Friday, 7 July 2017

PI Industries - another look

I have been invested in PI Industries for many years now. The aspects which appealed to me first, continue to appeal to me even now. The company has, over the years, managed to strengthen its moat and scale greater heights. The way the company has scaled its CSM & CRAMS business along with strengthening domestic distribution has been exemplary. 

Recently, during the Valuepickr conference in Goa, I was thinking about if PI's business moat and whether it was widening or shrinking. So, I decided to see how they were placed and see if I can poke some holes in their story.



BEAR CASE

  • Move from contract research to manufacturing will mean additional capex, reduced asset turns and lesser ROE
  • Risks - i) GM seeds, ii) herbicide resistance in plants, iii) client concentration, iv) gene-edited seeds
  • Contract research market is slowing due to:
    • New molecules are more difficult to get
    • 1st year sales have reduced drastically
    • High cost of new development of new molecules
    • Bio-tech is replacing agrochemical usage
  • Bayer, PI's largest client, is forecasting poor agrochemical growth due to high inventory, farmer stress in Brazil and Europe, reduction in corn acreage in US
  • Excel Crop has applied for manufacturing registration of (Bispyribac Sodium) Nominee Gold
  • 33% of the products in PI’s portfolio is in-licensed and faces a risk of import restrictions
  • Tax rates to go up substantially from 10% to 22-23%
  • With Bayer's acquisition of Monsanto (if it gets completed), there may be some changes in the relationship with PI

BULL CASE

  • $6bn is going off-patent in next 6 years
  • Moving to Pharma CRAMS, a much larger market. Inducted a team from AstraZeneca over last 2 years. They have also inducted a Pharma veteran - Mr Balaganesh, ex-MD and Head of Research of AstraZeneca's anti bacterial research facility - on their board as Additional Independent Director. Several other senior level recruitments to drive Pharma CSM.
  • Domestic market to grow substantially. 
  • Imports made more stringent, hence more products to be made in India versus imported
  • Recent tie-up with Kumiai Chemicals for producing Nominee Gold in India and also partner on other new molecules
  • JV with Mitsui for providing registration services - pre-launch feasibility analysis, market research and feasibility analysis. Mitsui is a global major in performance materials, petro & basic chemicals and functional polymeric chemicals
  • JV with BASF to produce 
    • Pendimethalin - Global sales US$325m - directly competing with Rallis in India
    • Saflufenacil - Global Sales US$180m
    • Dimethenamid - Global sales US$145m
  • Order book of $1 bn (June 2017) for 8-9 molecules
  • Improving margins due to better product mix and operating leverage
  • Jambusar facility capacity utilization is 65-60%, leaving a lot of room for operating leverage to kick in
  • Global AgChem spending has been on a downswing and a recovery is supposed to pickup from 2018



From Bayer's presentation - Jun 2016














CONCLUSION:
PI seems to be consciously changing themselves with JVs & partnerships to launch newer service offerings and product launches in India. Having done very well during the time AgroChem producers have struggled globally, they are poised for better times in FY19. The near term (1 year) may still remain a struggle due to the industry headwinds and revenue growth may not be very strong. The business seems to be on a very strong wicket specially given that agriculture as a sector is likely to be very strong with increased global population and need for more efficient & abundant farm production.

10 comments:

  1. Sir your view on techno electrical

    ReplyDelete
    Replies
    1. There may be some impact of GST on their fixed price contracts. But I am very interested in the medium to long term on the prospects.

      Delete
  2. Hi, Am an investor in PI Industries since last 4~5 years and has been tracking the company. It has given amazing returns and i continue to hold for another 4 to 5 years. Thanks for the update.
    Regds,
    G Rao

    ReplyDelete
  3. Near term head winds may pose a little challenge for PI, but, the long term prospects remain good, as ever. I think they are moving in the right direction towards pharma CRAMS should prove to be a right decision.

    ReplyDelete
  4. Dear Abhishekji,

    Are you still positive on Cera at the current price?. What could be the long term prospects. Do you think the Housing for All provide some tailwinds to Cera?.

    Best regards,

    JP

    ReplyDelete
    Replies
    1. There are 2 major themes for Cera - 1) more urbanisation and 2) move from unorganised to organised. Affordable housing will not lead to any direct gains for Cera. But once the overall pie increases, there will be a tendency to tradeup over a few years. People who are buying unbranded sanitaryware today, may migrate to buying branded ones in future. Also, one thing to remember is that sanitaryware and faucets are the only real brand play in the home building ancillary segment. Everything else like tiles, plywood, cement, steel etc are commodities and indistinguishable in the final product. For example, once you put tiles on the floor, no one knows whetheer it was Kajaria or local. Similarly, once you make furniture, no one knows if you used greenply or uniply! So, on a long term basis I am positive on Cera, that does not mean I will not sell it as & when I get better opportunities in the market.

      Delete
  5. The question is whether CERA's target customer is low income mass housing kind of customer set or a mid to high end type of customer set. I think it serves mid to high end and therefore this affordable mass housing drive may not yield much for Cera.

    ReplyDelete
  6. https://kiraninvestsandlearns.wordpress.com/2012/02/20/investing-mistake-and-a-list-of-value-investors/#comment-418 you sold of PI in 2012.

    Would like to understand what changed from then to now? Post is not to criticise but to understand the thought process.

    ReplyDelete
    Replies
    1. I have been invested in PI from that period. At times, I trim positions based on near term visibility and opportunity cost and at other times I add to holdings. Management has been focused on expanding the CRAMS business, the part which I like, so am holding for now. I think, with a lot more focus on farm productivity, the best years of PI may be ahead of us. The only caveat is that management needs to remain focused and continue with their first class execution.

      Delete
    2. Comments well taken. In fact, better articulation to put forth the point. The essence remains the same.

      Delete

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