In our constant endeavor to improve portfolio performance and spot valuation mismatch in the markets, we are adding PI Industries to our Diwali portfolio and trimming our exposure to Tata Global Beverages by 50 percent.
PI Industries is involved in the production of crop protection chemicals for the domestic market and custom research of chemical products and molecules for global agrochemical innovator companies.
Owing to several operational and macro challenges, FY18 turned out to be a difficult year for PI industries. After weak earnings in Q4FY18 that came on the back of consecutive quarters of soft numbers, the stock saw a correction of around 7 percent in the last 3 days and is now 20 percent below its 52-week high. It is now trading at 24x FY19e (estimated) PE.
We see the soft patch as a passing phase and expect improved performance in FY19 due to several positive operating factors like substantial growth in the custom synthesis manufacturing (CMS) segment backed by a healthy order book, limited and reducing exposure to rising global raw material prices and new product launches lined up for the domestic business.
With the continued commercialisation of new products, nearing timelines for the strong order book line up, global agro chem recovery, clearing up of inventory channels and a conducive domestic Agri environment should aid earnings revival at PI in FY19.
Tata Global Beverages (TGBL) was included in our coverage in June 2017 after a series of restructuring initiatives. The unwinding of cross-holdings, revaluation of current businesses and exit from loss-making ventures helped stock re-rate. The stock has more than doubled since then before correcting recently, particularly after the Q4FY18 result.
Company’s recent quarterly result was impacted by weak performance in the non-branded business (Tata coffee’s weak earnings). Other businesses that have sequential improvements are JVs where Nourischo turned profitable in FY18, while Tata Starbucks witnessed double-digit same-store revenue growth in Q4FY18.
The stock is currently trading at 30x 2019e earnings which partially prices in the improving operating performance and restructuring initiatives.
Given the commodity nature of the non-branded business, any restructuring aimed at hiving off this business can further help to unlock the value for shareholders. However, after the sharp run-up in last one year, we consider it prudent to take some profit. We are, therefore, trimming our exposure to TGBL by 50 percent and allocating it to PI industries.
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