PI Industries: Outperformance coming to an end

15 Dec 2023 , 11:03 AM

Recommendation: Reduce; Target Price: Rs 3,495

During H1FY24, PI Industries (PI) has outperformed as sales/Ebitda rose by 22%/30% YoY. Such stellar performance came on the back of robust 27% growth in the CSM business (2/3rd of revenues). The business got shielded from the prevailing challenges (destocking) in global agrochemicals, as its key product viz. Pyroxasulfone (IIFLe@45% of total revenues) did very well. However, analysts of IIFL Capital Services believe that the outperformance is not likely to last long as the innovator – Kumiai Chemical’s updated guidance implies sharp slowdown in Axeev’s (Pyroxasulfone) medium-term growth outlook (3yr Cagr of 4.8%). Kumiai also highlights the pressure from destocking and countermeasure against generic products in Australia and Argentina. Analysts of IIFL Capital Services slash earnings by 8%/13% for FY25ii/26ii and downgrade PI to REDUCE with revised TP of Rs3,495. 

Kumiai’s guidance implies sharp slowdown in Axeev: 

Kumiai guided for meagre 2.7% YoY growth in its Agricultural Chemicals sales for 2024. Though it anticipates increase in Axeev sales, it has guided for inventory adjustments in some countries and price adjustments as a countermeasure against generic products. After more than doubling Axeev’s sales in the last two years to 73.1bn Yen, the updated guidance of 84.2bn Yen by 2026 implies sharp slowdown in growth outlook (3yr CAGR of 4.8%). 

Other segments need to pick up now: 

There are other growth levers viz. 1) Domestic business 2) Ex-Pyroxasulfone business within CSM 3) Pharma business. However, growth momentum in these businesses have got subdued recently. While the domestic business is exposed to Indian monsoon vagaries, it is still early days for Pharma. Thus, the exPyroxasulfone business needs to pick up significantly to offset any headwinds arising out of pyroxasulfone. Further, a slower growth in the most profitable product will also weigh on profitability, going forward. 

Downgrade to REDUCE:

Analysts of IIFL Capital Services turn cautious on PI Industries as the expected slowdown in Axeev sales growth can create headwinds for PI’s CSM business, going forward. They tone down CSM growth assumption from 18%/15% for FY25/26 to 10% each and cut earnings by 8%/13% for FY25/26. Downgrade the stock to REDUCE with revised TP of Rs3,495 (30x Dec25 earnings) from Rs3,970, given that earnings remain vulnerable despite the cuts.