Business Beating On All Fronts

What distinguishes PI Industries from its peers is its capacity to provide complex chemical solutions in the agri-sciences industry. The company with a strong infrastructure set-up operates through three formulation facilities as well as eight multi-product plants around its three manufacturing locations. The management boasts of its net debt to equity position being almost zero with a sustained build up in its performance that has resulted in consistent accretion of reserves.

PI Industries witnessed revenue growth of 32 per cent Year-on-Year (YoY) based on its 40 per cent YoY growth in exports on account of demand boost of its existing products. “PI Industries is all set to make a comeback (revenue CAGR of 21 per cent between Financial Year (FY) 2018-2021E) driven by both domestic (~39 per cent of revenues) and CSM business (61 per cent of revenues),” pointed out an analyst at Prabhudas Lilladher.

Despite the soft demand in the current quarter due to poor rainfall and low agri produce prices, the company’s domestic revenue grew by nine per cent YoY. As per market analysts, its custom synthesis manufacturing (CSM) business made a good progression despite multiple headwinds. An analyst at Motilal Oswal said, “CSM business delivered a robust growth of 40 per cent YoY backed by higher demand due to an improvement in global sentiment. PI aims to capitalise  on the improved global market by investing Rs 3 billion - 3.5 billion per year over the next two years.”

Company’s earnings before interest, tax, depreciation and amortisation (EBITDA) for the third quarter (Q3) witnessed 42 per cent YoY growth at Rs 149 crore with margins at 21 per cent driven primarily by better product mix and improved realisation and operating leverage benefit. Its profit after tax (PAT) saw a growth of 33 per cent YoY for its Q3 in FY 2019, while the earning per share (EPS) stood at Rs 7.76 per share. “We raised our EPS estimates by two per cent for FY2019 and three per cent for FY 2020 to align with Q3 FY2019 performance. We tweaked our revenue estimate by two per cent for FY2019 and three per cent for FY2020, due to better-than-estimated revenue growth in Q3 FY2019,” said an analyst at Elara Capital.

Many analysts see the potential for further re-rating of this stock given healthy balance sheet along with strong earnings visibility. Further the management is confident of achieving its revenue growth and EBITDA margin of over 20 per cent and 21 per cent in the next two to three years. “We value the stock at 24x FY 2021E EPS (in-line with its five-year average trading multiple), which is  justified as the company has shown strong signs of returning to its robust growth cycle post three muted years,” said the analyst tracking the company at  Motilal Oswal.

Record High  EBITDA Margins

Diverse portfolio aids a double digit growth

One of the largest exporters of steel products in India, JSW Steel posted a standalone PAT of 68 per cent growth YoY to Rs 1,892 crore for Q3 of FY2019. The impressive show came mainly on the back of higher steel prices and a better product mix. The company management cited that despite an increase in costs of key inputs like iron ore, coal, energy prices, its EBITDA for Q3 witnessed 24 per cent YoY growth.

Although JSW Steel’s domestic operations reported a robust performance for nine months in FY2019 driven by healthy realisations, company’s exports during the quarter dropped sharply as both steel demand and pricing in the international markets witnessed a soft patch. This impacted company’s steel sales volume which stood at 3.68 million tonne (MT), down by seven per cent YoY.

This has led many brokerages to revise their sales volume and also the management reduced its sales volume guidance for FY2019 by two-three per cent due to weak exports. “Export contributed only 10 per cent to overall sales volume (compared to 17 per cent in Q2 FY2019 and 30 per cent in Q3 FY2018). Hence, due to a muted sales volume in Q3 FY2019, we downward revise sales volume estimate to 15.5 MT for FY 2019E (from 16 MT earlier) and  to 16.3 MT for FY 2020E (from  16.4 MT earlier),” said an analyst  at ICICI Direct.

Presently company has three captive iron ore mines operational with two MTPA capacity. Further the management expects this mined to produce 3.5 mt of iorn ore in FY2019 and 4.5 mt in FY2020E from its captive mines.

However, for the company, the downtick in the prices of iron ore is expected to provide some relief. “Margins in Q4 FY 2019 are likely to be lower due to the steel realisation decline of Rs 3,000-3,500/t and the increase in coking coal cost by USD10/t, partially offset by lower iron ore prices. This should set the base for margins in FY2020, as we see steel prices finding a floor in the global market,” pointed out an analyst at Motilal Oswal.

Despite all this, the company’s balance sheet continues to remain strong as its net debt to equity stood at 1.40x for Q3 as compared to 1.46x at the end of Q2 FY2019. It is also the highest bidder for the acquisition of bankrupt Bhushan Power and Steel for which it is awaiting the approval of the National Company Law Tribunal.

Given the headwinds in the business and despite the recent fall in steel prices most analysts are not changing their structural bullish call on the sector and are rather seeing it as a short-term blip to correct abnormal margins.

“We reiterate our structural theme of Chinese discipline focused on profitability that will help to gain price momentum in FY 2020E. Led by strong earnings growth and efficient operations, we continue  to like JSW Steel,” said an analyst who tracks the company at Prabhudas Lilladher.   himali@outlookindia.com