PI Industries. 1QFY17 Result Review HOLD. Better performance continued, valuations stretch; maintain HOLD. Sector: AGRI

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1 1QFY17 Result Review HOLD PI Industries Ltd. Better performance continued, valuations stretch; maintain HOLD PI Industries Ltd (PI) reported strong 1QFY17 result with a revenue growth of ~15.4%/12.9% YoY/QoQ, respectively, at Rs 6.8bn led by export/domestic business growth of 20%/10%, respectively. EBITDA stood at Rs.1.6bn YoY/QoQ, a growth of 23.3%/55.8% led by better product mix. EBITDA margin expanded by ~154 bps YoY to 24.2%. Revenue growth backed by CSM business: In 1QFY17 the company posted revenue of Rs 6.8bn, a YoY/QoQ growth of ~15.4%/12.9%, respectively, mainly led by 20% growth in the exports revenue. We expect revenue to grow at a CAGR of ~20% over FY16p-18e on account of abovenormal expectation of monsoon, strong CSM order book. CSM business Update: In recent past, PI witnessed some pressure in CSM business due to softening in global markets mainly because of erratic atmosphere. PI has not seen a major change in CSM business environment. However, the company has witnessed 20% growth with the revenue contribution of Rs 34bn in 1QFY17. Currently, CSM business has 23 product molecules. The total order book for the CSM business stood at $850 mn. The company expects CSM business to grow by 18-20% in FY17. Also, PI is venturing into pharmaceutical molecules for CSM business. Domestic agri-input business: PI has seen 10% growth on its domestic agri-input business despite a delayed onset of rainfall. PI is hopeful to get better traction from newline of products like Vibrant, Biovita, Osheen, Keefun and Legacee. Sector: AGRI 4 th August, 2016 Price Price Target Up/Down (%) 777 Rs Bloomberg Code PI IN Reuters Code PIIL.BO. Share Holding (%) Promoters As on 30th June, FII's DII's Stock Data Nifty 8,545 Sensex 27, week high/low 803/495 Maket Cap (Rs. bn) 108 Price performance (%) 1M 3M 6M 1Y Absolute Relative to Sensex EBITDA growth seen at 23.3% YoY: 1QFY17 EBITDA stood at Rs. 1.6bn a YoY/QoQ growth of 23.3%/55.8% respectively. EBITDA margin expanded by 154bps mainly due to better product mix (higher contribution of branded products, moderating input prices and higher contribution from CSM business). We expect EBITDA margin expansion of 105bps over FY16p-18e led by better product mix, higher contribution from Jambusar plant and higher contribution from CSM business. Valuation: The stock has recently run-up by ~23% in last three months on account of good set of 1QFY17 result and management commentary. However we feel that the valuations are little stretched at 23x PE on EPS FY18e, therefore we recommend to book the profits at this stage. None the less, we remain bullish on the sector and the company from medium to long term perspective. The stock currently trades at 30.5x/24.3x FY17e/FY18e EPS. We expect the company s revenue/earnings to grow at a CAGR of ~20%/22% respectively over FY16p-18e. We maintain our HOLD rating with a price target of Rs 734. (23x PE on EPS FY18e). Relative Performance Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 BSE Sensex Source:-Bloomberg Feb-16 Mar-16 Apr-16 May-16 PI Industries Jun-16 Jul-16 Exhibit 1: Financial summary (Rs mn) Y/E March FY14 FY15 FY16p* FY17e FY18e Net sales Growth (%) Operating margin (%) PAT Adjusted PAT EPS (Rs) Growth (%) P/E(x) ROE (%) ROCE (%) Debt/equity (x) P/Bv (x) Vaishali Parkar Kumar vaishali.parkar@bobcaps.in

2 Exhibit 2: 4QFY16 Financial (Rs Mn) 1QFY17 1QFY16 YoY (%) 4QFY16 QoQ (%) Net Sales 6,834 5, , Raw Material Cost 3,331 3, , %of net sales Staff Cost %of net sales SG&A 1,290 1, , %of net sales EBITDA 1,656 1, , %of net sales Depreciation %of net sales EBIT 1,478 1, %of net sales Interest/(Interest income) Other Income PBT 1,575 1, Provision for tax(including deferred tax) ,167.4 Recurring PAT 1, Exceptional Items (Loss)/Gain Reported PAT 1, EPS (Rs) Source: Company, BOBCAPS Management Discussion: 1) Total revenue to grow at ~20% in FY17, 2) expects to launch 2-3 products in domestic agri input segment and CSM business 3) capex of Rs 4bn over 2 years, 4) tax rate to remain at 22-23% in FY17 led by Jambusar plant in SEZ and investment in R&D, 5) PI to introduce a new rice herbicide named, Legacee during Kharif 2016, 6) ~70% in- licensing products contribute in domestic agri-input business. Equity research 2

3 Financials Exhibit 3: Income Statement Net sales 15,955 19,403 20,968 24,957 30,071 growth (%) COGS 11,083 11,154 11,585 14,339 17,127 Staff Cost 1,108 1,413 1,875 2,321 2,797 R&D Cost SG&A Cost 795 2,898 3,162 2,737 3,298 EBITDA 2,890 3,744 4,346 5,310 6,548 growth (%) Depreciation EBIT 2,574 3,246 3,803 4,451 5,559 Other income Interest paid Extraordinary/Exceptional items (1) PBT 2,614 3,386 3,924 4,630 5,795 Tax 733 1, ,157 1,449 Minority interest PAT 1,881 2,476 3,153 3,472 4,346 Non-recurring items 1 (184) (134) - - Adjusted PAT 1,881 2,292 3,020 3,472 4,346 growth (%) Exhibit 4: Balance Sheet Cash & Bank balances ,041 2,261 Other Current assets 6,931 8,899 9,266 9,663 11,475 Investments Net fixed assets 5,691 6,659 9,463 10,605 11,615 Goodwill Other non-current assets Total assets 13,227 16,332 19,790 21,809 25,851 Current liabilities 4,377 6,105 6,142 5,449 6,067 Borrowings 1, , Other non-current liabilities Total liabilities 6,282 7,367 8,072 6,648 6,766 Share capital Reserves & surplus 6,809 8,828 11,581 15,024 18,947 Shareholders' funds 6,945 8,965 11,718 15,161 19,084 Total liabilities 13,227 16,332 19,790 21,809 25,851 Equity research 3

4 Exhibit 5: Cash Flow Profit after tax 1,881 2,476 3,153 3,472 4,346 Depreciation Chg in working capital (63) (534) (360) (1,091) (1,193) Total tax paid (45) (184) (134) - - Cash flow from operations 1,937 2,256 3,203 3,240 4,143 Capital expenditure (470) (1,465) (3,347) (2,000) (2,000) Change in investments 0 (0) Cash flow from investments (470) (1,465) (3,347) (2,000) (2,000) Free cash flow 1, (144) 1,240 2,143 Issue of shares Net inc/dec in debt (937) (546) 436 (730) (500) Dividend (incl. tax) (159) - (307) (338) (423) Other financing activities (94) (525) (0) Cash flow from financing (1,190) (1,070) 230 (760) (923) Inc/(Dec) in Cash & Bank bal. 277 (280) ,220 Exhibit 6: Ratio analysis Y/E Mar F14 F15 F16p* F17e F18e Per share data (Rs) EPS CEPS DPS BV Profitability ratios (%) Gross margins Operating margins Net margins Valuation ratios (x) PE P/BV EV/EBITDA EV/Sales RoE RoCE RoIC Equity research 4

5 Sales and Dealing Team Anil Pawar Senior Manager Dealing Sachin Sambare Manager Dealing /33 Ashwin Patil Executive Dealing Research Team Sectors Vaishali Parkar Kumar Analyst Agri, Auto, Defence Padmaja Ambekar Analyst Auto Ancillary, Infra, Midcap Akanksha Tripathi Analyst Footwear, FMCG Rishabh Mehta Analyst Textile, FMCG, Infra, Chemicals Hareesha Kakkera Associate Bio Tech, Pharma Retail Dealing Team Kshitij Kelkar Kiran Sawardekar Nisha Rasal Debt Dealing Team Minaxi Tiwari UTI Tower, 3rd Floor, South Wing, Bandra-Kurla Complex, Bandra (E), Mumbai India. Ph.: Fax: research@bobcaps.in Web: NSE SEBI No. (CASH): INB NSE SEBI No. (DERIVATIVES): INF BSE SEBI No. : INB SEBI Registered Research Analysts: INH valid till 03rd February, 2020 Disclaimer BUY. We expect the stock to deliver >15% absolute returns. HOLD. We expect the stock to deliver 5-15% absolute returns. SELL. We expect the stock to deliver <5% absolute returns. Not Rated (NR). We have no investment opinion on the stock. 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