Ruchi Agrawal Moneycontrol Research
PI Industries (PIND) posted a healthy performance in Q2FY19 amid strong traction in the exports business. A strong volume growth helped it clock a 29 percent year-on-year (YoY) revenue rise. Earnings before interest, tax, depreciation, and amortisation (EBITDA) grew 11 percent but margins contracted sharply due to higher raw material costs and the lag in price hikes. Net margins were also hit by strategic investment in research and development activities, but this would benefit it in the longer run.
Impact on margins
A spurt in raw material costs due to strained supply from China continued to impact the margins. PIND currently imports around 20 percent of its raw material requirement from China but plans to reduce the dependence and distance itself from the unstable Chinese supply through backward integration and collaborations with new suppliers in Thailand, Vietnam and Indonesia. Higher expenses on research and development also ate into the profitability during the quarter. But, the management expects this to be beneficial in the future.
Domestic business
The domestic business top line grew a healthy 24 percent YoY on strong demand for established brands along with stabilisation of the new products launched in the last 2-3 years. The company launched two new products fantom and cosco which are expected to help capture a higher market share.
Strong traction from CSM business
After a lull in the previous years, the custom synthesis manufacturing (CSM) business has now started to gain traction and reported a strong 32 percent growth on positive momentum and healthy exports. The company has a healthy line up of new molecules which it believes would bring in higher volumes on commercialisation in the future.
An uptick in receivable days
While the working capital remained more or less under control, the quarter saw an uptick in the receivable days. According to the management, this was majorly due to sales towards the end of the quarter.
New Capacity to help drive volume
The company has invested in adding new capacity which is expected to come in by the end of the current year. Along with this, it is also undertaking a debottlenecking process. Both these would help in bringing additional capacity which would help boost the topline in the future. In the current year, the company plans a capex of Rs 300 crore followed by Rs 200 crores in the next two years.
Forex situation
While the overall depreciation of the rupee stands as a positive for PI, the management insists a majority of the growth was driven by volumes and forex gain was only a small portion. The company hedges a majority portion of the forex exposure which is revised every quarter.
Outlook
With healthy reservoir levels, strong product line up, prediction of a normal north east monsoon and supportive policy environment, the domestic business is expected to continue the current traction. With a further pick-up of recent product launches along and new molecules lined up for a launch, volumes are expected to improve.
The export business has now started to pick momentum and reported a healthy traction with inflows coming in from the order book. With increased enquiries and higher translation into firm orders, we expect the growth in exports to sustain. The company has an aggressive line up of new molecules with which it aims to expand volumes in this segment.
The stock has seen a steep correction in recent months and is now trading 27 percent below its 52-week high, at a 2019e (estimate) price to earnings (PE) of 22x and an EV/EBITDA of 17x. Valuation at this price point seems attractive. With a strong order book line up and removal of current hiccup,s we see the stock as an attractive pick.
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