Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of PI Industries Limited (PI; part of the PI group) at ‘CRISIL AA+/Stable/CRISIL A1+’.

 

On July 31, 2021, PI announced that it has executed a business transfer agreement with Ind-Swift Laboratories Limited (ISLL) and certain identified promoters of ISLL for acquisition (either itself or through its affiliate) of the Active Pharmaceutical Ingredients (API) business division of ISLL by way of a slump sale on a going concern basis, for a total consideration of Rs. 1530 crore, on a debt free, cash free basis. The acquisition will be funded using proceeds of the Qualified Institutional Placement (QIP) raised in fiscal 2021. The transaction is expected to be completed in the third quarter of fiscal 2022.

 

CRISIL Ratings believes that the acquisition of the API business of ISLL will enable PI to diversify its product offerings as well as leverage combined capabilities. ISLL reported revenues of Rs.857 crores and operating profitability of 21% in fiscal 2021. The API business of ISLL has a diversified portfolio of 20+ products with leadership position (global top 5) in several of them and a good R&D product pipeline, which can be monetised by PI. Further, considering that the acquisition will be funded using the proceeds of the QIP, PI’s financial risk profile will continue to remain healthy. As on June 30, 2021, PI had surplus cash of Rs. 2450 crore which should be more than sufficient to fund the acquisition.

 

PI’s performance in fiscal 2021 also remained strong. Supported by healthy demand and launch of new products like Awkira, Shield (fungicide) and Londax Power (rice herbicide), domestic agrochemical business grew at a robust 39% year-on-year. At the same time, backed by growth of existing products and commercialization of 5 new products, the Custom Synthesis Manufacturing (CSM) segment registered a 35% growth year-on-year. Operating profitability benefitted from favourable product mix and improvement in scale, as well as healthy processes, and remained healthy at 22%.

 

A strong order book of USD 1.5 billion in the CSM segment from the existing product basket, improving contributions from recent new launches in the domestic market, and new molecule additions in both business segments, supports revenue visibility. Besides, agrochemical demand is expected to remain healthy in the domestic and European markets, overall leading to revenue growth of ~12-15% for PI over the medium term. The improving scale of operations and stronger product portfolio, along with healthy operating efficiencies, should translate into sustenance of operating margins of at 21-22%.

 

The ratings continue to reflect PI’s growing presence in the CSM business supported by strong tie-ups with global innovators and established position in the domestic agrochemicals market supported by in-licensing business. The ratings also factor the group’s healthy financial risk profile and strong liquidity position. These rating strengths are partially offset by working capital-intensive operations and susceptibility to risks inherent in the agrochemicals and pharmaceutical sectors.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of PI and its wholly-owned subsidiaries, PILL Finance & Investments Ltd (PFIL), PI Life Science Research Ltd (PLSRL), PI Japan Co Ltd (PJCL), Isagro (Asia) Agrochemicals Private Limited (IAPL) and Jivagro Limited. That’s because all these companies, together referred to as the PI group, have the same promoters, and business and financial linkages. PFIL handles the investment activities of PI, while PLSRL handles its contract research and development activities. PJCL is the group’s marketing arm in Japan.

 

Goodwill generated on account of acquisition of IAPL and ISLL’s API business has been amortised over a period of 5 years.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Growing presence in CSM exports: The CSM export segment is marked by a significantly de-risked business model, which provides healthy revenue visibility and stable profitability. The PI group is one of the pioneers of CSM in the agrochemical space in India. The group, which has been engaged in this business for over a decade, has built a strong reputation, based on its sound research capabilities. Its clientele includes some of the largest agrochemical innovator companies in the world. The group has invested significantly in enhancing manufacturing capacities over the past five fiscals and has commercialised 37 molecules up to fiscal 2021.

 

CSM business’s revenues registered a healthy CAGR of around 30% between fiscals 2012 and 2021 on the back of regular launches of new products, and not withstanding tepid demand for agrochemicals in the European market in fiscals 2019 and 2020. Going forward, the CSM business is expected to grow at around 20-25% backed by current healthy order book position of ~USD 1.5 billion; thus providing revenue visibility for the next 2-3 years.

• Established position in the domestic agrochemical business with healthy in-licensing and co-marketing (ILCM) product pipeline: A presence of over five decades in the domestic agricultural inputs business, a healthy product mix, leadership in several generic product segments, and increasing number of launches through the ILCM route have helped the group establish itself as one of the top 10 players in this space.

 

Apart from fiscal 2020, where delayed monsoon and erratic rainfall during the year impacted sales, domestic business has witnessed steady growth over the last 5-6 fiscals led by introduction of new molecules and increased market penetration. With a solid product line up, supportive policy environment, and normal monsoon, the domestic business is expected to register healthy revenue growth over the medium term.

 

• Healthy financial risk profile, and strong liquidity: Financial risk profile is healthy, marked by strong net worth (Rs.5200 crore at March 31, 2021) and low debt, which along with healthy operating profitability ensures robust debt metrics. Gearing was 0.05 times at March 31, 2021, while the ratio of debt to earnings before interest, depreciation, taxation and amortization (EBITDA) stood at 0.25 times in fiscal 2021. The QIP issue of Rs.2000 crore in fiscal 2021, bolstered liquidity.

 

The company’s liquidity is expected to moderate in the near term, as a sizeable portion of the QIP proceeds will be utilized for the acquisition of ISLL’s API business. Capital spending is expected at ~Rs.600 crores per annum. With healthy annual cash generation, cash surpluses are expected to improve to sizeable levels again over the medium term.

 

That said, the company is expected to pursue inorganic and organic expansion plans over the medium term to strengthen its business further. CRISIL Ratings expects PI’s management will exhibit financial prudence while implementing these growth plans as demonstrated in the recent past.

 

Weaknesses

• Moderate working capital requirement: The agrochemical industry is characterised by working capital-intensive operations, due to large inventory requirement, seasonality in demand, and extended credit to dealers and distributors. The group maintains sizeable inventory of 65-70 days, to ensure that dealers’ requirements are met on time, and also because bulk of its raw material (technical) is imported. Dealers too need to be offered credit of 75-90 days, given the intense competition. Credit of 90-120 days from suppliers partly mitigates pressure on working capital management.

 

• Susceptibility to risks inherent in the agrochemicals and pharmaceutical sector: The crop-protection or agrochemical sector remains susceptible to specific and separate registration processes in different countries, and various environmental rules and regulations. Change in regulatory requirements, such as export and import policies and environmental and safety requirements could also impact growth prospects. For PI, strong early stage association with global innovators offers stable revenue visibility. Nevertheless, as the top 10 products in this division account for 60-65% of revenue, the group is partially susceptible to any product failures or lower-than-expected offtake.

 

Furthermore, the sector is highly dependent on monsoon and level of farm income. With about 30% of revenue coming from the domestic agricultural inputs business, performance remains exposed to monsoon vagaries.

 

The management’s ability to effectively monetize and grow ISLL’s API business will be critical, given it’s a new business segment. Besides, diversification into the pharmaceutical space also renders the API business vulnerable to regulatory risks and approvals, associated with the sector.

Liquidity: Strong

While a significant part of the current surplus cash will be utilised for the upcoming acquisition, strong cash generation of Rs. 900-1100 crore per fiscal will be sufficient to fund company’s organic capex plans as well as incremental working capital needs. Surplus cash is expected to gradually improve to ~Rs. 800-1000 crore by end of fiscal 2023. PI also has access to Rs. 400 crore of bank lines which have remained largely unutilised. With low debt outstanding, the group has sufficient headroom, to raise funds for sizeable capex of acquisitions.

Outlook: Stable

CRISIL Ratings believes that the PI group’s business risk profile should strengthen further over the medium term driven by its expanding product portfolio and healthy revenue visibility in both domestic agrochemicals and CSM segments, as well as steady profitability, leading to healthy cash generation. CRISIL Ratings also expects the group’s financial risk profile and liquidity to remain solid, supported by prudent capital spend and working capital management, and healthy net cash accruals.

Rating Sensitivity Factors

Upward Factors

• Better than expected revenue growth and operating profitability sustaining over 20%
• Maintaining strong debt metrics and heathy liquidity, while pursuing organic and inorganic growth; for instance Debt/EBITDA below 0.8-1 time

 

Downward Factors

• Significant moderation in revenue growth and operating profitability (below 14-15%), impacting the group’s cash accruals
• Large debt-funded capex or acquisition or elongation of working capital cycle leading to deterioration in key debt  metrics – debt/EBITDA  above 1.8-2 times
• Material further decline in liquid surplus due to share buyback, large dividend payout or sizeable acquisitions.

About the Group

PI was set up in 1946 as an edible oil refinery by the late Mr P P Singhal. The company later entered the agrochemical formulations business. In the mid-1990s, PI diversified into CSM exports for global agrochemical innovator companies.

 

PI currently operates in the domestic agricultural inputs and CSM exports segments. It is a leading player in the domestic agricultural inputs sector, primarily dealing in agrochemicals and plant nutrients. In the CSM exports segment, its business interests include dealing in custom synthesis and contract manufacturing of chemicals, which constitutes techno-commercial evaluation of chemical processes, process development, lab and pilot scale-up, as well as commercial production. The PI group has three agrochemical formulation plants and five multipurpose plants in Panoli, Gujarat, three multipurpose plants in Jambusar, Gujarat, and an R&D unit in Udaipur, Rajasthan. In December 2019, PI acquired IAPL. IAPL’s manufacturing facility are located in Panoli and Ahmedabad, Gujarat.

 

For the quarter ended June 30, 2021, on consolidated basis, the company registered a profit after tax (PAT) of Rs.187 crores on net sales of Rs.1194 crores, compared with PAT of Rs.146 crores on net sales of Rs. 1060 crores in the corresponding period of fiscal 2021.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31,	Unit	2021	2020
Revenue	Rs.Crore	4577	3369
Profit After Tax (PAT)^	Rs.Crore	722	453
PAT margin	%	15.8	13.4
Adjusted debt/adjusted networth^	Times	0.05	0.20
Interest coverage	Times	40.48	40.41

^CRISIL adjusted numbers due to amortization of goodwill on account of acquisition

Any other information: Not applicable