PI Industries: Custom synthesis business provides good revenue visibility

Despite the company’s mixed performance, the stock of agriculture inputs provider PI Industries Ltd has rallied more than 11% since the announcement of its earnings for the March quarter. Sales increased a tepid 10% and operating profit was weighed down by impairment of assets and provision for doubtful debts.

The subdued performance, however, did little to hurt analysts’ faith in the stock. Most left their ratings unchanged. Lending credence to their views is the firm’s custom synthesis business, the outlook for which continues to remain healthy. From $365 million in December, custom synthesis orders increased 8% to $395 million in March. According to Prabhudas Lilladher Pvt. Ltd, the current order book provides business visibility of 2-2.5 years of PI Industries’ custom synthesis capacities.

With the company planning to commercialize three molecules this year, orders are expected to increase further. What’s more, the existing order book may be understated. PI Industries receives renewal orders, many of which are not reflected in the stated order book. “We would like to highlight that order book is understated, given the fact that it only includes multi-year orders, while expected annual renewals (40% of annual custom synthesis revenues) are not accounted for in the order book,” brokerage firm Prabhudas Lilladher said.

In the domestic market, the firm is planning to launch two new insecticides. One molecule has received regulatory approval. The second is estimated to be launched in the third or fourth quarter of the current fiscal year.

The regular launch of new products, both in the domestic market and custom synthesis, will aid the company’s volumes and help it improve market share.

Encouraged by the prospects, PI Industries has guided for a 25% growth in both of its business segments. The El Niño threat is making some brokers doubt if the company can grow its domestic business by 25% in the current fiscal year.

But analysts are enthused by continuing momentum at PI Industries’ custom synthesis business. With existing capacities running full, the firm has begun constructing the second phase of its Jambusar (Gujarat) facility. The plant will open new growth avenues when it opens in the second half of the next fiscal year. In the meantime, it aims to concentrate on improving product mix, which can aid revenue and margins.

While all this is fine, what investors need to bother about is the value of the rupee. Most of PI Industries’ custom synthesis revenue comes from abroad. A sharp rise in the rupee against the dollar can squeeze margins.