Stock Pick From The Fertilisers Sector

HERE IS WHY:

• A better monsoon to result in better demand for its products in the domestic agri-inputs business
• It has a robust pipeline of products in the custom synthesis business
• The management has guided for a growth of 25 per cent in annual revenues over the next three years

With a normal monsoon in the year 2013, the rabi crop is likely to be a good one. This bodes well for companies catering to the agri-inputs segment. PI Industries is a company in this segment which has witnessed 25 per cent growth in its topline and 72 per cent growth in the bottomline on a CAGR basis for the past five years. The company also has a presence across the value chain of the lucrative CRAMS business. The icing on the cake is that the company has been paying dividend consistently for the past four years, and this trend is likely to continue going forward also.

In the agri-inputs business, the company operates through an extensive network of 29 stocking points around 9000 distributors/direct dealers and more than 40000 retail points across the country. It has launched eight products in this segment in the last three years, and there are another seven to eight products in the pipeline. Once these products are launched, they will be value accretive for the company going forward. The uptake in its manufacturing unit at Jambusar SEZ in Gujarat has been according to expectations, and a ramp up cannot be ruled out in the coming quarters.

In the CRAMS business, PI Industries’ continuing relationship with innovators has worked well for the company, resulting in a robust pipeline of new products. This segment is likely to be the major growth driver for the company in the future. Volumes growth in the existing molecules is also likely to see an increasing market share in the times to come.

For the first half of the present fiscal, the company’s topline witnessed a growth of 62 per cent on a YoY basis to stand at Rs 868.80 crore. The bottomline has crossed the Rs 100 crore mark to stand at Rs 103.08 crore, marking a gain of 111 per cent YoY. The growth in revenues can be attributed to the robust product portfolio, a good monsoon and higher minimum support price in the domestic business. The company has reduced its debt-to-equity ratio for H1FY14 to 0.22x from 0.35x reported during the end of FY13, strengthening its balance sheet. At the end of FY13, it had mentioned growth prospects of 25 per cent in its annual revenues over the next three years.

Speaking of valuations, the stock is trading at a TTM PE of 21.87x. We believe that it has the potential to witness substantial gains over the next one year. We recommend a ‘buy’ on this counter with a price target of Rs 295, for an upside of 21 per cent.