Domestic and pharma businesses, lower guidance to weigh on PI Industries

PI Industries reported a revenue growth of 5 per cent year-on-year (Y-o-Y) in Q2FY25, led by a surge in the custom synthesis and manufacturing (CSM) segment and the export business, which posted 10 per cent growth.

 

However, the domestic and pharma businesses continued to witness subdued demand (domestic revenue down 5 per cent and pharma down 43 per cent).

 

The operating profit grew 14 per cent Y-o-Y, led by an improvement in gross margin (up 520 basis points or bps) on account of better product mix and operating leverage.

 

Given healthy reservoir levels and late withdrawal of monsoon, the agricultural sector should see demand recovery, while pharma is also positioned for recovery.

 

But continued global challenges and downward revision in management guidance, has led to lower earnings estimates.

 

Higher other income could offset this to an extent.

 

Consolidated revenue stood at Rs 2,220 crore, up 5 per cent Y-o-Y. Operating profit stood at Rs 630 crore, up 14 per cent Y-o-Y.

 

Operating profit margin expanded 220 bps to 28.3 per cent. Gross margins came in at 51.8 per cent (up 520 bps). Employee expenses rose 110 bps to 8.8 per cent.

 

Other expenses increased 190 bps to 14.7 per cent of sales. The adjusted net profit was up 6 per cent at Rs 510 crore.

 

There was a significant increase in other income, up 2.6 times Y-o-Y to Rs 120 crore.

 

Exports (CSM) revenue grew 10 per cent to Rs 1,720 crore, driven by growth in new products (up 42 per cent) and healthy volume growth.

 

Segment operating profit grew 30 per cent Y-o-Y to Rs 710 crore, with a segment margin of 32.9 per cent (up 600 bps).

 

Domestic agrochem revenue declined 5 per cent Y-o-Y to Rs 460 crore due to reduced institutional demand. Pharma revenue stood at Rs 41 crore (2 per cent of total revenue) in Q2FY25, down 43 per cent Y-o-Y due to customers holding high inventory.

 

Cash flow from operations in Q2FY25 stood at Rs 180 crore (versus Rs 370 crore in Q2FY24).

 

Net working capital days improved to 70 days as of September 2024 against 84 as of September 2023 on account of lower receivable days.

 

In H1FY25, revenue grew 7 per cent to Rs 4,290 crore, operating profit was up 19 per cent to Rs 1,210 crore and adjusted net profit rose 11 per cent to Rs 950 crore.

 

Revenue growth could be low double digits in H2FY25.

 

The company expects the domestic branded business to perform well in H2 (early double-digit growth). Exports are expected to grow by high single digits. In the pharma segment, the company is targeting revenue of Rs 250-270 crore.

 

New products saw 42 per cent Y-o-Y growth during Q2 and accounted for 16-18 per cent of the total revenue.

 

The margin profile for new products is largely similar to existing products.

 

Overall global challenges have tapered growth outlook.

 

The management said that global players are watching high inventory levels.

 

A major customer has filed for bankruptcy. Hence, there was lower overall revenue growth guidance from 15 per cent to high single-digit or early double-digit growth for FY25.

 

But medium-to-long term prospects are promising, with consistent growth in CSM.

 

This is driven by momentum in commercialisation of new molecules and product launches in the domestic market and ramping up of the active pharmaceutical ingredient (API) segment. 

 

High inventory with customers negatively impacted revenues in pharma.

 

But the management said that the integration of contract research, manufacturing and API platforms is on track, with expected order visibility and volume pickup in H2.

 

The stock has fallen on guidance downgrades and lower earnings estimates. However, some analysts are maintaining buy recommendations albeit on lower price targets.