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Buy PI Industries, target Rs 1,050: Sharekhan by BNP Paribas

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Sharekhan by BNP Paribas has a buy call on PI Industries with a target price of Rs 1,050.

The current market price of PI Industries is Rs 894.10.

Time period given by the brokerage is one year when PI Industries price can reach the defined target.

Investment rationale by the brokerage:

Delivers healthy exports growth: For Q3FY2019, PI Industries reported revenue growth of 31.6 per cent YoY to Rs 708 crore due to growth in exports as well as domestic market. Exports grew by 40 per cent YoY to Rs 541 crore, led by ramp-up in demand of existing products, whereas domestic revenue grew by 9 per cent YoY to Rs 167 crore, despite softness in demand on account of poor pattern of rainfall in Rabi and low agri produce prices. Management stated that the company is witnessing growth in both its flagship products as well as newly introduced products (launched during the past 18 months). Higher input cost led to slight gross margin contraction of 89 BPS at 46.6 per cent, resulting in gross profit of Rs 330 crore (up 29 per cent YoY). EBITDA grew by 41.9 per cent YoY to Rs 149 crore, led by operating leverage as other expense grew at a slower pace of 18.2 per cent YoY. This led to a 153 BPS improvement in operating margin at 21 per cent. PAT growth was restricted at 33.6 per cent YoY to Rs 107 crore, as a result of lower other income (down 5.6 per cent YoY), higher depreciation (up 9.3 per cent YoY) and interest expense (up 7.1 per cent YoY) coupled with higher tax incidence of 22.8 per cent in Q3FY2019 as against 18.1 per cent in Q3FY2018.

Outlook for CSM business seems encouraging, as business sentiments improve globally: Management sounded confident of having robust growth (largely volume driven) in the CSM business, as business sentiments seem to have improved in global markets, with global innovators having a healthy product launch pipeline. Management has guided for capex of Rs 300 crore each for the next two years, largely committed to the CSM business, wherein two manufacturing facilities are expected to be commissioned during Q4FY2020. With a strong balance sheet, having cash surplus of Rs 204 crore at the end of Q3FY2019 coupled with healthy cash flow generation going forward, management is hopeful to get capex completed by way of internal accruals. Management has guided for an asset turnover of 1.5x-1.6x, resulting in additional revenue of Rs 450 crore-500 crore likely to accrue in FY2021E. The CSM order book stood at $1.3 billion at the end of Q3FY2019. Management highlighted that the CSM business currently seems to be more sustainable with clear visibility for the next 4-6 quarteRs Moreover, 80 per cent of the revenue in CSM business from long-term contracts is expected to be from existing products.

Mitigating concerns and securing raw-material supplies: The company’s overall procurement from China does not exceed 20 per cent. However, considering the rising scale of CSM business and to mitigate price volatility and secure raw-material supplies, the company undertook a backward integration project. This project is expected to be commissioned during Q1FY2020. Though management highlighted that concerns on margins prevail due to input cost pressures, led by crude derivative price rise and currency fluctuations, management is confident of achieving margin guidance, led by cost efficiency and economies of scale. In addition, investment in R&D activities is expected to continue as the company tries to explore new chemistry for future growth opportunities.

Maintain ‘Buy’: We have increased our earnings estimates for FY2019 and FY2020, led by strong beat in Q3FY2019 results, and have introduced our FY2021 estimates in this note. Management reiterated its guidance and sounded confident of achieving revenue growth of 20 per cent+ and EBITDA margin of ~21 per cent over the next 2-3 yeaRs We expect the company to post a revenue and earnings CAGR of 21.6 per cent and 23.4 per cent over FY2018-FY2021E, respectively. Hence, we maintain our Buy rating on the stock with a revised price target (PT) of Rs 1,050/share.

Source: Economic Times