Product concentration to remain overhang for agrichem major PI Industries- QHN

The Street’s concern is the recent announcement by China’s Shandong Weifang Rainbow Chemical to set up a 2,000-million-tonne-per-annum facility to manufacture herbicide pyroxasulfone. This is the third Chinese company announcing a capacity for pyroxasulfone, which can have a negative impact on PI Industry’s exports.

The custom synthesis and manufacture (CSM) business (exports) accounted for 78 per cent of PI Industry’s revenues, and pyroxasulfone accounts for over half of the CSM revenues. Pyroxasulfone is estimated to contribute about 35 per cent of the company’s overall revenues.

PI Industries supplies pyroxasulfone to Japan’s Kumiai Chemical Industry, which is the patent holder. The patent for the product expires in 2025 in the US market. The Japanese company has cut its FY24 guidance given demand pressures reflected in the high channel inventory. Pyroxasulfone was one of the key factors for PI’s strong performance over the years, shielding it from global headwinds in the agrochemical industry. Since Kumiai is one of the largest clients of PI, a guidance cut translates into a weak outlook for the company, says Motilal Oswal Research.

Nuvama Research, too, believes that these developments will impact the stock. Rohan Gupta and Rohan Ohri of the brokerage acknowledge that PI faces the risk of a sharp impact on earnings led by potential price erosion in pyroxasulfone and increasing generic competition from China. It will have an impact on margins and earnings due to significant dependency on a single product at present and will continue to have an overhang on the stock price.

The positive from PI Industries’ perspective is the diversification of its revenue base into pharmaceuticals, given the acquisition of assets and the focus on new product development, which would help reduce product concentration.

While there is a structural issue, the near-term impact might be limited given the supply contract agreement to Kumiai and minimal impact of molecule pricing for PI. Further, the company has maintained its growth guidance of 20 per cent led by new launches and pharma expansion. Nuvama Research has a buy rating with a target price of Rs 4,233 per share.

While it has a buy rating, Motilal Oswal Research believes that new capacities, the demand scenario, and realisation of pyroxasulfone will be key monitorables. The brokerage expects PI to sustain near-term growth momentum, led by consistent growth in the CSM business on the back of a strong order book ($1.8 billion), faster commercialization of new molecules (plans 4-5 launches every year), and sales ramp-up in existing molecules. In addition to the pharma/contract manufacturing, product launches in the domestic market (five this year) would support its sales growth. Motilal Oswal Research has a target price of Rs 4,480 a share.