PIIND — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Q4 FY24 Earnings Conference Call of PI Industries Limited.

I now hand the conference over to Mr. Nishid Solanki from CDR India.

Thank you, and over to you.

Nishid Solanki

Good afternoon, everyone, and thank you for joining us on PI Industries’ Q4 FY24

Moderator · Conference Operator

We have the first question from the line of Abhijit Akella from Kotak Securities.

Please go ahead.

Abhijit Akella

Just a couple from my side.

Just to clarify the tax rate guidance.

So, you're now talking about 24% tax rate from FY25 onwards, so that would be a continuing tax rate beyond that.

Is that correct?

Manikantan V.

Yes, that will be the continuing tax rate for the FY25 and also FY26. As long as we see deductions are available, we will be in that range.

Abhijit Akella

And Mani sir, this will be for 5 years now and after 5 years probably the entire tax holiday at Jambusar goes away.

Is that how it should be?

Manikantan V.

Yes.

Currently, it looks like that, but there will be an opportunity to extend this period further through reinvestment.

Abhijit Akella

Just the other question I had was on the new product launches.

You mentioned that about one-third of the new products are going to come from non-agro segments.

If you could please just shed some colour on what end-use industry these might be whether it is electronic chemicals, semiconductors, etc. and then just one add on to this what percentage of sales come from biologics in the domestic business and if you could also possibly share the breakdown of the pharma sales between Archimica and Therachem if possible?

Rajnish Sarna

Thank you, Abhijit.

We don't have a breakup right away, but there is substantial growth in this quarter to the tune of 35%, and if you look at the financial year, this growth is ~29% over last year on the biological side.

Can you repeat your other question, please?

Abhijit Akella

Yes, non agrochem side sir which one would be the prominent ones we are looking at?

Rajnish Sarna

Yes, over one-third of the new products are coming from non-agchem space if we talk about new enquiries, R&D pipeline, etc. These non-agchem segments are like you mentioned, electronic chemicals, semiconductors, etc. Maybe Atul you can pitch in and briefly explain which are the other areas we are operating.

Atul Gupta

Yes.

There are other areas with respect to performance chemicals, advanced polymers which are used for the various applications apart from electronics and semiconductors.

Abhijit Akella

The last question I just had was whether it's possible to get a breakdown of pharma between Archimica and the rest?

Rajnish Sarna

That is not available right now here, but we can provide it to you separately, Abhijit.

Moderator · Conference Operator

The next question is from the line of Rohit Nagraj from Centrum Broking.

Please go ahead.

Rohit Nagraj

First question is on the pharma business.

So, the entire development spends, has it been completed in FY24 and given that we have done capex of Rs.

132-odd crore, what is the kind of growth that we are looking in FY25?

And what kind of margins are we looking at and what could be the levers for the growth?

Rajnish Sarna

Well, this development phase will continue for the next 1-1.5 years although we will be growing more than 25% in the next financial year.

In terms of margins, till the time we complete this development phase, it is difficult to clearly indicate the numbers but once we complete this development cycle in next 1.5 years or so, we expect to achieve normalized EBITDA margins.

Rohit Nagraj

Second question is on overall consolidated business.

We have seen that there is a strong almost 450 bps expansion in gross margins during FY24 and that has led to further EBITDA margin expansion.

So how are we looking at it when we move to FY25?

What kind of EBITDA margins that are sustainable in FY25 onwards given that there could be some benefit from gross margins which may taper down in FY25?

Rajnish Sarna

We are expecting to maintain a gross margin of around 49%- 50% in FY25. The EBITDA margins will also sustain at this level as we are also making a lot of development spending in some of the new segments.

Moderator · Conference Operator

The next question is from the line of Ankur Periwal from Axis Capital.

Please go ahead.

Ankur Periwal

First question, on the working capital side.

Commendable job in terms of reduction in inventory driving the working capital lower.

How do you read this number going ahead, given where I'm coming from this domestic business had been through in this year as well?

And going ahead, hopefully, FY25 onwards, things should improve.

So, will we see some increase in working capital led by inventory going ahead or these numbers should sustain?

Rajnish Sarna

We will sustain the current levels.

While there are some improvement opportunities, there are also going to be some contingencies, and hence, we believe we'll be able to sustain the current w/c levels we are operating at.

Ankur Periwal

Secondly, on the overall revenue growth guidance that you have mentioned 15%.

Is this at the company level?

And how do you see the agchem CSM part going here?

Rajnish Sarna

Yes, this 15% guidance is at the Company level.

We all know that on the domestic side, a lot depends on how the overall season pans out.

But going by the positive commentary we hear about the monsoon and the onset of it, etc., we believe that we'll be able to achieve this growth across domestic CSM exports as well as on the pharma side.

Ankur Periwal

Lastly, if I may, just on the cash that we are sitting on, plus the incremental operating cash flow generation.

For the pharma business scale up, are we still looking at the inorganic part or probably organic capex can see a significant uptick?

Rajnish Sarna

Right now for pharma, we are focusing on completing the current investment cycle.

However, we are actively evaluating several inorganic opportunities in other business areas..

Moderator · Conference Operator

The next question is from the line of Vivek Rajamani from Morgan Stanley.

Vivek Rajamani

Two questions.

You mentioned in the presentation that about 70% of the export growth has come from the new products.

Would it be possible to share some colour in terms of what is the absolute share of these new products in your CSM portfolio today?

And where do you see the scaling up, say, in the next couple of years?

Rajnish Sarna

These percentages or absolute numbers are not in front of us.

But suffice it to say that we are diversifying the whole portfolio of CSM, which is also reflected in the growth numbers that we are seeing.

A significant growth is coming from the new molecules that we have commercialised in the last 3 years.

Secondly, the R&D pipeline consists of more than 30% of the molecules that will come from non-agchem based, basically diversifying the overall portfolio.

Vivek Rajamani

The second question was you've obviously mentioned that a third of the new molecules will be non-ag chem and they will also ramp-up.

Just wondering if these products will still be operated out of your existing space of facilities and at what point in time do you think you'll have to invest in new or dedicated capacities to cater to these new non-ag chem opportunities?

Rajnish Sarna

Currently, these are being manufactured at our existing site and multi-purpose plants, white spaces.

But as the volumes grow, we can certainly consider dedicated plants.

By the way, one of the plants, which is in construction, is planned for some of these products.

Moderator · Conference Operator

The next question from the line of Rohan Gupta from Nuvama Institutional Equities.

Rohan Gupta

First question is on the new products you have mentioned in the presentation, roughly six new products and a large part of the growth in exports have come from, 70% has come from the new products.

I mean not immediately in the near term, I mean, not FY25, but I'm looking at over the next 3 years, how do you see that the revenue contribution coming in our export market from the new products in overall exposure and can you give some broader colour on that?

Rajnish Sarna

It would be quite significant contribution.

If we see the next 3 years, I think more than 30%-35% of the contribution would be from new products commercialised in the last 3-4 years or so.

Going forward, there is a lot of focus on commercializing new products and intensifying the development phase of many of these projects, which are in the R&D phase today.

Rohan Gupta

Sir, if you can give some sense on the pharma piece and where the margin profile is still, I mean, gross margin though is pretty decent at 65%.

But at EBITDA level because of the overheads, if you can give some sense of how the revenue ramp up will be on the pharma part of the business.

And if we can expand that because you have initially guided that your EBITDA margin in the pharma business also be aligned with the PI margin over the next 3 years.

I think that almost 1.5 years already completed.

So, are we looking at that margin profile of pharma realigning with the PIs and in what timeframe?

Rajnish Sarna

Yes.

We have just completed one year of these acquisitions.

As I mentioned to the earlier participant, the development/investment will continue for at least the next 1.5 years or so after which we expect to see the normalised EBITDA margins.

Rohan Gupta

We are still looking at in next 2 years, EBITDA margins in Pharma business is aligned to 22%-24% kind of numbers with the PI number.

Is that fair assumption?

Rajnish Sarna

Yes, it will surely be a 20%-plus kind of level post 3 years development phase.

Rohan Gupta

Sir, after 1 year of acquisition of Pharma.

Once again, going back to the history, when we were looking at that the Pharma piece should contribute roughly Rs.

1,500 crore kind of revenue over the next 3 years.

So, are we still looking at those numbers intact from the Pharma part?

Rajnish Sarna

As explained earlier, we expect to complete this investment and development cycle in the next 1.5 years or so.

Number two, revenue growth will continue during this period.

Our original outlook of more than doubling the revenues of the acquired businesses over the next 3-4 years continues.

Rohan Gupta

I was saying that we are still giving a 15% revenue growth guidance.

However, the 6 new products launched in export markets, where you see the significant ramp up along with the biologicals.

So, in our view, the growth guidance should be higher unless we are expecting our top contributing product pyroxasulfone is seeing some de-growth.

Are we reflecting any such possibility, while you are giving the guidance of 15%?

Rajnish Sarna

No, it's not about the de-growth/growth prospects of a particular product.

You see, we have a product portfolio where some products will provide stable growth; for a few late stages, the growth will taper down, while many new products early in their life cycle will drive the growth.

In fact our business model is such that we will continuously build the product pipeline and keep commercialising these new products.

So, at an overall level, we are confident of achieving around 15% growth, which I think is quite reasonable given the not-so-positive growth scenario/sentiment of the global industry.

Rohan Gupta

Last bit from my side if I'm allowed.

On the capex front, you mentioned that roughly Rs.

1,100 crore kind of capex we have done last year and Rs.

500 crore is the acquisition out of that.

So Rs.

600 crore kind of investment in existing business.

However, I think you're guiding for roughly Rs.

800 crore investment for the current year.

So, if you can share the capex number for next year?

And is there any spill over capex we will be looking at next year in the current year?

Rajnish Sarna

We are looking at close to Rs.800 – Rs.900 crore capex in the current fiscal.

Rohan Gupta

Okay.

So, there is no spill over impact like because I think last year, we were still short of close to Rs.

200 crore in terms of capex.

So Rs.

800 crore is a maintained number for this year also in terms of capex.

We are increasing the capex guidance to Rs.

1,000 crore.

Rajnish Sarna

We have a little higher plan but there’s always some lag between budget and actual spend/capitalization, etc. Keeping that in mind, we are indicating iRs.

800 –900 crore.

Moderator · Conference Operator

The next question is from the line of Sumant Kumar from Motilal Oswal.

Please go ahead.

Sumant Kumar

So, we see around 37% kind of degrowth for FY24 in Pharma business.

Sir, can you talk about what is the key driving factor and how things are going to shape up in FY25?

That should be the start.

Rajnish Sarna

This is mainly due to the deferment of supplies for some of the products.

Sumant Kumar

Okay.

So, is there any realisation decline for the existing portfolio also?

Rajnish Sarna

There's no decline in the price realisation decline; only supply deferment.

Moderator · Conference Operator

The next question is from the line of Ramesh Sankaranarayanan from Nirmal Bang Equities.

S. Ramesh

So, in the pharma business, the development expenditure, which you're talking about right now is routed through P&L.

Can you give us some indication of what is the kind of development expenditure you would incur, say, over FY25-FY26?

And will it continue through the P&L, or will you capitalise it after some time?

Rajnish Sarna

No, it will continue through P&L, and that is why we explained this in our presentation.

We don't have the development spend figures for the next couple of years, but as I said earlier, this investment cycle will continue for at least one and a half years.

S. Ramesh

In terms of ramp-up in revenue from the post-Ind AS Rs.

300 crore, can we expect, say, Rs.

500 crore by FY26 and this performance EBITDA margin before development spend of 12%?

Can that go to about 14%-15% in the next two years?

Rajnish Sarna

Yes, that's what we are expecting.

S. Ramesh

And in terms of the order book execution that you have right now, that is presumably the CSM exports excluding pharma, $1.75 billion?

Rajnish Sarna

Yes.

S. Ramesh

You have the order book of $1.75 billion, assuming that it doesn't include any pharma orders and that's pretty much in CSM.

So, when you look at unwinding this order book in terms of your future revenue in CSM, would that be evenly spread out in terms of execution, say, over the next .3-4 years?

Or will it be frontend loaded or backend loaded?

Rajnish Sarna

Yes., some products for two years, some products for four years, some products for five years.

But on an average, we can say 3-4 years.

In addition to the order book, where we have long-term agreements or contracts, there are several products where we have annual purchase orders.

So, the annual revenue or growth number that we see basically comes from not only the order book but also from annual contracts or purchase orders.

I hope this answers your question.

S. Ramesh

Understood.

So just one last thought.

If you look at the Chinese price index, there is a report which says pyroxasulfone prices have declined to about $75, which is a steep decline.

So how does it impact your current CSM arrangements for supply of this molecule?

Rajnish Sarna

Well, I do not have information about the price of Chinese suppliers and also not sure if any supply is happening from China for this molecule.

Moderator · Conference Operator

We have the next question from the line of Yash Master from Unifi Capital.

Yash Master

Sir, my first question is, this year, we are targeting around 15% revenue growth.

Previously, you were targeting 18% to 20% growth.

So, I just wanted to understand that this reduction in guidance, is it just for like short term because this year our main product will face some pricing pressure.

And in the short term, it may impact our revenue.

But as you are scaling up new products and diversifying into pharma and also, we have heavy cash on balance sheet.

And we have been looking for pharma acquisition for some time, and that can bring in significant growth.

So, can we expect in long term that we can go back to achieving our 20% plus revenue growth?

Rajnish Sarna

Well, there were several questions in your one question.

So let me try and answer one by one.

Regarding your question around why 15% versus last year, 18%-20%.

So, a few aspects.

One is that the base has gone up.

Now we have a new business as well.

Secondly, as we were discussing earlier, the overall industry sentiment/demand scenario is not very positive for the next several quarters.

Thirdly, the domestic market will depend heavily on the monsoon onset and rainfall distribution.

So, we are cautiously guiding this growth, considering those contingencies and situations.

Moderator · Conference Operator

We have the next question from the line of Krishan Parwani from JM Financial.

Please go ahead.

Krishan Parwani

Firstly, on this Pioxaniliprole.

So, when can we expect first launch?

Will it be 3-4 years down the line?

And also, any number on peak sales from this product, if you can give.

Mayank Singhal

Well, yes, it typically should start 3-4 years plus, although it is too early to comment given that this product is still in the development phase.

Krishan Parwani

And secondly, on this rest of the QIP money.

Do you have any more inorganic acquisition plans?

Rajnish Sarna

Yes.

We are very actively evaluating a few options.

Krishan Parwani

Understood.

And lastly, if I may, just some small clarification.

On this Rs.

800 – Rs.

900 crore capex that you're going to do in the current fiscal, so like could you give a breakup in terms of what could be the non-ag chem capex?

Rajnish Sarna

It would be very difficult.

Atul, maybe you can come in if you have any such breakup.

Atul Gupta

Not really, sir.

Rajnish Sarna

We don't have such a breakup.

As you may know, these are multiproduct plants and not for a very specific molecule.

Krishan Parwani

Understood, sir.

I was just more of asking because in the agchem, since you have the technicals, so those would be different.

But in any case, no worries.

I wish you all the best for the coming year, sir.

Moderator · Conference Operator

The next question is from the line of Yash Master from Unifi Capital.

Please go ahead.

Yash Master

I just had one more question.

I wanted to understand on the pyroxasulfone side, the technical that we are supplying to the innovator is going off patent this year in the U.S., but the formulation is still patented for some years.

So, the final product could see less price erosion, but our technical is going generic.

So other suppliers could make it.

So how much price erosion are we expecting on the technical side?

Rajnish Sarna

Well, we don't really expect a major impact of this product going off patent in the U.S. in the current fiscal because it will take a few years before another player registers and comes in.

Secondly, the final formulations/combinations have longer patent protection, we don't expect a significant impact in such developed markets.

Yash Master

Can you just provide something on domestic outlook, like how is it looking right now?

And when can we expect growth to pick up in that segment?

Rajnish Sarna

Prashant, you may comment.

Prashant Hegde

Yes, last one year, we all know has been a challenging year for domestic because of extreme weather condition.

However, given the IMD forecast and climate forecast on rains, so we are definitely optimistic for the first quarter.

Yash Master

Okay.

So maybe we can see growth from first quarter itself?

Prashant Hegde

The first quarter is more of a placement quarter.

Otherwise, if you look at the consumption, it starts by second half of June and basically second quarter is at the major consumption.

Having said that, the industry has a higher inventory in the marketplace.

So, we also need to have a close watch in case there is a little bit of delay in rain that may have impact.

Otherwise, as of now, going by the forecast, we are positive.

Yash Master

On a Q-o-Q basis, it may defer, but on an annual basis, there will be a growth in domestic revenue.

Am I right?

Prashant Hegde

Yes, definitely.

Moderator · Conference Operator

The next question is from the line of Lavanya Tottala from UBS.

Please go ahead.

Lavanya Tottala

I'm asking on the new product revenue share.

So last year, our revenue share was somewhere around 17%-18%.

Considering 17% of growth in this segment, our revenue share from new products should have been somewhere around 23% to 25% in FY24. Is that the right understanding?

Rajnish Sarna

Yes, you're right.

Lavanya Tottala

Okay.

So, this, we are expecting to grow to about 30%-35% the next 3 years?

Rajnish Sarna

Yes, at least 30%.

Lavanya Tottala

Also, I wanted to understand a bit more on the deferment of innovative products, which you mentioned.

I just missed a bit there.

Is it on the Pharma space which you are speaking about?

Rajnish Sarna

Yes, that was for Pharma because the question was for Pharma.

Lavanya Tottala

Do we expect these orders to come back this year or it will take longer?

Rajnish Sarna

Yes, the discussions are going on with the customer and we are expecting this supply to happen in the coming financial year or a little later.

Moderator · Conference Operator

We have the next question from the line of Naushad Chaudhary from Aditya Birla Sunlife AMC.

Please go ahead.

Naushad Chaudhary

Sir, a follow-up on the previous participant question.

We appreciate your guidance of 15% growth despite global headwind.

But post FY25, do you see we have product pipeline ready that can help us to go back to our 18%-20% growth for 2-3 years post FY25?

Rajnish Sarna

Yes, as the overall industry cycle returns to normal, there will be opportunities for us to return to our 18%- 20% levels.

Naushad Chaudhary

Without compromising on the margin?

Rajnish Sarna

Yes, of course.

The option to increase growth by sacrificing margins always remains.

But as you may know, our business philosophy has always been to manage business in a sustainable and differentiated manner without compromising on the quality of the business.

Naushad Chaudhary

We appreciate it, sir.

Lastly, on the US market.

Not from your product point of view, but in general, if product goes off patent, how much time does it take for a generic player to register in that market and to have a real impact on the patented product once it goes off patent?

Rajnish Sarna

It varies from product to product, so difficult to generalise.

Broadly, it takes anywhere between 1.5-2 years.

However, if formulations are also patent-protected, then it's a completely different scenario.

Moderator · Conference Operator

The next question is from the line of Meet Vora from Emkay Global.

Please go ahead.

Meet Vora

My question was regarding the capex that we have done over the last two years, so roughly Rs.

800 – Rs.

900 crore last year, and we are planning to do this year.

So, can you just give a broad sense of what is the capex that we have done?

We have installed 1 dedicated plant is what you mentioned, and others will be all MPPs.

As in how many plants we have put up.

Rajnish Sarna

Atul, maybe you can come in and briefly explain.

Atul Gupta

The capex, what we are talking about is for a dedicated plant, one dedicated plant and also a multiproduct plant in further new molecules, one which we have been working.

And this continues for this year as well, it's in the 2025 forecast what we have given.

Meet Vora

So, in total, we'll be putting up 2 dedicated and 2 MPPs?

Atul Gupta

Yes.

Meet Vora

Sir, second question was on margin front.

So, while we are mentioning that our gross margin has improved because of that overall favourable product mix, is it because that contribution from a higher-margin product is more?

Or is it because that new products that we have commissioned are having higher margins?

Rajnish Sarna

I'm not sure what you meant.

But let me clarify that gross margin improvement is due to several factors.

The product mix is one aspect, but also the business mix.

The addition of the Pharma business where the gross margins are higher, increase in CSM exports' share in the overall revenues, etc., have made the overall business mix favourable.

Besides, the product mix has also been favourable.

Meet Vora

And just one last bit if I may.

If I look at the US geography, I just wanted to understand that even if pyroxasulfone, for example, is patented, can someone import pyroxasulfone from some other country or some other supplier and sell it in US?

Or whether there is an application patent or there is only a process or a technical patent?

Rajnish Sarna

So long the finished product is patented in the importing country, it would be difficult for anyone to import pyroxasulfone because they will ultimately be required to use/sell the technical material for the formulation product.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, we will take that as a last question for today.

I would now like to hand the conference over to the management for closing comments.

Over to you, sir.