For PI Industries, new competition, demand concerns play spoilsport

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PI Industries Ltd’s shares have fallen by about 11% in the past two trading days. With this, the returns in the stock are flattish for 2023 so far. Some worries have emerged recently, especially about increased competition for its key product, pyroxasulfone.

The risk arose after Chinese crop protection company Shandong Weifang Rainbow Chemicals received government approval to set up a manufacturing plant, marking its entry into the domestic pyroxasulfone market.

Pyroxasulfone, a herbicide, is one of the key molecules for PI Industries’ sales and profits, which it manufactures for Japan-based agrochemical company Kumiai Chemicals. Pyroxasulfone, a part of PI Industries’ custom synthesis manufacturing (CSM) business, contributes 35-40% to revenue.

Sure, this underlines the risks associated with heavy reliance on a single product and the resultant margin erosion. As such, the CSM business is export-oriented.

In the September quarter earnings call, the management said PI Industries’ exports growth was well-diversified and not limited to agrochem, extending to areas such as electronics, imaging, and other specialty chemicals.

Yet, investors seem nervous about the possibility of earnings being hit by a potential price erosion in pyroxasulfone owing to competition. But there could be reason for some comfort.

For Kumiai, pyroxasulfone is a vital product and PI Industries is the key supplier. So, even as competition increases, it will be a gradual process, said Nuvama Institutional Equities, as Kumiai has secured patent protection for multiple combinations and enjoys brand leadership in key markets such as the US.

At the same time, potential weakness in Kumioi’s earnings is seen as a near-term dampener. For now, PI Industries had retained its FY24 guidance of 18-20% revenue growth and improvement in margin and returns.

“The company has had a strong track record of past performance with 10-year revenue CAGR of 19% and PAT CAGR of 29%,” said Prathamesh Sawant, analyst at Axis Securities. “The growth in other segments such as specialty chemicals, pharma and domestic business and possible discovery of other scalable molecules in future will reduce the concentration risk on pyroxasulfone revenues.”

Moving forward, investors will closely monitor the scale-up of recently acquired pharma businesses, and brand launches in the domestic market. Besides, the impact of El Nino on Indian agriculture might affect demand for the company’s products.

Given the underperformance in PI Industries’ shares this year, valuations appear reasonable.“The stock with the recent sharp fall trades at 27x FY25 estimated earnings, which is at a discount to its historical valuations,” said Sawant.

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