A relatively safe investment option
By Arun Mukherjee
This company has grown its sales and bottom line at a thundering speed of 22% and 73% respectively over the last decade. Let’s have the quintessence.
Incorporated in 1947, PI Industries (erstwhile Pesticides India) focuses on Agri-input, custom synthesis and polymer compounding with strength of over 1,100 employees. PI currently operates three formulations and two manufacturing facilities as well as five multi-product plants across Gujarat and Jammu, and one R&D unit in Rajasthan at Udaipur. PI is one of India’s leading players in the Agri-input industry, primarily dealing in agro-chemicals, specialty fertilizers, plant nutrients and seeds. The company has exclusive rights with several global corporations for distribution in India, and is constantly evaluating prospects to further expand its product portfolio. The fine chemicals business unit of PI focuses on custom synthesis, which entails dealing in custom synthesis and contract manufacturing of chemicals, including commercial evaluation of chemical processes, process development, lab and pilot scale up as well as commercial production. The company has a strong product portfolio as a result of exclusive tie-ups with leading Agro-chemical, pharmaceutical and fine chemical companies around the world.
PI has one of the oldest, most robust and a highly loyal distribution channel/ marketing network spread throughout India. For effective marketing, the country is divided into 8 Zones, 29 Regions and over 160 territories. There are more than 500 people working with the marketing team spread across the country. The marketing team is partnered with one of the most loyal distribution channels. Its 3 tier distribution channel has more than 8000 distributors and direct dealers and over 40,000 retail points across the country. PI has 30 stock points, including its own depots and C&F agents who work on a hub-and-spoke distribution model to ensure timely delivery.
PI Industries seems to be on verge of resuming next phase of wealth creation cycle because of 6 reasons:
1) CSM business will resume it’s high double digit growth rate starting next financial year.
2) Proactive approach of management in domestic Agri-input space which will keep the company ahead of peers and will insulate it to a large extent from the recent trend of MNCs increasing their direct presence in Indian market.
3) The Unique JV based model adopted by management for domestic Agri-input space will benefit CSM segment immensely over medium to long run.
4) The company has built a strong senior level team in the pharma segment over last one year with prominent industry guys enjoying high credibility having vast experience to work with innovators; in addition it is attractively placed in terms of timing of foray in the segment as it can comfortably wait and choose it’s acquisition target.
5) The company has a historical track record of 60% EBITDA to OCF generation and with increasing contribution of CSM segment, EBITDA margins are expected to remain healthy at 21-25% over the foreseeable future. In addition, the company is likely to end current FY18 at a net cash surplus of around 300 crore in balance sheet ex-acquisition.
6) Valuation has of late turned very attractive at just 20X FY18e EV/EBITDA, 16X FY19e EV/EBITDA. Here, no acquisition numbers are built in. Once growth visibility sets in, most probably by FY18 end, the immediate valuation market would assign 25X forward EV/EBITDA.
Also, it’s normally hard to get a combination of dynamic management, derisked strong business model, exceptional past execution track record, good opportunity size and strong partnership (modelled ties with MNCs wherein they are equally dependent on the company as much as the company is dependent on them).
There is also a relatively clear growth visibility wherein 65% of the current consolidated revenue size is assured to recur every year for the next 4 years (because of 1 billion USD order book which majorly possesses of take or pay contracts).
Negligible debt on the books and net cash on BS to the tune of 12% of the current revenue size with a track record of serving even 2x D/E comfortably (in other words, it simply means company possesses 50% of the current revenue size as war chest @ just 0.5x D/E, which is exceptionally attractive as it is in the hands of a dynamic management with a stated objective of profitable safe growth).
Concerns
The domestic Agri business’ fortunes are dependent on the monsoon season. A dull monsoon season, could impact growth. Considering about two-thirds of PII’s revenues (CSM segment) are export related, the company does face currency related risks – although the company is able to renegotiate prices every time it receives a new order.
IE&M Take
When all above factors get combined and are offered at attractive valuation because of minor bump company is going through, it makes for a relatively safe investment option which is difficult to get in the current bull market. An investor just needs to have patience to ride the difficult phase and should wait and look for zero tax (LTCG) attractive returns in such investment opportunities.
(Disclaimer: The views expressed herein are based on publicly available information and other sources believed to be reliable. The information contained in this document does not have regard to specific investment objectives. Neither IE&M nor any person connected with the organisation, accepts any liability arising from the use of this document.)
