PI Industries Limited analyst Q&A

We will now begin the question -and-answer session. We'll take our first question from the line of Ankur Periwal from Axis Capital. Please go ahead.

First question is on the pharma business here. We have been seeing pretty soft revenues. If we leave out the one -time expenses that we incur in this quarter, but otherwise also the margins have been keeping low. Just trying to understand your thoughts in terms of the volume, whether there's a volumetric decline as well or it is largely pricing and the trajectory going right over there?

Thanks, Ankur. The key reason for softness is the slow offtake of som e of these products due to inventory at the innovators level, that has also impacted the overall margin profile as you see. The other reason is that one of our customers has filed Chapter 11 in this quarter, and some inventory which was meant for them, we have not supplied and that has also impacted this quarter's projected revenues and the margin, as the development spend is continuing. I hope this answers your question.

Just a follow up there. From a volumetric perspective, is there a signi ficant decline in terms of volumes as well what we see in the revenues and how do you see that picking up?

Yes, so for H1, there is certainly volume reduction, but we are expecting the volume to pick up in the third and fourth quarters.

Second question is on our guidance wherein now we are expecting a high single digit number versus let us say a 15% sort of a growth earlier. What is driving this guidance revision -- is it the domestic AgChem business which has declined year -on-year in H1 or the pharma or CSM or all of them?

In any case, as you know, pharma doesn't contribute significantly to the overall PI's revenue as of now. So, this realignment in growth guidance is done in view of the global industry scenario we are seeing. We are also experiencing that, at least for the short term, global companies are in a wait-and-watch situation and are critically monitoring inventory levels. You must also be reading the commentaries of these global companies as they are closely monitoring the working capital levels and deferring their procurement decision. So, in view of this transient phase, we have also realigned our growth guidance for FY25, which we were earlier projecting in double digits; we now see that we should c ertainly be aiming for higher single-digit or near double-digit kind of levels.

Just a clarification here. So, when you say deferment in the short term, essentially, we are referring to the entire H2 then, right, because this is a peak season from a business perspective for us, so any deferral here is going to, the recovery will be further back-ended in FY26, is that the right way to look at it?

Well, I will not at this point comment on mid to long-term because, as I said in the beginning, this is kind of a wait -and-watch situation at this point. But yes, we are clearly able to see the next two quarters scheduling and believe that we should be touching higher single digit or near double digit kind of growth in FY25.

We will take our next question from the line of Vivek Rajamani from Morgan Stanley. Please go ahead.

Just to kind of go back to the previous question, you have mentioned that you are facing these inventory issues. Just wanted to check if these issues are actually more focused on your legacy portfolio? And given that you were actually reporting very strong volume numbers for the past many quarters, I just wanted to understand that's actually what has caused a bit of an inventory pile up? And just wanted to get your assessment in terms of how severe you think this could be a bit of an extension of the previous question?

Yes, this is certainly pertaining to some of our existing products, because for the new products, we have registered an impressive growth of close to 42% in this quarter. If you also see that in the same period, last year and before last year, we have grown at a very decent pace, 20%-plus in H1FY24 and 30% plus in H1FY23. So, yes, some of these existing products are witnessing higher inventory at customer and channel level and given the overall industry scenario and general pressure on these companies to rationalise their working capital, etc ., they are kind of slowing down their fresh procurements. For the new product, I think those are doing well, which is also reflecting in year-on-year growth rate.

The second question I had is a bit of a two-part question on the margins. Again, the margin trajectory has been very strong. So, just wanted to understand, how much of this is actually coming from the newer products? So, if you could just give us some sense of how much these new products are making up of your overall export portfolio, and just how different are the margin profiles compared to say your legacy portfolio?

Well, new products account for anywhere between 16% to 18% and this depends on the quarter that we reviewing. The margin profile is generally similar and not significantly different. Yes, in the case of new products, we keep improving the processes as we produce campaign -after-campaign, and therefore some margin improvement is always there, which is also shared with our customers.

We will take our next question from the line of Madhav Marda from Fidelity International. Please go ahead.

My first question is about the margin profile. If I look at PI's longer-term history, generally gross margins for us have been about 45% to 46%. In the last two or three quarters the number obviously has moved up to a very healthy 52% to 53%, which is helping EBITDA margins as well. Just could you give us some sense in terms of sustainability of these EBITDA margins for the Company on a longer-term basis -- is it a product mix or domestic a bit weaker why the margins are a bit better for us, could you help us understand something there?

This is mainly on account of favourable product mix in our export domestic portfolio wherein we commercialized and introduced a lot of new products including biologicals. So, yes, the product mix has been favorable for us over the last few quarters and that is certainly driving this margin improvement that we are witnessing both in terms of gross margin, in terms of EBITDA margin.

Is that sustainable or once some other parts of the business probably come back, of course there is some parts of the portfolio where growth is a bit slower because of challenges which you highlighted, so on ce that comes back, do we see like better revenue growth but with more normalized margins in line with historical or is this like a new margins for the Company?

We consider 26-27% margin to be sustainable, particularly for the core business that we are talking about here. It would, however, take us some time to scale up and achieve a similar kind of margin profile for the new businesses that we have invested, e.g. , health science and global biological business.

We will take our next question from the line of Abhij it Akella from Kotak Institutional Equities. Please go ahead.

Sir, if you could please just help us understand of this high single digit revenue growth guidance for fiscal 2025, what sort of expectation do we have for the Agrochemicals, CSM business in particular, and then maybe any of the other lines as well?

Can you please explain a bit because I couldn't get your question.

So, I mean high single digit guidance, I presume is for the overall company level. So, within that, for the Agrochem, CSM business in particular, is there some sort of range we can offer as a guidance range?

As you know that we have done reasonably well in term s of our exports; we have grown by almost 10 -11% in the first half. The domestic branded business was relatively skewed but given the positives on water levels in reservoirs, the prospects of Rabi are reasonably good and we believe that we should be doing well in our domestic branded business, a low double-digit kind of growth in H2. On the export side, we expect to do higher single-digit kind of growth in H2. So, on a blended basis, we should be reaching close to higher single digit or near double digit kind of growth in full year FY25.

Just to clarify these numbers, you mentioned early double digits for domestic and high single digit for exports, this is for the second half only or for the full year?

Since you asked me for the second half, I was trying to explain to you for second half, and on full year basis this will result into higher single digit. This is our current estimate.

One is the other income seems rather on the higher side. So, what exactly has contributed to that and how sustainable is that? And also, just on the revenues from new products, it is 16% to 18%, that pertain only to the CSM business, right? that 16% to 20% of CSM revenues is what we're seeing, just to clarify that?

Also, the other income, this primarily has gone up due to interest earned on higher cash balance. So, if you see this year, we have Rs. 3,922 crore versus Rs. 2,890 crore last year. So, the base of the cash balance what we have has gone up say by around 25%. So, that has led to higher interest income and then there are small one- off gains primarily due to some favorable orders we had received on tax litigation. So, that has broadly added up to the other income increase.

So, the one-off items, is it possible to just split out how much that might have been?

That won't be that significant. Primarily, as I said, it is because of the higher cash balance, what we have, which is more on a consistent basis.

We will take our next question from the line of Rohit Nagraj from Centrum Broking. Please go ahead.

Sir, first question is again delving on to the CSM part of the business. So, given that probably our customers, innovators would have finalized the volumes for 2025, so how do we have a visibility on our legacy products and new products from a calendar year 2025 perspective, although you have given largely for the second half, but jus t to be a little bit on a broader perspective for 2025?

Well, it is a bit early to project particularly since companies are in a wait and watch kind mode. While for many products, there is a clear indication and longer -term understanding is there, it would take some time for these companies assess the overall situation to finalise supply schedules for 2025 . So, we will be able to get a clear picture in the next 1-2 quarters.

Second question is, usually we give our order book which is missing during this particular quarter in the presentation. So, is it because like the way you answered the earlier question in terms of the visibility that we have, or there is some order book which has probably got dissipated because of the impending issues? Just your thoughts on the same.

Since there is no significant change in the order book, it is not figuring in our communication, but yes, we still maintain a $1.4 to $1.45 billion order book position as of now.

So, my question was that the new molecule growth for this quarter has been 45% on about 18% of your business, right? So, that may be like contributing 8% of the total growth and the total growth was like 10%. So, that kind of tells that your old legacy molecules are probably growing at like 2% to 4%. So, could you just elaborate on why that legacy molecule growth has kind of slowed a little bit?

Yes, that’s what I was saying that some of our old legacy molecules have grown slower, whereas the newly commercialized molecules in the last three years have grown at a much higher rate. So, yes, this is the kind of change we see. We are very aggressively introducing new molecules. This year itself, we will be commercializing 6-7 products for exports; have already commercialised four products in the first half. And on the other hand, the growth of these newly commercialized products is higher on a lower base.

My second question was on the second half outlook th at you mentioned, right, that you expect kind of high single -digit growth for the AgChem exports, but that growth was like 10 -11% for first half and the other way around for the domestic, right, so essentially, we are seeing some softness on the AgChem export side, right. So, what are the key reasons of that kind of slow down, sometimes 11% to high single digit levels or AgChem exports for the second half, is it more because of the industry that the destocking with how it is coming to an end and maybe i t is not or is it from competition just to get some views on that, right?

Yes, as I explained earlier, it is mainly because of inventory levels and the initiatives of these global companies to bring down their overall working capital investm ents, exposures, etc.

And just any kind of visibility on like when it can potentially, by when the inventory is going to normalize or it is still too early to kind of call out on that?

Well, I would say we get different kinds of indications. Some indications suggest another 2-3 quarters before this whole thing is normalized. We also witnessed some very interesting scenarios where we were indicated that there was a slowdown in specific product requirements , and then suddenly , two months later, we are air shipping products due to urgent requirements . So, you can imagine , there are different kinds of scenarios here and this is the reason I believe this is more a wait - and-watch kind of a situation, a transient situation because business fundamentals remain strong given the growing population, increasing climate change impacts and growing food security concerns. We are also not seeing acreages going down. So, demand in mid to long term is going to normalise. It is only a temporary phenomenon because of generic pricing pressure, commodity price corrections and destocking in some of these markets that it is reflecting on overall market sentiments at this point, but we believe that in the next few quarters, these things should get normalised to a great extent.

Next question is from the line of Aditya Jhawar from Investec. Please go ahead.

Just one question. What has been the pricing trend for some of our key older products -- are we seeing any change in that?

I would say reasonably stable pricing. Of course, wherever there is some softening of raw material prices, that have reflected i n the selling prices. But if your question was more about our exports of existing molecules, yes, it was reasonably stable.

You explained well about the inventory buildup, but sorry to harp on the same topic. So, clearly, I mean since we cater to the innovators, the supply is fairly curtailed in that sense. Now, are we seeing a situation on the ground where some of the products are seeing an increase in competition, are we seeing shift towards the generic maybe downgrading because some of the generic companies have reported a strong volume growth? Any specific thing that you would like to call out on product-specific issues?

Well, so far we have not seen that sort of a scenario that some of these product volumes are getting curtailed due to genericization. In fact, we have also not seen a great financial performance coming from many of these generic companies. So, I am not sure what kind of generic company performance you are indicating.

I want to highlight that we may also need to look at the base from last year while showing growth. Whatever the growth, please look at the drop in the base from what we had last year and then you can probably get a better sense.

This is what I was also explaining earlier that last year same quarter we grew by 24%, before last year around 30%, even first half if you see last year we grew by 22% and before last year almost 30%. So, the point being made is the high base built over a period of time.

So, final question. So, could you please remind us of which are the key markets for our main products where registration process is still ongoing? We are yet to launch in some of the major markets.

For which product are you referring?

Our biggest product Pyroxasulfone which are the key markets where the registration process is still.

We will not be in a position to comment, yes.

Because these registrations are generally taken up by the innovator, not by us.

Right. But there is geotagging also for our location. So, last time I think I rememb er you indicated about markets and just wanted to get an update on that , I will take it offline and final question o n any change in CAPEX outlook considering changed situation.

No, we are going with the same plan, Rs. 800 crore to Rs. 900 crore this year. That is the plan.

Thank you. We will take our next question from the line of Nitin Agarwal from DAM Capital. Please go ahead.

Thanks. On the pharma business, Sir, what is the outlook for the business from here on and from the time you acquired the business, what has not really played out to plan?

So, the outlook I already explained to the earlier participants that we are seeing volume uptick from second half. This is what the current assessment is . In terms of your second question that what has not played, so I will say I do not see anything that has not played because we always maintain that we are acquiring these companies to build this CRDMO platform. A lot of development effort will be there, and which is what we are currently doing, whether it is upgradation of the research and manufacturing facilities that we have got with these acquired entities or whether building leadership team both on the research side as well as on the business development side, building new clients , product pipeline, etc . So, a lot of development is happening. I would also request that Ramesh, my colleague, shed some light on this. Ramesh, you are there?

So, as Rajnish pointed out, what we focus on is to have the right people in the team. We have now almost fully staff ed based on the business side and on the scientific side. And the second part we focus on is operationall y we have the right cadence growing, so we focused on the sites that we acquired to make sure that any customer that comes in is able to scale with us so the people who come want to stay with you for a longer time. And that is why we build a sustainable business. So, to that extent we have that sort of back integrated one of the sites that we got in Italy by putting a key role in that, that should be operationally almost there. That should be operational in Q1 FY26. So, we can begin projects there and the R&D center in Hyderabad and the Jaipur facilities are also now operational. So, we have got the operational thing almost done. When we finished the key hires, we have had some headwinds in terms of the general market also in the pharmaceutical business and we see that also sort of favoring us and green shoot happening in terms of the future. So, starting from H2 this year and for the future, we expect to provide you with a lot more detailed answers on both the pipeline build up and future growth.

And Ramesh do you expect the business to be EBITDA positive? When do you expect the business to become an EBITDA positive from which period of time?

We certainly hope that the trend will begin even in H2, but I will be able to give you a lot more clarity as we go into Q4 next year. So, if you can just hold that thought as I push through.

My last one, what is the pipeline like on the CDMO side in your business right now? How many products do you supply commercially and how many more do you expect to go commercial?

So, the pipeline buildup in general, I can comment saying that we are engaged with several customers both on the early development side and on the late development side. On the commercial side, although we are talking with multiple customers, commercial projects are not easy to come by. Typically , we try to get into the late phase and then go into commercial, that is what we are trying to do.

Thank you. We will take our next question from the line of S Ramesh from Nirmal Bang Equities. Please go ahead.

In the pharma business, you have mentioned on Slide #13, some new additions to your business like new CDMO order and three new projects. So, is it poss ible to quantify this in terms of what will be the impact on revenue and some color on exit revenue for FY25 if I may ask?

Sorry. Come again. What was your second question?

The second question was what do you hope to achieve as revenue by the end of March 2025 or exit revenue for the base for FY26?

We are targeting to achieve Rs. 250 to 275 crore by the end of this year. But yes, we are also assessing the inventory situation while talking to these large customers. So, this is more of the current assessment that we can share. In terms of your other question, projects identif ied for near to long-term. So, again I think it will be too early for us to quantify these numbers. But yes, the key point here is that there is a significant pace that these new customer interaction, engagement and development is happening with the strengthening of team both in US, Europe and of course in India. And by the way, this is only the second year of this business. So, as we have indicated in past that it will take for us a couple of years’ time to bring this to a faster pace from the level that we have acquired it , and we are still very confident that in the next 3 -4 years ’ time, we will be taking this to a completely different level and making a meaningful contribution to the overall PI’s Business.

And secondly, if you look at the domestic business, I think the revenue of Rs. 460 crore, it is very hard and possibly one of the highest. So, in the context of the growth in new products you talked about and the pricing pressure, can you highlight what is the kind of timeline you see for the pricing pressure to abate? And any key segments or crops where you saw the growth and how do you see the second half based on the strengthening Rabi fundamentals helping you in terms of the second -half performance in the domestic business?

There were too many questions, so let me try and respond one by one. I think I have already explained to the earlier participants about our current outlook for the second half, which we expect to do better in terms of our domestic distribution business. We expect Rabi to be good. We already have launched a host of new products. There are already very interesting products introduced in the last 2-3 years. So, we have a very decent portfolio where a lot of effort is going on, and we expect that we should be growing in double -digit in second half . As far as our exports are concerned, second-half, as I said, we will b e in the higher single digit kind of level given the overall global industry situation that we are seeing. And then for pharma, I think we have separately explained it to you, so this probably answers your question.

On pharma, one last thought, you have given some CAPEX details. So, can you give us some sense of how much you plan to spend for full year in CAPEX in pharma in for FY25 and for the next couple of years?

I think we already indicated the CAPEX to the tune of Rs. 100 to 125 crore for FY25 and for next year, it will be half of it because lot of spend is already done this year.

Thank you. We will take our next question from the line of Siddharth Gadekar from Equirus. Please go. Ahead.

Given that we have completed the Plant Healthcare acquisition, can you give us some color in terms of how are we planning to scale up this business in terms of both domestic and global launches?

On Plant Health Care, as you know, we completed our acquisition this quarter. Now our objective is to invest in product and market development of their existing and pipeline products to take this business to the next level. This company has a cutting- edge technology platform, they have three products which are already commercialized in major markets like US, Brazil , Europe. We would also be commercializing some of these products in India for which initial effort have already started. So, lots of development efforts will be made because all these three products have a significant growth potential across these major markets that I explained. The other market, I forgot to mention was Mexico. we are also very actively working with the research team of Plant Health Care and looking at opportunities of working on joint development along with our Agri Research setups in PI and coming out with some very interesting solutions for regenerative and sustainable farming. This is our next goal in this business.

Well, we are evaluating various options; for now, we are continuing with the existing sources. However, for the future, we are evaluating several opportunities.

So, just one last question, Plant Healthcare had spoken about $100 million plus revenues by FY28-29. Do we think that we could get to that number now that given that we have a strong balance sheet size as well?

Yes, that is very much possible given the significant potential those products have.

Thank you. We will take the next question from the line of Sumant Kumar from Motilal Oswal. Please go ahead.

Sir. So, for domestic business in the last two quarters , we have seen 6% growth. When we see the industry , growth is in higher single digit or double digit and other Agrochemical companies are performing. So, is there any issue with any product where the price is declining apart from what institutional sales de-growth you are talking about.

Yes, as far as our domestic brand business is concerned, there is no de-growth and that is the reason we tr ied to explain in our Investor Communication that there is volume growth that we have seen, for example, for the first half we have seen close to 9% volume growth. we have seen some price pressure in some of the old molecules. But yes, overall, there is 3% growth . In the second half as I mentioned earlier, we are expecting double -digit growth mainly driven b y many of the new introductions we made over last 2-3 years. Prashant, if you are there, you may want to give some color on domestic brand business.

Domestic brand business has registered a volume growth of 12% and overall growth of 7% in Q2 and H1 volume growth of around 9% and overall growth of 3% because there is a price correction. Second -half is looking good. Water in the reservoirs is better. Hopefully, adverse weather-related events what we have seen in the first half are behind us. Hence, we are seeing a good momentum, especially in crops like chili, rice, pulses, fruits and vegetables, plus the three new products which have launched in first half and another three more products which are scheduled for launch in the second-half these things should help us to register good growth next quarter.

Thank you. We will take a last question from the line of Krishan Parwani from JM Financial. Please go ahead.

By when do you think our recently acquired Plant Health Care business could turn EBITDA positive and does this quarter contain any one -off expenses from the acquisition?

Yes, there were some one -offs not in front of me, but yes, there were some small one-offs in this quarter. It will take, I would say 2-3 years’ time for this new business to scale up mainly because a lot of development spend ing would be needed , as I explained earlier, to grow these products in the large markets that are there from US, to Brazil, to South America, to Asia, to Europe and also a lot of research work which will happen. So, yes , maybe in the next 2 -3 years’ time , we would expect this business to start contributing in terms of profitability.

Yes, so this is what when we share our outlook on margin, we account for these development spends that are happening. So, yes, we will continue. The strength of our portfolio both in our exports as well as our domestic, so strength of our product portfolio, t he technologies that are helping us keep on improving processes and margin profile of these products basically differentiates us in the in the industry and that strength will continue.

Thank you all for your continued interest in PI. We r eally appreciate your time and effort in joining and participating in this call. Thank you so much.

You. Thank you , m embers of the Management Team, on behalf of PI Industries Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your line.

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