The stock of agrichemicals major PI Industries is down 11.3 per cent over the last two trading sessions, pulled down by worries that competition for a key product could hurt the company’s revenues. The stock was under pressure for a second consecutive session despite the management indicating no impact on Financial Year 2023-24 (FY24) guidance or growth.
The Street’s concern is the recent announcement by China's Shandong Weifang Rainbow Chemical to set up a 2,000 million tonnes per annum facility to manufacture an herbicide called pyroxasulfone. It is the third Chinese company to announce a capacity for pyroxasulfone, increasing pressure on PI Industry’s exports.
The custom synthesis and manufacture (CSM) business (exports) accounted for 78 per cent of PI Industry’s FY23 revenues and pyroxasulfone accounts for over half of the CSM revenues. Pyroxasulfone is estimated to contribute about 35 per cent of the company’s overall revenues.
PI Industries supplies pyroxasulfone to Japan’s Kumiai Chemical Industry, the patent holder of the herbicide. The patent for the product expires in 2025 in the US market. The Japanese company has cut its FY24 guidance given demand pressures reflected in the high channel inventory. Pyroxasulfone has been a key factor for PI’s strong performance over the years, shielding it from global headwinds in the agrochemical industry. As Kumiai is one of the largest clients of PI, a guidance cut translates into a weak outlook for the company, said Motilal Oswal Research.
Nuvama Research, too, believes that these developments could affect PI Industries' stock. Rohan Gupta and Rohan Ohri, analysts with the brokerage, said that PI’s earnings risk a sharp impact due to potential price erosion in pyroxasulfone and increasing generic competition from China. It will have an impact on margins and earnings due to significant dependency on a single product at present and will continue to have an overhang on the stock price.
The positive from PI Industries perspective is the diversification of its revenue base into pharmaceuticals given the acquisition of assets and the focus on new product development which would help reduce product concentration.
While there is a structural issue, the near-term impact might be limited given the supply contract agreement to Kumiai and minimal impact of molecule pricing for PI. Further, the company has maintained its growth guidance of 20 per cent led by new launches and pharma expansion. Nuvama Research has a buy rating with a target price of Rs 4,233 per cent share.
While it has a buy rating, Motilal Oswal Research believes that new capacities, demand scenario and realisation of pyroxasulfone will be key factors to monitor. The brokerage expects PI to sustain near-term growth momentum, led by the CSM business expanding on the back of a strong order book ($1.8 billion), faster commercialization of new molecules (the company plans 4-5 launches every year) and sales ramp-up of existing molecules. In addition to the pharma/contract manufacturing, product launches in the domestic market (five this year) would support its sales growth. Motilal Oswal Research has a target price of Rs 4,480 a share of PI Industries.
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