Valuations at PI Industries defy gravity as growth bounces back

While there is gloom and doom all around us, shares of PI Industries Ltd hit a new 52-week high this week, rising about 44% so far this year.

What gives? The company has reported a strong rebound in growth in FY19 after witnessing turbulent times in FY18. This was followed up by a strong June quarter, which saw 24.5% rise in revenues. The growth was driven by the custom synthesis and contract manufacturing (CSM) segment, which generates a large part of PI Industries’ revenues. The company’s order book increased by $400 million from a year ago to $1.4 billion last quarter.

The management is confident the CSM business will clock strong double-digit growth over the next three years. PI Industries is a supplier to large global agrochemical firms and its commentary is in variation to their cautious tone.

For global agrochemical firms, the demand outlook is clouded by adverse weather conditions in North America and Europe.

But PI Industries was helped by a diversification in sourcing, away from China. Tightening of environmental regulations and the resultant plant shutdowns disrupted supplies, creating shortages in the market. This drove up the prices, hurting profitability of most agrochemical firms last year. While the situation is slowly improving, the episode triggered realignment of supply sources.

As a consequence, contract manufacturers, such as PI Industries, are seeing increased enquiries and orders. “Despite cost of production in China still being cheaper by ~10-15%, management does not see loss of business with capacities coming back in China, as most innovators are looking for an alternative source of supply. Hence, despite slowdown in the innovation process, there is no threat to future prospects, as there is enough business moving out of China,” Investec Capital Services (India) Pvt. Ltd said in a note.

But for a company that derives a large portion of its revenues from contract manufacturing, the PI Industries stock looks richly valued at 31 times estimated earnings for FY20.

Another factor will be the company’s diversification plans. It is expanding into specialty chemicals and pharmaceutical ingredients, and is looking at acquisitions to gain a foothold. Investors would do well to price in some of these risks as well.