Buy PI Industries; target of Rs 890: Motilal Oswal

Motilal Oswal's research report on PI Industries

Revenue miss, but EBITDA and PAT exceed estimates: PI’s revenue declined 1.9% YoY to INR5,611m (est. of INR6,256m) in 2QFY18. EBITDA margin shrunk 60bp YoY to 21.8% (est. of 17.4%) in 2QFY18, led by a 390bp YoY contraction in the gross margin to 48.1% and a 160bp rise in employee expense to 10.8% of net sales. EBITDA declined 5% YoY to INR1,222m (est. of INR1,091m). Consequently, adj. PAT declined 21% to INR803m (est. INR759m) from INR1,014m in 2QFY17. The decline in revenue is partly attributable to the change in accounting standards; excise in 2QFY17 was reported as an expense item above EBITDA; however, it is net off from gross sales in 2QFY18. Excise stood at INR279m in 2QFY17 (our estimate in 2QFY18 was flat).  Domestic business revives, CSM to follow suit: The domestic agro-chemicals business grew 13% YoY, in spite of generic product pressure on Nominee Gold. The company launched three new products for BASF in 1HFY18, and two more launches are expected in FY18 for the domestic market in segments where the company has little presence, thereby broadening the scope. Global agchem industry has also witnessed falling inventory levels, providing improved visibility of a revival in offtake.

Outlook
With the industry witnessing signs of a global agchem revival, we believe PI is well braced to leverage its strong order book and aid growth, with continuous commercialization of new products (3-4 products expected per year). FY18 is expected to be a back-ended growth year, with improvement largely expected in the quarters to follow. We largely maintain our estimates and value the stock at 25x FY19E EPS, arriving at a PT of INR890, implying an 18% upside. Maintain Buy.

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