Investors favour PI Industries on strong order book and new launches

Firm added to its growth pipeline by acquiring Isagro last week

The PI Industries stock is up about 15 per cent in September, on expectations of strong earnings growth over the next two years, led by an improvement in the custom synthesis and manufacturing (CSM) business.

The management, according to analysts at IDFC Securities, is positive on the growth outlook for the CSM as well as domestic business, led by strong order book for the former and differentiated product launches in the latter.

In addition to organic growth, the company is also looking at acquisitions to boost growth. Last week, PI acquired the Asian business of Italian agrochemical company Isagro for Rs 350 crore. About two-thirds of the acquired company’s business is from domestic formulations.

Isagro has a manufacturing facility next to PI’s Panoli facility in Gujarat. The company is engaged both in contract manufacturing as well as distribution of agrochemicals in India.

Analysts at Motilal Oswal Financial Services believe the acquisition bodes well for PI, not only from the point of view of synergies but also from the valuation standpoint. The company paid 15x 2018-19’s net profit for the acquisition.

Given lower utilisation of Isagro’s capacity, margins for the acquired entity should go up, while also helping PI derisk the supply chain for a few products.

Margins for the acquired entity are thus, expected to improve from 11-12 per cent to PI’s level of 20 per cent over the next three-four years. While the company will take some debt for the same, analysts are not too worried, given the negligible debt of PI and net debt-to-equity ratio of 0.04.

Margins at the company level are expected to expand on the back of stabilisation in raw material prices as well as local procurement negating price volatility.

Most brokerages are positive on the company, given the growth visibility led by order book of $1.5 billion, higher enquiries, its research and development pipeline, and execution capabilities.

Due to multiple triggers, analysts at Edelweiss Securities expect the stock to trade at the higher end of the historical valuation band of 24-30x price-to-earnings ratio. Investors can look at the stock on dips.