Growth guidance may help PI Industries maintain 'outperformance'

Despite cost pressures, the company was able to expand margins in Q1

The stock of the country’s second largest agrochemical maker by market capitalisation, PI Industries has been an outperformer gaining 12 per cent since the start of the month. Both the BSE 100 of which it is a constituent as well as the benchmark BSE Sensex are up about 2 per during this period. The trigger for the stock rally has been the June quarter (Q1FY23) and a strong growth guidance for FY23.

Led by robust volumes, price gains and currency benefit, the company posted a better than expected top line performance. Consolidated revenues were up 29 per cent y-o-y to Rs 1,543 crore. The improved show was largely on account of contribution from the custom synthesis and manufacturing (CSM) or exports segment which accounts for three-fourths of overall revenues for PI Industries.

The CSM segment posted a volume and value growth 30 per cent and 12 per cent respectively with uptick across key products. The company’s order book in this segment remained robust at $1.2 billion; it has, however, remained flat over the last four quarters. The company expects the segment to report a strong performance and has guided for a revenue growth of 20 per cent plus in FY23.

The company received 13 enquiries in the June quarter of which more than 13 per cent was in non-agrochemical segment. The company commercialised one product among seven it has planned for in FY23. While the company has over 40 products at different stages of development about a third are in the non-agrochemical space. Prashant Biyani and Vatsal Vinchhi of Elara Securities believe that volume scale-up of existing business, pace of new molecule launches in more geographies and demand from global customers will drive growth in the CSM business.

Even as growth prospects remain strong, profitability after the June quarter outperformance will be tracked. Despite higher raw material prices, gross margins were flat y-o-y at 43.8 per cent led by better product mix and price hikes. Higher operating leverage led by strong exports helped the company expand its operating profit margins by 160 basis points to 22.4 per cent which was better than estimates. The company clocked higher margins despite the sharp rise in power, fuel and freight costs as well as product launch-related (promotion) costs.

Harmish Desai and Surya Patra of PhillipCapital India expect cost pressure as well as trade issues to persist in FY23 mainly led by visible trade and supply chain disruption. Despite the challenges, the analysts are cautiously optimistic driven by enhanced export potential (supported by China+1), favourable agri economics and capability to pass on elevated cost.

Strong exports demand (order book and new enquiries) and ability to pass on high input cost inflation has kept the street expectations high. Any acquisitions on its diversification agenda (pharma) would be the new trigger to look out for.

While brokerages have upgraded earnings for FY23/24 by about 6 per cent, the run up in the stock price means that the stock which trades at 37 times its FY24 earnings estimates lacks valuation comfort. Investors can consider it on dips.