Agrochemical / Result Update

PI Industries
CMP: ` 525
High Points
Revenue growth broadly in-line Unfavorable sales mix in agri-inputs biz restricts earnings growth CSM grows 3x YoY and is expected to aid margin expansion in future V i e w : R e v i s e recommendation to Accumulate with a revised target price of ` 570 BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High/Low Avg. Volume (no) Bloomberg Code Reuters Code ` 126mn ` 5/` 13.2bn USD 265mn ` 630 / 194 13,525 PI IN PIIL.BO 17193 5169

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Target Price: ` 570

Accumulate

Q2 FY12 revenues in line with estimates, operating performance subdued PI Industries Q2 FY12 revenue grew 31.4% YoY to ` 2.46bn. On a like-to-like basis (excluding polymers) revenue growth stands higher at 45% YoY. The agri-input business (62% of sales) grew 9.9% YoY to ` 1.53bn. Growth and margins were hit as continuous rainfalls during the later part of the quarter discouraged farmers to apply higher margin products. Instead they opted for granules, which accrue lower margins. The custom synthesis manufacturing (CSM) segment almost tripled YoY to ` 920mn, aided by scale up in sales from existing molecules and commercialisation of new products. Healthy order book (USD 325mn) continues to ensure higher revenue visibility. Operating performance for the quarter was subdued due to 1) increased manufacturing expenses ensuing ramp-up in CSM business and 2) higher selling & advertisement expenses incurred on recent product launches. EBITDA margins stood at 15% (down 340bps YoY) as other operating expenses as percentage of sales increased to 19.6% (up 400bps YoY). Raw materials and employee costs stood at 58% (unchanged YoY) and 7.4% (down 60bps YoY) respectively. PAT was at ` 194mn, up 3.3% YoY. Tax rate stood at 30.3%. New product launches and timely execution of orders in the CSM business will continue to accelerate growth momentum. At the same time, the management expects margins to improve as CSM achieves more specialisation in operations. We reiterate our positive stance on the company and the agro-chem sector.
Q2FY12 Result (` mn) Particulars Q2FY12 Net Sales 2452 Other Operating Inc. 5 Income from Operations 2456 Other Income 0 Total Income 2456 Total Expenditure 2089 PBIDT 368 OPM (%) 15.0 Interest 48 PBDT 320 Depreciation 42 PBT (w/o EOI) 278 Tax 84 Profit After Tax (before EOI) 194 EOI - Gains/ (Losses) 0 PAT 194 Q2FY11 1868 2 1870 0 1870 1526 344 18.4 40 304 36 268 81 188 0 188 YoY (%) 31.3 8 31.4 31.4 36.9 6.9 20.0 5.2 18.1 3.5 4.1 3.3 3.3 H1FY12 H1FY11 YoY (%) 4516 3167 42.6 6 4524 3173 42.6 0 0 4524 3173 42.6 3725 2634 41.4 799 539 48.4 17.7 17.0 98 76 29.1 701 463 51.6 84 71 18.3 617 392 57.6 248 107 132.3 370 285 29.6 303 0 673 285 136.0

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Shareholding Pattern as on Sept11(%)

Financials (Consolidated)

Year Net Sales# % growth EBIDTA OPM % PAT % growth EPS(Rs.)* % growth PER(x) ROANW % ROACE % FY10 5,425 17.2 875 16.1 419 72.8 16.6 72.8 31.6 34.3 23.1 FY11 7,210 32.9 1,252 17.4 651 55.4 25.8 55.4 20.3 35.7 26.5 FY12E 8,928 23.8 1,608 18.0 1,102 69.2 34.6 34.1 15.2 32.8 27.4 FY13E 11,607 30.0 2,119 18.3 1,199 8.8 47.5 37.3 11.0 31.7 30.8 *`Mn # Includes Other operating income. *EPS figures is on fully diluted equity for FY10-13E; excludes gain on sale of polymer biz in FY12E (net of tax- ` 228mn). Sr. Analyst: Bhavin Shah Tel : +9122 4096 9731 E-mail: bhavin@dolatcapital.com Associate: Hardick Bora Tel : +9122 4096 9748 E-mail: hardickb@dolatcapital.com

November 11, 2011

India Research

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Key Concall Takeaways

Agri inputs business (AIB) AIB grew 9.9% YoY to ` 1.53bn with the generics to in-licensing ratio at 60:40. The later part of the quarter witnessed continuous rainfall that restricted off-take of high-margin products. Given the weather conditions, farmers shifted from liquid products in favour of granules, which accrue lower margins. Nominee Gold sales were also affected due to this reason. But the product is expected resume healthy growth in H2 FY12. Operating margin, at 12-13%, was also confined due to higher selling & advertisement expenses incurred to promote the recently launched products. The management does not envisage further promotional spend in subsequent quarters. The management expects to garner ` 5.75bn from this division in FY12. This will be primarily supported by contributions from existing products as no new products are expected to be launched in H2 FY12. CSM Business (38% of sales) tripled YoY to ` 920mn; operating margins stood in the range of 19-20%. PIIs order book position, as of September 2011, stood at USD 325mn. Average execution time for orders in hand stands at 3-4 years. The orders are evenly skewed between 7-8 molecules. The product pipeline includes 30-32 items mostly non-agro in early stages of development. The management expects to garner ` 3.2-3.4bn in revenues from this segment for FY12.

Sony collaboration update This research association is progressing, though material revenue contribution will only begin in FY13E. Currently we havent factored any upsides accruing from it. Other key updates Of the previously guided capex of ` 1.25bn, the company has already spent ` 550-600mn in H1 FY12. Expects to incur the balance in FY13. Gross debt has gone up to Rs 1.78bn, mainly following capex incurred during H1 FY12. Inventories have gone up from ` 1.85mn in June to ` 2.12mn, of which 60% is in agri-inputs and the balance in CSM. Revised Estimates
Particulars (` Mn) ` Sales EBITDA PAT Revised* FY12E FY13E 8,928 11,607 1,608 2,119 **1,102 1,199 Earlier FY12E FY13E 8,924 11,607 1,839 2,398 1,072 1,451 Change % FY12E FY13E 0.0 0.0 -12.6 -11.6 2.7 -17.4

*Lowered EBITDA Margins due to higher manufacturing led costs and increased interest outgo. **Includes gain on sale of polymer biz (net of tax- ` 228mn) November 11, 2011 PI Industries
2

India Research

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Valuation We expect 27% revenue CAGR over FY11-13E, aided by rising contribution from CSM (from 33% in FY11 to 42% of sales, excluding polymers in FY13E). Divestment of polymers has boosted operating performance and strengthened the balance sheet position. We expect 36% earnings growth over FY11-13E assuming non dilutive capex. We reiterate our positive stance on the company and the agro-chem sector. At CMP, the stock trades at 15.2x FY12E and 11x FY13E earnings. We revise our recommendation to Accumulate with a revised target price of ` 570 (12x FY13E earnings).

November 11, 2011

PI Industries

India Research
INCOME STATEMENT Particulars Net Sales Other Operating Income Income from Operations Other income Total Income Total Expenditure Raw Material Stock Adjustmnt Purchase of Finished Goods Employee Expenses Other Expenses EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Deferred Tax Net Profit (before EOI) Extra Ordinary (exps)/Income Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Preference Capital Share Premium Other Reserves Net Worth Revaluation reserve Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Other Liabilities Total Capital Employed Mar10 5,425 0 5,425 11 5,437 4,550 3,025 23 136 471 897 875 886 183 704 132 572 572 133 20 419 0 419

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CASH FLOW Particulars Profit before tax Depreciation & w.o. Net Interest Exp Direct taxes paid Chg. in Working Cap. (Non Cash) (A) CF from Opt. Activities Capex {Inc./ (Dec.) in FA n WIP} Free Cash Flow Inc./ (Dec.) in Investments Other (Bal fig) (B) CF from Investing Activities Issue of Equity/ Preference Inc./(Dec.) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) CF from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O.I.) Interest / Sales Gross Profit Margin Tax/PBT Net Profit Margin (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses (C) Measures of Financial Status Debt / Equity (x) Interest Coverage (x) Average Cost Of Debt (%) Debtors Period (days) Closing stock (days) Inventory Turnover Ratio (x) Fixed Assets Turnover (x) Working Capital Turnover (x) Non Cash Working Cap. (` Mn) (D) Measures of Investment EPS (`) (excl EO) EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.) (E) Valuation Ratios CMP (`) P/E (x) Market Cap. (` Mn.) MCap/ Sales (x) EV (` Mn.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates Mar10 Mar11 Mar12E Mar13E 572 914 1,220 1,666 132 157 190 250 183 181 198 204 -133 -207 -347 -467 130 -810 -89 -899 883 235 1,172 753 -346 -941 -600 -600 537 -707 572 153 -2 0 0 0 -39 -5 70 94 -387 -946 -530 -506 241 0 272 22 -535 980 -678 50 -183 -181 -198 -204 -17 -58 -59 -59 -493 741 -663 -190 3 30 -21 57 51 54 84 63 54 84 63 120

` mn Mar11 Mar12E Mar13E 7,202 8,918 11,602 7 10 5 7,210 8,928 11,607 0 0 0 7,210 8,928 11,607 5,958 7,320 9,487 4,294 4,858 6,318 -295 0 0 205 178 232 597 683 886 1,156 1,601 2,051 1,252 1,608 2,119 1,252 1,608 2,119 181 198 204 1,071 1,410 1,916 157 190 250 914 1,220 1,666 914 1,220 1,666 207 347 467 56 0 0 651 873 1,199 0 228 0 651 1,102 1,199

Mar10

Mar11 Mar12E Mar13E

Mar10 71 206 0 1,249 1,525 20 1,053 444 1,498 270 0 3,313

Mar11 Mar12E Mar13E 112 81 84 1,840 2,117 20 1,560 918 2,478 326 0 4,941 125 6 418 2,655 3,204 20 1,138 662 1,800 395 0 5,419 126 0 445 3,795 4,366 20 1,216 634 1,850 489 0 6,725

16.1 3.4 13.0 26.7 7.7 58.7 8.7 16.5 1.0 4.9 10.3 70 69 5.3 1.9 4.4 1,167 16.6 16.6 38.9 1.1 6.3 93.7 107.6 34.3 23.1 23.5 525 31.6 7,442 1.4 8,885 1.6 10.2 4.9 0.2

17.4 2.5 14.9 28.8 9.0 58.3 8.3 16.0 1.2 6.9 9.1 89 71 5.1 2.0 3.5 1,977 25.8 25.8 36.1 2.2 8.7 91.3 94.6 35.7 26.5 27.0

18.0 2.2 15.8 28.5 9.8 56.4 7.7 17.9 0.6 8.1 9.3 73 80 4.6 2.0 4.2 2,066 34.6 43.7 42.4 2.0 5.8 94.2 127.9 32.8 27.4 27.8

18.3 1.8 16.5 28.0 10.3 56.4 7.6 17.7 0.4 10.4 11.2 70 81 4.5 2.3 3.8 2,965 47.5 47.5 57.4 2.0 4.2 95.8 173.0 31.7 30.8 31.3

Applications of Funds Gross Block 2,924 Less: Accumulated Depreciation 923 Net Block 2,001 Capital Work in Progress 86 Investments 5 Current Assets, Loans & Advances Inventories 1,028 Sundry Debtors 1,034 Cash and Bank Balance 54 Loans and Advances 347 sub total 2,463 Less : Current Liabilities & Provisions Current Liabilities 1,191 Provisions 51 sub total 1,243 Net Current Assets 1,221 Misc Expenses (Deferred Rev Exp) 0 Total Assets 3,313 E-estimates

3,617 1,076 2,541 335 5 1,410 1,766 84 503 3,763 1,568 134 1,702 2,061 0 4,941

4,552 1,266 3,285 0 5 1,955 1,784 63 551 4,352 2,053 169 2,223 2,129 0 5,419

5,152 1,516 3,635 0 5 2,575 2,225 120 651 5,570 2,295 190 2,485 3,085 0 6,725

525 525 525 20.3 15.2 11.0 11,747 13,150 13,247 1.6 1.5 1.1 14,141 14,887 14,977 2.0 1.7 1.3 11.3 9.3 7.1 5.5 4.1 3.0 0.4 0.4 0.4

November 11, 2011

PI Industries

India Research

DOLAT CAPITAL

November 11, 2011

Int en tio na lly Le ft B lan k

PI Industries

DOLAT CAPITAL
BUY ACCUMULATE REDUCE SELL Upside above 20% Upside above 5% and up to 20% Upside up to 5% Negative Returns

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