PI Industries stock gains from CSM business and margin expansion

Robust order book, product pipeline will ensure steady growth of agrochem player

A strong performance in the October-December quarter (third quarter, or Q3) of 2022-23 (FY23) led to an 8 per cent jump in the stock of the country’s second-largest agrochemical player by market capitalisation — PI Industries.

It was the highest gainer in trade among the BSE 100 constituents. The agrisciences major gained from a growth momentum in the custom synthesis manufacturing (CSM) segment and margin expansion. The CSM business accounted for 82 per cent of the company’s Q3FY23 revenue.

Even as overall revenue saw a growth of 19 per cent, the CSM business, or the export segment, grew by a strong 23 per cent over the year-ago period.

While volume growth accounted for 9 per cent of gains, the rest of the growth came from favourable pricing/currency benefits and a better product mix.

The segment has an order book of about $1.8 billion. This should translate into revenue visibility. The company has commercialised three new products and highlighted that 40 more are in various stages of development.

The management also indicated that a quarter of the new enquiries/research pipeline is in the non-agrochemical space. This, it said, is an encouraging sign.

Alternatively, domestic performance was muted, registering a growth of 1.6 per cent year-on-year (YoY). Growth, which largely came from pricing growth, was impacted by adverse weather conditions and a higher channel inventory.

So far in the year, the company has launched seven products, and growth has been higher in brands launched in the past two years.

In addition to business performance, what stood out in the quarter was improving profitability. While gross margins were up 80 basis points (bps) to 47.2 per cent, operating margins were up a sharper 390 bps to 25.7 per cent, led by better operating leverage and a superior product mix.

Analysts, led by Sumant Kumar, of Motilal Oswal Research highlight that operating profit margins have been expanding for the past seven quarters — from 19 per cent in the fourth quarter of 2020-21 to 25.7 per cent in Q3FY23 on a favourable mix and higher volumes.

The brokerage has maintained its estimates after the December quarter results and has a ‘buy’ rating, with a target price (TP) of Rs 4,300 per share.

By and large, the company has maintained its guidance of 20 per cent revenue growth over the next few years, with improvement in margins on the back of better operating leverage and ramping up of new products.

Prabhudas Lilladher Research has increased its earnings estimates for FY23 by 9 per cent; for 2023-24 (FY24) and 2024-25 (FY25) by 4 per cent apiece. It is positive on the company’s 20 per cent YoY revenue growth guidance with significant improvement in margins ahead, primarily led by strong enquiries in the CSM business and launches in the domestic segment.

Equity research analyst Himanshu Binani of the brokerage expects revenue and net profit to register an annual growth of 20 per cent and 27 per cent, respectively, in 2021-22 through FY25. He maintains a ‘buy’ rating, with a revised TP of Rs 4,500 per share.

After recent gains and at a current market price of Rs 3,374.8, the stock is trading at 35x its FY24 estimated earnings. Investors could look at it on dips.