PI Industries Ltd by Deven Choksey Research

Result Highlights of Q2FY25:

• PI Industries revenue missed our estimates significantly due to decline in domestic segment. EBITDA missed our estimates due to increase in employee expenses and other expenses, however, Adj. PAT was largely in-line.
• We decrease our FY26E EPS estimates to INR 140.6 (previously: INR 148.0) due to reduced FY25E guidance, global demand fluctuations, and normalization of inventory level will take two to three quarters.
• We maintain our PE multiple at 35.0x as we believe new product launches, including biological solutions are expected to drive domestic revenue, and growth in CSM exports will be supported by strong demand for newly commercialized products. Therefore, we arrive at a target price of INR 4,922 (previously: INR 5,184) and maintain our “BUY” rating.

KEY FINANCIALS 

Weak revenue growth led by pricing challenges and high inventory levels

1) For Q2FY25, the revenue increased 4.9% YoY (7.4% QoQ) to INR 22,210 Mn, the subdued revenue growth was led by decline in domestic segment and moderate growth in export segment.
2) Exports (79.3% of revenue) grew by 7.8% YoY (+0.7% QoQ) to INR 17,610 Mn driven primarily by growth in the custom synthesis and manufacturing (CSM) exports, which saw a 10.0% rise due to volume growth and the introduction of new products.
3) However, Pharma which is a part of exports (2.0% of exports) declined by 42.8% YoY (+62.5% QoQ) to INR 411 Mn led by high inventory levels with innovators in the pharma business.
4) Domestic (20.7% of revenue) declined by 5.0% YoY (+44.0% QoQ) to INR 4,600 Mn, due to reduced supply to institutional customers which was partially offset by growth in branded business and biologicals.
5) Additionally, price pressures due to high inventory levels in distribution channels contributed to the reduced demand for agrochemical products in domestic markets.

Strong gross margin improvement; Increased operating costs impacted profitability

1. Gross margins expanded 519 bps YoY (flat QoQ) to 51.8%, driven by the favourable product mix with a focus on high-margin segments, including biologicals and new products in export segment.
2. EBITDA grew by 13.9% YoY (7.7% QoQ) to INR 6,282 Mn, with EBITDA margin expanding by 224 bps YoY (10 bps QoQ) to 28.3%.
3. The margin improvement was mainly driven by higher gross margins. However, the rise in overhead costs, driven by the scale-up of exports and promotional expenses for new product launches, impacted overall profitability.
4. Adj. Net profit increased 5.8% YoY (13.2% QoQ) to INR 5,082 Mn.

PI Industries Ltd by Deven Choksey Research

Key Concall Highlights:

(1) In response to global challenges and fluctuating demand patterns, PI Industries revised its FY25E growth guidance to high single-digit or low double-digit revenue growth.
(2) Unpredictable rainfall patterns delayed sowing and impacted crop acreage, which reduced demand for the company’s agrochemical products in domestic markets.
(3) New products within the CSM export portfolio showed a YoY growth of 42.0%, demonstrating successful commercialization efforts and growing demand for PI’s advanced molecules.
(4) Strategic alliances with global innovators and expansion of the CSM portfolio helped the company capitalize on high-value crop protection and sustainable agricultural solutions.
(5) The company’s customers in the export segment, especially in developed markets, have been adjusting inventory levels due to industry-wide trends and concerns about working capital.
(6) The company remains cautiously optimistic about H2FY25E, expecting a recovery in the domestic market, driven by improved water reservoir levels and potential growth in the Rabi crop season.
(7) PI Industries has introduced three new products in H1FY25 and plans to launch three additional products in the H2FY25E.
(8) These products, including innovative biological solutions, are expected to bolster domestic revenue and offset pricing pressures in older product lines.
(9) Despite inventory adjustments by customers, PI Industries expects high single-digit growth in CSM (custom synthesis and manufacturing) exports for H2FY25E, supported by strong demand for newly commercialized products and ongoing engagements with global innovators.
(10) The company plans to continue expanding its CSM and biological portfolios and expects inventory levels to normalize within the next two to three quarters.

Valuation and view:

In Q2FY25, PI Industries achieved modest revenue growth, driven mainly by the exports segment, particularly in the CSM business, due to strong demand for high-margin products. However, the Pharma segment in exports struggled with high client inventory levels. Domestically, revenue declined due to reduced institutional demand and price pressures from excess inventory. Despite this, growth in branded and biological product lines provided some support to the domestic market. Gross margin improved significantly due to a favorable product mix, especially in high-margin segments like biologicals and new exports.

We decrease our FY26E EPS estimates to INR 140.6 (previously: INR 148.0) due to reduced FY25E guidance, global demand fluctuations, and normalization of inventory level will take two to three quarters. We expect the revenue to grow at 11.5% CAGR and Adj. PAT to grow at 12.6% CAGR over FY24-FY26E. Currently, the stock is trading at a PE multiple of 35.2x/30.3x, based on FY25E/FY26E, respectively. We maintain our PE multiple at 35.0x as we believe new product launches, including biological solutions are expected to drive domestic revenue, and growth in CSM exports will be supported by strong demand for newly commercialized products. Therefore, we arrive at a target price of INR 4,922 (previously: INR 5,184) and maintain our “BUY” rating on the stock which will have an upside potential of 15.8%.