Ruchi Agarwal Moneycontrol Research
PI Industries reported a subdued set of Q2FY18 results with 3 percent topline growth, much below Street expectations, majorly due to lower than anticipated export performance. Domestic revenues grew 13 percent YoY to Rs 260 crore; however, revenue from exports contracted by 4 percent YoY at Rs 300 crore. EBITDA declined by 4.5 percent YoY and EBITDA margins were down 270 basis points YoY mainly on account of an unfavorable product mix during the quarter.
What led to the contraction?
The decline in the revenues despite an increase in domestic demand with the normalization of the pre-GST impact was majorly on account of softness in the global demand and lower exports, low capacity utilization at 70 percent which led to lower operating leverage, a product mix tilted towards less profitable products during the quarter, high tax incidence due to a one-time tax adjustment charge and higher working capital on account of high receivables due to inventory pile-up.
Positive Outlook
Despite a weak performance in Q2 and H1FY18, there seems to be greater visibility for growth in the coming quarters. The management remains confident of achieving around 10 percent growth in FY18 across domestic and export businesses with the schedule for new product launches in the domestic market and commercialization of 3 major projects in H2FY18.
With strong curbs on new procurements, global inventory levels have gone down and inventory channels have cleared which will lead to better off-take in Q3 and Q4. Moreover, the company’s current order book stands at a strong USD 1 billion with deliveries scheduled in coming quarters which should boost revenues. With increased production, the management also expects better capacity utilization and benefits of operating leverage.
Update on nominee gold
Nominee gold is the flagship herbicide product of the company used primarily for rice cultivation. The product has witnessed increased competition as almost 24 generic players have entered the market which has led to reduction in prices and realisations. However, the risks associated with nominee gold seem to be waning. According to the management, the overall industry volumes expanded by almost 15 percent due to which the company has been able to retain its market share and volume growth. This has also helped in reducing the impact of price reduction. Moreover, owing to a superior formulation, the company expects lesser impact of generics on demand.
Future plans
The company plans to foray into fungicides in a partnership with BASF which would further accelerate demand. The plans for an entry into pharma and the electronic imaging segments are becoming increasingly visible with clear guidance of an announcement in H2. PI’s R&D pipeline is much improved and the company has received a lot of queries and interesting projects which should translate into future benefits. The possibility of a clampdown on Chinese imports in India and the compulsory shut-down of Chinese plants during specific winter months brings in the possibility of increased opportunity for PI in both domestic and overseas markets.
With better visibility of future operations and a positive outlook and guidance by the management, the stock has run up 10 percent in the last five days. The stock is trading at a PE of 25x FY18 earnings and 21x FY19 estimates and a EV/EBITDA of 18x FY18 and 16x FY19 earnings, which is in line with the average for the competition. This makes PI an attractive stock to look at in the coming quarters.
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