Dear Friends,
We are recommending Buy on our Actionable Ideas "PI Industries" as per following:-
CMP: Rs 726 Target: Rs 850 (17% Upside)
Key Points:
PI Industries Q2FY2019 Result Update: Growth momentum gaining traction – Upgrade to Buy
· Mixed quarter: PI Industries reported strong revenue growth of 29% y-o-y to Rs. 723 crore, led by healthy growth in both domestic operations and exports (up by 24% y-o-y and 32% y-o-y, respectively). Higher raw-material cost coupled with volatile currency (up by 41.6% y-o-y on combined basis) had an adverse impact on gross margins and contracted sharply by 512 BPS to 42.9%. EBITDA margin also witnessed contraction; but the impact was lower (contraction of 316 BPS to 18.6%), as employee expenses and other operating expense were lower by 132 BPS and 64 BPS to 9.4% and 14.9% of sales, respectively. Moreover, the impact of input price rise and continued strategic investment in R&D are visible with lag effect. However, EBITDA witnessed 10% y-o-y growth to Rs. 135 crore. Despite higher depreciation and interest expense (up by 11% and 8% y-o-y, respectively), PAT grew at a higher pace of 17.6% y-o-y to Rs. 94 crore as a result of lower tax incidence of 23.1% in Q2FY2019 as against 28.7% in Q2FY2018.
· Outlook seems encouraging: The company's advanced portfolio of branded products has shown healthy volume off-take across key crops and geographies. Momentum in exports is also building as anticipated by the management. This has led to increased demand for existing products and introduction of new products. Management stated that the outlook for H2FY2019 seems to be encouraging because of healthy growth in domestic market share, in-line with the traction seen in the existing portfolio of high-potential brands and strong visibility of scale up in exports.
· Strong balance sheet to support growth initiatives: The company continues to generate healthy cash flow, which has further strengthened the company's balance sheet as it is almost a net debt free company. This helps the company to invest in R&D for growth initiatives (especially in early stage molecule to complex molecules, which commands higher margins) without any leverage (external financing). The company has a capex plan of Rs. 700 crore for FY2019-FY2021E (Rs. 300 in FY2019 and Rs. 200 each in the next two years) as additional capacities at SEZ are expected to be commissioned in Q4FY2019. Further, there has been certain debottlenecking of capacities, which will contribute to growth and improved profitability. The company anticipates that few of the products, which are currently in the R&D pipeline, will be translated into commercialisations in the near future, which will drive growth.
· Valuation - Upgrade to Buy with a revised PT of Rs. 850: Management foresees improved demand outlook because of new product launches, demand chasing lower capacities and improved realisation due to low inventory pipeline. However, management has stated that growth will largely be volume driven. Hence, it has maintained its guidance for FY2019, with revenue growth of 18-20% and EBITDA margin at ~21% levels. However, concern on margins prevails due to input cost pressures, led by crude derivative price rise and currency fluctuations, though management is confident of achieving margin guidance, led by cost efficiency improvement. Management has stated that the CSM order book continues to remain at $1.2 billion (executable in 3-5 years) as value of fresh order intake was similar to the value of contracts executed during the quarter. We have tweaked our earnings marginally to factor in better revenue growth prospects and lower margin profile than anticipated earlier. With improved growth outlook and reasonable valuation, we now upgrade our rating on the stock to Buy with a revised price target (PT) of Rs. 850/share.
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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