 18 and the

company expects to commercialize two more in the next two quarters. PI is

confident of commercializing 2-3 molecules every year and this will continue to

provide revenue visibility.

Exhibit 17: Order book to revenue ratio

Revenue USD mn

Order book USD mn

Order book to revenue

578

3.85

300

FY12

110

2.77

305

153

395

2.58

187

3.09

FY13

FY14

FY15

Source: MOSL, Company

Order book to be complemented by the upcoming Jambusar facility

The company expects to commission two new plants at Jambusar during FY16. The

work at the plants is progressing as per schedule and the PI expects to commission

the first plant by October 2015 and the second by December 2015. The plants will

be fully automated, unlike the previous plants (which involved higher manual

intervention). Both plants are multipurpose and can produce various molecules with

a downtime of two weeks between switching.

The total capex incurred on the plants is expected to be around INR2,500m-3,000m

while the asset turnover on maturity is expected to be 2-2.5x the capex; this will

convert into additional revenue of INR5,000m-6,000m. Considering that order

visibility is already there, the estimated time to scale up these plants to full capacity

utilization is around 1-1.5 years. The revenue from Jambusar facility, where one

plant is already operational, was INR300mn in 1QFY16; the total capex incurred in

the plant was INR1,800m, including supporting infrastructure.

The new plants in Jambusar will have a 10-year tax break on all products

manufactured. We expect these plants to contribute majorly to the revenue going

ahead, leading to margin expansion and tax savings.

10 October 2015

PI Industries

Exhibit 18: Attractive RoCEs on core investments in CSM model overshadow capital

intensity (only for new capacities)

Capital Investment

Working capital

Total capital employed

Sales

EBITDA

Less: Depreciation

EBIT

RoCE %

100

136

200

Source: MOSL, Company

Asset turnover - 2x of capital

employed

22% EBITDA margins

average 6% depreciation rate

60 days of sales based on FY15

Leveraging its existing capabilities to diversify beyond agrochemicals

PI has created strong capabilities in R&D. The general nature of the intermediates

that it manufactures is such that they can be applied to other verticals of the

chemicals sector (like pharmaceuticals or fine chemicals used in the electronics

sector) with some modification; these verticals can be new growth opportunities for

PI and will in turn expand its customer base and geographical reach.

Exhibit 19: Revenues in CSM business to post a CAGR of 27% over FY15-17

Revenues (INR m)

59%

61%

54%

Growth (%)

24%

3,731

FY12

6,001

FY13

9,250

FY14

11,430

FY15

28%

27%

14,605

FY16E

18,517

FY17E

Source: MOSL, Company

Exhibit 20: EBITDA in CSM to post a CAGR of 30% over FY15-17

EBITDA (INR m)

18%

19%

21%

Margins (%)

22%

672

FY12

1,132

FY13

1,785

FY14

2,400

FY15

3,213

FY16E

4,074

FY17E

Source: MOSL, Company

10 October 2015

PI Industries

Earnings to post 26% CAGR over FY15-17

Robust growth in revenues led by CSM business

We expect revenues to post 23% CAGR over FY15-17, led by 17% revenue CAGR in

the domestic agro-chemicals business and 27% revenue CAGR in the CSM business

over FY15-17. We expect EBITDA margins to expand 80bp over FY15-17, led by a mix

change in favor of CSM business. Consequently, we expect 26% PAT CAGR over

FY15-17.

Exhibit 21: Revenues to post 23% CAGR over FY15-17

Revenues (INR m)

39%

22%

11,514

FY13

15,955

FY14

19,403

FY15

22%

23,694

FY16E

24%

29,424

FY17E

Growth (%)

16%

Exhibit 22: EBITDA to post 26% CAGR over FY15-17

EBITDA (INR m)

18%

19%

Margins (%)

19%

20%

22%

8,791

FY12

31%

16%

1,434

FY12

1,806

FY13

2,889

FY14

3,727

FY15

4,595

FY16E

5,894

FY17E

Source: Company, MOSL

Exhibit 23: PAT to post 26% CAGR over FY15-17

PAT (INR m)

93%

Growth (%)

Exhibit 24: Consistently strong asset turnover

Asset Turnover (x)

1.8

1.4

1.8

1.9

2.0

24%

804

FY12

21%

973

FY13

1,880

FY14

31%

2,459

FY15

33%

20%

2,939

FY16E

3,895

FY17E

FY12

FY13

FY14

FY15

FY16E

FY17E

Source: Company, MOSL

Exhibit 25: RoCE to improve to 42.5% by FY17

RoCE (x)

39.9

Exhibit 26: Free cash generation on cards

Free cash flow (INR m)

1,548

34.9

25.6

25.3

39.4

42.5

2,455

1,253

156

FY12

FY13

FY14

FY15

FY16E

FY17E

(47)

FY13

(490)

FY14

FY15

FY16E

FY17E

Source: Company, MOSL

10 October 2015

PI Industries

Valuation and view

Initiate with a Buy



PI boasts of a unique business model—a strong R&D-led custom synthesis business

(59% of revenues) build over the last two decades, and an equally compelling

domestic agro-chemicals business (41% of revenues), largely built by in-licensing

arrangements with major global agro-chemicals innovators.

With a mere 10% penetration, we believe there is untapped growth potential in PI’s

largest product—Nominee Gold, which (along with new products like Osheen, Vibrant)

will continue to drive growth momentum for the domestic agro-chemicals business.

With a strong order book amounting to USD600m, the CSM business has robust

revenue visibility—book-to-bill of 3.2x; we thus expect 23% revenue CAGR over FY15-

17. We believe the foray into new segments like pharmaceuticals and electronics

chemicals will be the next key growth drivers for the CSM business.

With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust growth

outlook—23% revenue CAGR and 26% PAT CAGR), we believe PI is one of the best

plays on India’s agri sector and CSM opportunities. Initiate coverage with a Buy.

Exhibit 27: Price-to-earnings (one-year forward)

9.3

6.9

Exhibit 28: Price-to-book (one-year forward)

28.3

9.0

6.0

P/E (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

15.4

P/B (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

7.5

3.0

0.0

3.8

2.2

1.5

Source: Company, MOSL

Exhibit 29: Assumption sheet

FY12

Revenues (INR m)

Domestic agro-chemicals

CSM

Revenues growth (%)

Domestic agro-chemicals

CSM

EBITDA (INR m)

Domestic agro-chemicals

CSM

EBITDA margins (%)

Domestic agro-chemicals

CSM

16%

18%

12%

19%

16%

19%

16%

21%

15%

22%

17%

22%

23%

59%

1,434

783

672

61%

1,806

664

1,132

22%

54%

2,889

1,039

1,785

19%

24%

3,727

1,276

2,400

14%

20%

4,576

1,363

3,213

20%

23%

5,873

1,800

4,074

8,791

5,052

3,731

FY13

11,515

5,500

6,001

FY14

15,955

6,700

9,250

FY15

19,403

7,973

11,430

FY16E

23,694

9,089

14,605

FY17E

29,424

10,907

18,517

Source: Company, MOSL

10 October 2015

PI Industries

Key risks

Uncertain monsoon

Unfavorable monsoon is the biggest risk for the domestic agro-chemicals sector.

Delayed or deficient rainfall hurts sales return and, thus, negatively impacts growth.

Similarly, unseasonal rainfall can damage standing crops, resulting in income loss for

farmers.

Lower prices of agricultural produce

Decline in prices of agricultural commodities or lower MSP (minimum support price)

can reduce farm incomes and, consequently, demand for agri-inputs. Unlike

fertilizers, prices of agrochemicals are not subsidized and farmers may choose to

decrease their purchase of agro-chemicals to lower their production cost.

Delay in getting approvals for new products

Registration of pesticides is a time-consuming process in India. It can take 2-4 years

to launch a new molecule. Delay approvals could lead to loss of potential profit

opportunity.

Delay in capacity expansion or utilization

Delay in commissioning a plant or ramping it up within expected timelines post-

commissioning can adversely impact CSM exports revenue growth prospects.

10 October 2015

PI Industries

Management overview

Mr. Salil Singhal, Chairman and Managing Director

Mr. Salil Singhal serves as the CMD of PI and has been leading the company since

July 1979. Mr. Singhal is a highly reputed and well-known agro-chemicals industry

leader and was the Chairman of the Pesticides Association of India (now Crop Care

Federation of India) for 20 years.

Mr Mayank Singhal, Managing Director and CEO

Mr. Mayank Singhal serves as the Managing Director and CEO of PI. An Engineering

Management Graduate from the UK, Mr. Singhal joined PI in 1996; he was

appointed as Joint Managing Director in 2004 and as CEO and MD on December 1,

2009. He has worked at the plant level for two years and has been responsible for

the rapid growth and expansion of the company’s manufacturing and marketing

capacities.

Mr. Rajnish Sarna, Executive Director

Mr. Sarna is the Executive Director at PI. He is a Chartered Accountant and brings to

table his diverse experience of over two decades in the areas of Business

Development & Strategy, Customer Relationship Management, Operations, Finance

& Risk Management, Legal Contracting & Compliances, Investor relations, Corporate

Planning & Reporting, Information Technology & Process Re-engineering, etc.

Mr. Sarna has been associated with PI for more than 16 years has held several

senior leadership roles (including that of Executive Director, CFO and CIO) over the

years.

10 October 2015

PI Industries

Industry overview

Strong growth potential for Indian agro-chemicals sector

India’s crop protection industry is estimated at USD4.3b, of which domestic industry

forms 52% (USD2.3b) and exports 48% (USD2b). According to CRISIL, the industry is

expected to post 12% CAGR over FY14-19 to reach USD7.5b. Domestic/exports

expected to grow at 8% (to USD3.3b) and 16% (to USD4.2b). Given the minimal

pesticide penetration in India (0.75 kgs/Ha as against the global average of

10kgs/Ha), growth prospects for Indian industry are strong. Over 400 companies

operate in the domestic market and can be broadly categorized under three heads:

a) MNCs—30% market share, b) Indian organized—50% market share, and c)

unorganized—20% market share.

Exhibit 30: India’s agro-chem market valued at USD4.3b

Exhibit 31: Pesticide consumption lowest in India

Pesticides consumption (Kgs/Ha)

Domestic

market,

52%

Exports,

48%

0.75

India

Source: Company, MOSL

France Korea

USA

Japan

China Taiwan

Source: Company, MOSL

Exhibit 32: Indian organized sector dominates the domestic agro-chem market

Indian

Unorganized, 20%

Indian Organized,

50%

MNCs, 30%

Source: Company, MOSL

Key growth drivers



Growing food demand with limited land availability will lead to higher focus on

crop yields. Escalating labor costs are driving demand for herbicides (as against

manual weed cutting), thus ensuring higher agrochemicals usage. India’s

pesticide consumption (0.75 Kgs/Ha) is amongst the lowest globally.

Strong export opportunity: Low-cost manufacturing, availability of technically

skilled manpower, seasonal domestic demand, available capacity, better price

realization globally and strong presence in generic pesticide manufacturing.

Agro-chemicals worth USD6.3b are expected to be off patent by 2020; this

presents a large opportunity for Indian companies to participate in the global

generics business.

10 October 2015

PI Industries

Financials and valuations

Income Statement (Consolidated)

Y/E March

Income from Operations

Less: Excise Duty

Total Income from Operations

Change (%)

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT

Current Tax

Deferred Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY14

16,812

857

15,955

38.6

13,066

81.9

2,889

18.1

316

2,573

118

158

2,613

779

-46

28.1

1,880

93.2

11.8

FY15

20,332

929

19,403

21.6

15,675

80.8

3,727

19.2

498

3,229

420

3,552

1,147

-54

30.8

2,459

30.8

12.7

FY16E

24,828

1,134

23,694

22.1

19,099

80.6

4,595

19.4

555

4,041

279

4,259

1,320

31.0

2,939

19.5

12.4

(INR Million)

FY17E

30,832

1,409

29,424

24.2

23,530

80.0

5,894

20.0

660

5,234

348

5,564

1,669

30.0

3,895

32.5

13.2

Balance Sheet (Consolidated)

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Deferred Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Deferred Tax assets

Appl. of Funds

E: MOSL Estimates

FY14

136

6,809

6,945

485

1,223

8,653

6,829

1,563

5,267

425

7,482

3,188

2,568

438

1,289

4,574

4,251

324

2,908

8,653

FY15

137

8,828

8,965

434

1,148

10,546

7,050

1,724

5,326

1,332

9,668

3,782

3,826

341

1,719

5,851

5,437

413

3,817

10,546

FY16E

137

11,184

11,321

434

498

12,253

8,800

2,278

6,522

1,461

11,047

4,464

4,220

302

2,062

6,848

6,026

822

4,199

12,253

(INR Million)

FY17E

137

14,330

14,467

434

14,901

10,050

2,938

7,112

1,609

14,701

5,495

5,240

1,492

2,475

8,591

7,555

1,036

6,110

14,901

10 October 2015

PI Industries

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Working Cap. Turnover (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

FY14

13.8

16.1

51.0

2.0

17.0

47.8

40.9

12.9

5.5

30.3

0.3

11.4

30.7

34.9

1.8

126

169

1.6

0.2

FY14

2,613

316

-20

-743

-81

2,084

104

2,188

-640

1,548

179

-461

-1,097

-115

-272

-7

-1,451

276

161

437

FY15

18.0

21.6

65.6

2.5

16.9

36.7

30.5

10.1

4.5

23.5

0.4

1.1

30.9

39.9

1.8

124

178

1.7

0.1

FY15

3,552

498

-126

-1,195

-971

1,759

1,841

-1,685

156

274

-1,412

-153

-111

-300

-526

-96

437

341

FY16E

21.5

25.6

82.9

3.5

19.8

30.7

25.8

8.0

3.7

18.9

0.5

9.2

29.0

39.4

1.9

120

162

1.6

0.0

FY16E

4,259

555

-1,320

-422

3,132

-1,879

1,253

-1,879

-650

-60

-583

-1,293

-40

341

302

FY17E

28.5

33.3

105.9

4.5

19.2

23.1

19.8

6.2

2.9

14.5

0.7

18.0

30.2

42.5

2.0

120

165

1.7

0.0

Cash Flow Statement (Consolidated)

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(inc)/dec in FA

Free Cash Flow

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

E: MOSL Estimates

(INR Million)

FY17E

5,564

660

-1,669

-720

3,852

-1,397

2,455

-1,397

-498

-18

-749

-1,265

1,190

302

1,492

10 October 2015

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

PI Industries

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