Built on impeccable R&D track record and trust

PI Industries

Initiating Coverage | 10 October 2015Sector: Agri

Chintan Modi (Chintan.Modi@MotilalOswal.com); +91 22 3982 5422

Niket Shah (Niket.Shah@MotilalOswal.com); +91 22 3982 5426

FY10

61%Domestic agri-inputs

FY15

41%Domestic agri-inputs

FY15

59%CSM exports

FY10

39%CSM exports

PI Industries

10 October 2015 2

PI Industries: Built on impeccable R&D track record and trust

Summary ................................................................................................... 3

Company overview..................................................................................... 5

Higher share of in-licensing differentiates PI from peers ............................. 7

Nominee Gold growth to continue; scale-up of recent launches, new products to maintain growth momentum ..................................................10

Capabilities in CSM exports make PI an ideal choice ..................................13

Earnings to post 26% CAGR over FY15-17 ...................................................18

Valuation and view ...................................................................................19

Key risks ....................................................................................................20

Management overview .............................................................................21

Industry overview .....................................................................................22

Financials and valuations ...........................................................................23

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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10 October 2015 3

Built on impeccable R&D track record and trust Expect 26% EPS CAGR over FY15-17

PI boasts of a unique business model—a strong R&D-led custom synthesis business (59% of revenues) built over the last two decades and an equally compelling domestic agro-chemicals business (41% of revenues), largely built by in-licensing arrangements with major global agro-chemicals innovators.

With a mere 10% penetration, we believe there is untapped growth potential in PI’s largest product—Nominee Gold, which along with new products like Osheen, Vibrant will continue to drive growth momentum for domestic agro-chemicals.

With a strong order book amounting to USD600m, the CSM business has robust revenue visibility—book-to-bill of 3.1x; which will be complemented by upcoming facilities in Jambusar. We believe the foray into new segments like pharmaceuticals and electronics chemicals will be the next key growth drivers.

With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust growth outlook—23% revenue CAGR and 26% PAT CAGR), we believe PI is one of the best plays on India’s agri sector and CSM opportunities. Initiate coverage with a Buy.

In-licensing—a key differentiator against rest of the peers PI has managed exclusive tie-ups with patent originators, led by its track record of respecting innovator’s IPR. The company’s focus on selected and patented innovative products through in-licensing differentiates it from the rest of the market participants, who sell largely generic products with little product differentiation. PI currently has a product portfolio spanning 33 brands across categories (herbicides, insecticides, fungicides and specialty chemicals), including 5-6 products that are in-licensed and 10-12 products that are co-marketed. With higher proportion of in-licensed and co-marketing revenues as against generic products, PI enjoys industry-leading margins (16%) in the domestic agro-chemicals division. Nominee Gold growth to continue despite new competition PI launched Nominee Gold in FY10 (as a tie up with Japan based innovator Kumiai), which went on to become a blockbuster product—clocking highest revenues and margins amongst its product portfolio. With likely easing of registration process for 9 (4), we believe competitive intensity will increase going forward and could result in some extent of price and margin erosion for the product. However, with product penetration still very low (only 10% of the area under rice cultivation covered by Nominee Gold as against potential for at least 30%, with dosage being a fraction of the ideal dosage), we believe Nominee Gold will continue to grow as the market expands. We believe the fears around price, margin erosion and de-growth for the product are unfounded.

Initiating Coverage | Sector: Agri

PI Industries CMP: INR660 TP: INR800 (+21%) Buy

BSE Sensex S&P CNX 27,080 8,190

Stock Info Bloomberg PI IN Equity Shares (m) 136.1

M.Cap. (INR b)/USD b) 89.8/1.4 52-Week Range (INR) 786/372 1, 6, 12 Rel. Per (%) -7/1/52

AvgVal. INR m/Vol‘000 124/211 Free float (%) 41.6

Financial Snapshot (INR b) Y/E Mar 2015 2016E 2017E Sales 19.4 23.7 29.4

EBITDA 3.7 4.6 5.9 NP 2.5 2.9 3.9 EPS (INR) 18.0 21.5 28.5

EPS Gr. (%) 30.3 19.5 32.5 BV/Sh. (INR) 65.6 82.9 105.9 RoE (%) 30.9 29.0 30.2

RoCE (%) 39.9 39.4 42.5 P/E (x) 36.7 30.7 23.1 P/BV (x) 10.1 8.0 6.2 Shareholding pattern (%) As on Jun-15 Mar-15 Jun-14 Promoter 58.4 58.4 58.6

DII 8.5 8.6 6.4

FII 17.5 18.5 19.9 Others 15.7 14.5 15.1 FII Includes depository receipts Stock Performance (1-year)

PI Industries

10 October 2015 4

Osheeen—the second blockbuster product after Nominee Gold In FY13, PI launched Osheen—an insecticide—through an in-licensing deal with Japan’s Mitsui Chemicals. Just like PI’s other products, Osheen has proved to be a runaway success with sales for the first two years reaching INR1b. Osheen continues to be the second biggest product for PI after Nominee Gold. OSHEEN has effectively managed the Brown Plant Hoppers in rice for a number of years in the leading rice growing countries. PI spent nearly six years on Osheen’s development. After rice, PI extended the product to cotton and is looking to extend to vegetables as well. Capabilities + Trust = Ideal choice for global innovators in CSM Custom synthesis and manufacturing involves trust as it the most critical factor, as it is an IPR-driven business and requires capabilities to scale up production from lab scale work to dedicated plant. PI’s longstanding relationship with global innovators in the agro-chemical space is a testament to capabilities and trust it has built over the years. The company has been in the CSM business for the last 20 years and it will take long gestation period for any new entrant to acquire knowledge, create strong R&D capabilities, infrastructure and build trust, which acts as a major entry barrier. PI also participates in patented and early-stage life cycle of the molecules, which again acts as an entry barrier as innovator companies have only one or two suppliers due to the confidentiality involved. Robust order book, complemented by upcoming Jambusar facility, will convert into revenue CAGR of 27% in CSM PI has an order book USD600mn (which is 3.1x its FY15 revenue USD187m) from CSM exports on account of 18 molecules already commercialized in the past. The company also intends to commercialize two more molecules in the next 2-3 months which will continue to add to order book in future. New Jambusar facility, which is likely to be commissioned in the next 4-5months, is expected to generate revenue of INR5b-6b at maturity and takes about 1-1.5 years to fully scale the plant. Leveraging existing capabilities to diversify beyond agro-chemicals PI has created strong capabilities in R&D. The general nature of the intermediates that it manufactures is such that they can be applied in other verticals of chemicals sector (like pharmaceuticals or fine chemicals used in electronics sector) with some modification; these verticals can be new growth opportunities for PI and will in turn expand its customer base and geographical reach. Valuation and view With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust growth outlook (23% revenue CAGR and 26% PAT CAGR), we believe PI is one of the best plays on India’s agri sector and CSM opportunities. We believe mix change in favor of the R&D intensive CSM business would continue to drive re-rating for the stock. PI trades at 31x and 23x FY16 and FY17 EPS. We initiate coverage with a Buy with a target price of INR800, valuing the stock at 28x FY17E earnings.

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10 October 2015 5

Company overview

Unique mix of domestic agro-chemicals and CSM exports Mr. Piyush Singhal founded PI Industries in 1947 as Mewar Oil and General Mills Limited, which was predominantly into edible oils business. A decade later, the company started selling agro-chemicals. The name was changed to PI Industries in 1990s. PI has two business activities: a) Domestic Agri Inputs (41% of revenues) offering plant protection products, and

specialty plant nutrient products and solutions. PI has a strong rural reach andbrand equity, with millions of Indian farmers duly backed by a robust pipeline ofproducts for sustained growth in the sector.

b) Custom Synthesis & Manufacturing (CSM) (59% of revenues) for contractresearch and production of agro-chemicals, intermediates and other niche finechemicals for global innovators. The business, backed with a strong R&Dsupport, works to develop and commercialize products based on newlydiscovered chemistries with reputed MNC innovators.

Exhibit 1: CSM contributed 59% of revenues in FY15

Source: Company, MOSL

Exhibit 2: Share of CSM segments in revenues is gradually increasing

Source: Company, MOSL

Domestic agri-inputs, 41%

CSM exports, 59%

61% 64% 58% 48% 42% 41% 38% 37%

39% 36% 42% 52% 58% 59% 62% 63%

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Domestic agri-inputs CSM exports

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10 October 2015 6

Exhibit 3: Gist of activities that PI is involved in

Source: Company, MOSL

Exhibit 4: Timeline of PI’s journey

Source: Company, MOSL

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10 October 2015 7

Higher share of in-licensing differentiates PI from peers In licensing early-stage molecules gives PI an edge

PI’s focus on selected and patented innovative products through in-licensingdifferentiates it from market participants, who sell largely generic products with littleproduct differentiation.

The business faces procedural entry barriers in India in the form of protractedregistration process and a three-year exclusive data protection for the product postregistration.

After India became TRIPS compliant in 2005 and started giving patent protection,MNCs turned comfortable launching their patented products in India; Indiancompanies, too, have been able to in-license many patented products from globalinnovators in this better IP environment.

Unique business model of in-licensing PI works on a unique model of in-licensing new molecules from global innovators and nurturing the same into strong brand propositions in the Indian agro-chemical market; these are high-performance, high potential, early-stage products over which PI enjoys exclusive marketing rights. Some of the key brands include NOMINEE GOLD, OSHEEN, KEEFUN, BIOVITA, KITAZIN, FORATOX, FOSMITE and ROKET. Depending upon the agreement with the global innovator, PI either imports the technical or bulk formulations or chooses to manufacture either of the two at its owned factories in India. The agreements are typically formed with innovators for early-stage patented molecules in a way that PI can realize the growth benefit throughout the entire product life cycle. In-licensing products enjoy exclusivity and market leadership and with ~60% of domestic agro-chemical revenues coming from in-licensing, PI enjoys best-in-class margins in this segment over peers.

Exhibit 5: Product-focused approach by operating in select key brands

TRIPS—a game changer for patented products’ entry in India Implementation of The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 2005 in India was a game changer for patented products’ entry in the country. TRIPS is an international agreement administered by the World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO member countries. The agreement was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994. With the implementation of TRIPS, product patents were applicable instead of process patent—a major break-through for global patent owners. In the era of process patents, Indians reverse engineered the processes to arrive at the same product; thus circumventing the patent law. After India became TRIPS compliant in 2005 and started giving patent protection, MNCs turned comfortable launching their patented products in India; Indian companies, too, have been able to in-license many patented products from global innovators in this better IP environment.

PI Industries

10 October 2015 8

Non-compete model makes PI the preferred partner for innovators Over the last 20 years, PI has won the trust of global innovators and remains their preferred partner owing to its blemish-free record in terms of patent disputes and litigations and its commitment to intellectual property right (IPR) protection.

In-licensing—a key differentiator for the company PI has managed to have exclusive tie-ups with patent originators, led by its track record of respecting innovators’ IPR. The company’s focus on selected and patented innovative products through in-licensing differentiates it from the rest of the market participants who sell largely generic products with little product differentiation. PI currently has a product portfolio spanning 33 brands across categories (herbicides, insecticides, fungicides and specialty chemicals), including 5-6 products that are in-licensed and 10-12 products that are co-marketed. With higher proportion of in-licensed and co-marketing revenues as against generic products, PI enjoys industry-leading margins (16%) in the domestic agro-chemicals division.

Exhibit 6: Strong product portfolio—33 brands across categories Category Brands

Insecticides Osheen, Oval, PI Bupro, Lepido, Dodger, Colt, Divap, Colfos, Fosmite, Fluton, Jumbo, Snailkil, Foratox, Roket, Carina, Simbaa, Voltage, Maxima

Herbicides Nominee Gold. Bunker, Melsa, Solaro, PI Glypho, INRO, Bingo, Pimix,

Fungicides Cuprina, Lurit, Kitazin, Sanipeb, Clutch, Logik

Specialty chemicals Biovita Source: Company, MOSL

Exhibit 7: Key products Product name Category Technical Name Particulars

Biovita Specialty chemicals Ascophyllum nodosum

It provides over 60 naturally occurring major and minor nutrients and plant development substances in organic form and contributes to greater microbial activity when applied to soil, thus increasing the nutrient availability to plants.

Foratox Insecticide Phorate 10 % CG Controls major insects and mites and checks infection and spread of viral diseases by controlling vectors.

Carina Insecticide Profenofos 50% EC Kills insects on lower and upper surface of leaves due to trans-laminar penetrating action, controls larvae, white flies, mites and other sucking pests.

Osheen Insecticide Dinotefuran 20% SG Launched in FY13, it manages the brown plant hoppers in rice, targets pests which are not controlled by other molecules.

Nominee Gold Herbicide Bispyribac Sodium 10% SC Launched in FY10, Controls major grasses, sedges and broad leaf weeds of rice.

Melsa Herbicide Pinoxaden 5.1% EC Integrated weed management in wheat crop.

Fosmite Insecticide Ethion 50% EC Effective control of mites, scales, thrips, beetles and lepidopterous larvae.

Roket Insecticide Profenofos 40%+Cypermethrin 4%EC Protects against several insect pests (both chewing and sucking types)

Source: Company, MOSL

Massive entry barriers make the business model exciting PI has built its reputation over 20 years through innovative products, respect for IPs, long-term relationships with global innovators and farmer acceptability. Any new product by the company becomes immensely successful on the back of its effectiveness, marketing, brand value, early-stage nature and acceptability to farmers. Considerable time and costs are required for any company to replicate the

PI Industries

10 October 2015 9

success of PI. Besides, the business faces procedural entry barriers in India in the form of protracted registration process and a three-year exclusive data protection for the product post registration.

Strong product pipeline provides multi-year growth visibility PI’s success is driven by the effectiveness of its products. At any given point of time, the company has a niche pipeline of products under different stages of registration—from which it introduces one or two products every year before Kharif or Rabi season. Since the products are of early-stage patented molecules, the multi-year growth potential is robust—with very high growth in the initial years of launch. PI banks on its strategy of selective alliances to broaden product offerings and strengthen market position. The company currently has 5-6 products in pipeline, which will be launched over the next three years—with an annual target of 2-3 products.

Exhibit 8: New launches in domestic agri-inputs Year Product launched

FY13 Osheen (insecticide), Fluton (insecticide) and Cuprina (fungicide)

FY14 Melsa (herbicide)

FY15 Keefun (insecticide) Source: Company, MOSL

Strong pan-India distribution network PI has a wide distribution network, covering more than ~35,000 retail points, ~10,000 distributors/direct dealers and 29 branches across major agricultural areas of India. The company has a strong reach in north, west and east of India, and is gradually expanding its presence in the south. PI has a centralized SAP-based ERP system, which provides an efficient last-mile connectivity through effective supply chain management and inventory handling. PI provides delivery of products as per the requirement through its just-in-time management of stocks, thereby avoiding excess inventory.

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10 October 2015 10

Nominee Gold growth to continue; scale-up of recent launches, new products to maintain growth momentum New products like Osheen, Vibrant to be the new growth drivers

Given the extremely low penetration levels for Nominee Gold (only 10% of the areaunder rice cultivation covered as against potential for at least 30%, with with dosagebeing a fraction of the ideal dosage), we believe it has tremendous headroom forgrowth as the market expands. We believe the fears around price, margin erosion andde-growth for the product are overdone.

Launched in FY13, OSHEEN is PI’s second largest product and is reputed to be the mostreliable solution to manage Brown Plant Hoppers in rice. An INR1b brand, we expectOSHEEN to be the largest growth driver for PI over coming years.

PI recently launched Vibrant (Thiocyclam)—a broad-spectrum insecticide for ricetreatment and can attack two pests (stem borer and lepidopetra) in a single dose. Theaddressable markets for Vibrant are Punjab, Haryana, Chattisgarh and AP, with a totaladdressable market opportunity of INR6b.

Nominee Gold growth to continue despite new competition PI launched Nominee Gold in FY10 (as a tie up with Japan-based innovator Kumiai), which went on to become a blockbuster product—clocking highest revenues and margins amongst its product portfolio. NOMINEE GOLD is a post-emergent, broad-spectrum systemic herbicide for all types of rice cultivation—direct sown rice, rice nursery and transplanted rice. The product has enjoyed exclusivity over the last five years, with exclusivity till FY13 due to regulatory requirements and post that due to a Gujarat High Court Ruling that delayed the process for 9 (4) registrations—thus limiting the entry of new players and, thereby, competition.

However, with the likely easing of registration process for 9 (4), we believe competition will increase going forward; this could erode the product’s price and margin to some extent. However, given Nominee Gold’s low penetration, we believe it will grow as the market expands. We believe the fears around price, margin erosion and de-growth for the product are overdone.

Exhibit 9: Nominee Gold expected to remain highly successful in near future

Osheeen—the second blockbuster product after Nominee Gold In FY13, PI launched Osheen—an insecticide—through an in-licensing deal with Japan’s Mitsui Chemicals. Just like PI’s other products, Osheen has proved to be a runaway success as the first two years of its launch saw sales reaching INR1b.

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10 October 2015 11

Osheen continues to be the second biggest product for PI after Nominee Gold; it has still not seen any price erosion and will enjoy exclusivity till the end of 1HFY17. Osheen controls the brown plant hoppers in rice, targeting pests that are not controlled by other molecules, owing to the unique action of the ingredient Dinotefuran. OSHEEN has effectively managed the Brown Plant Hoppers in rice for number of years in the leading rice growing countries. The product has also been tested and recommended by leading agriculture research institutes of Govt. of India for rice and cotton. PI spent nearly six years on Osheen’s development. After rice, PI extended the product to cotton and is looking to extend to vegetables as well.

Exhibit 10: Osheen achieved revenues of INR1b in the first two years of launch

Vibrant—another promising product addressing the ~ INR6b market PI will launch Vibrant (Thiocyclam) in November, 2015 — a broad-spectrum insecticide for treatment of rice and can attack two pests (stem borer and lepidopetra) in a single dose. Farmers currently use two insecticides—one for stem borer and another for leaf folder. As a result, Vibrant will help farmers in the form of savings of chemistry, cost of application and efforts. PI estimates that farmers are using products worth INR6b on protecting their crops from pests. This product is exclusive (registration u/s 9(3) of CIB) and has an in-licensing arrangement with a Japanese MNC. The addressable markets are Punjab, Haryana, Chattisgarh and AP and market size is INR6b. Also, the product doesn’t cannibalize any of PI’s existing products.

Higher contribution from new products to keep growth momentum intact Rice contributes nearly 40% to revenues, followed by vegetables, tea and chilies. However, PI is a complete agro-chemicals player as it provides protection across crop categories. Insecticides contribute ~50% to revenues, followed by herbicides (~30%) and fungicides (~20%). PI’s top six products include Nominee Gold, Keefun, Biovita, Foratox, Osheen, Kitazin. With a market share-focused approach, along with top products, the management bundles generic products to drive scale and viability at the dealer level.

Differentiated distribution strategy—to augur well for growth PI is now targeting to enter and penetrate newer geographies, which will further strengthen its position—considering the company’s product effectiveness and brand value. While PI is already strong in Chhattisgarh, UP and Bihar, it now plans to enter markets that are largely untapped (e.g., Maharashtra, where it has approvals in

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10 October 2015 12

place and expects revenue traction from FY17). We believe the focus on market share, emphasis on being the market leader, entering new geographies and smaller farmers will keep growth momentum intact going forward.

Exhibit 11: Revenues in agro-chemicals to post a CAGR of 17 % over FY15-17

Source: MOSL, Company

Exhibit 12: EBITDA in agro-chemicals to post a CAGR of 19% over FY15-17

Source: MOSL, Company

5,052 5,500 6,700 7,973 9,089 10,907

23%

9%

22% 19%

14%

20%

FY12 FY13 FY14 FY15 FY16E FY17E

Revenues (INR m) Growth (%)

783 664 1,039 1,276 1,363 1,800

16%

12%

16% 16% 15% 17%

FY12 FY13 FY14 FY15 FY16E FY17E

EBITDA (INR m) Margins (%)

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10 October 2015 13

Capabilities in CSM exports make PI an ideal choice Robust order book of USD600m gives revenue visibility

IPR protection is vital criteria for global innovators to choose partners in the CSMbusiness and all Indian players are subject to TRIPS agreement, which provides IPRprotection. Additionally, economic competencies relative to China have also graduallyimproved over the last few years. These factors make Indian players an economicallyviable choice.

PI has exhibited strong scale-up and execution capabilities in CSM, which involvescomplex activities, and has accreditation for GLP along with best-in-class supportinfrastructure; this has led to longstanding relationship with global innovators in theagro-chemical space and acts as major entry barrier for new entrants.

PI participates in early stage of molecule life cycle, which enables it to participate inthe growth phase of products. The company’s robust order book of USD600m providesrevenue visibility over the next two years and will be complemented by upcomingfacilities in Jambusar. PI is also looking beyond agro-chemicals for new growthopportunities.

We expect CSM exports to post revenue CAGR of 27% over FY15-17, with EBITDAmargins improving by 100bp to 22%.

In CSM, Indian players being preferred over Chinese Respect for IPR: Global Innovators partnering Indian suppliers stand protected under a stringent patent protection as India is a signatory to Trade Related Intellectual Property Rights (TRIPS) agreement.

Competitive advantages over China: China is the largest exporter of agro-chemicals globally and is, thus, a primary competitor to India in this space. However, over the years, China has been gradually losing its dominance in manufacturing on the back of rising labor cost, stricter environmental and safety regulations, and weak IPR policy. Further, India’s currency has been more competitive than the Chinese Yuan against global currencies; thus making Indian companies economically attractive. Agro-chemicals exports from India showed 15% CAGR over FY98-14.

The global fine chemical industry is estimated to be about USD300b with CSM segment estimated to be ~USD85b; India’s share is currently ~5%, but it is growing at a healthy pace of 12% due to its emergence as a preferred destination.

R&D capabilities, infrastructure and trust aspect make PI a preferred choice In CSM exports, PI undertakes custom synthesis and contract manufacturing of niche fine and specialty chemicals for process research and large-scale manufacturing of newly discovered molecules by global innovators.

It is supported by high-end infrastructure, which includes R&D Lab, Kilo Lab, Pilot Plant, and Flexible and Dedicated plants. PI has also created various reaction capabilities and continuously adds to it to meet customer requirements.

PI Industries is also accredited for ‘Good Laboratory Practices’ (GLP). Data generated in the company’s laboratory is, hence, acceptable by registration authorities (for agro-chemical, pharmaceuticals, etc.) in all the OECD regions such as USA, Europe and Japan.

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CSM business involves a high level of trust, especially for companies like PI who are involved in the development of early stage molecule. Longstanding relationships with global agro-chemical innovators is a testament to PI’s trust and reliability, which are major entry barriers for any new entrant.

PI has reached this level over a period of 20 years and it will take a long gestation period for a new entrant to acquire knowledge, create strong R&D capabilities, infrastructure and built trust.

Exhibit 13: End-to-end process flow in custom synthesis and contract manufacturing

Source: Company

Exhibit 14: Custom synthesis—production technologies

Source: Company

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Focus on early stage molecules provides opportunity to participate over the life of a product As a part of its core strategy, PI focuses on manufacturing molecules— of high/medium value and low volume—that are patented, in early stages of their life cycle and involve complex chemistries. The contribution of early stage molecule to the CSM exports business is ~90%; thus the company is able to participate through the life of a product, which provides opportunity to be the first and second suppliers of such molecules under global patents.

It takes around 3-5 years for a molecule to get commercialized post inquiry by a customer; thereafter, it gives revenue visibility for 5-10 years until new molecule is discovered or resistance to a particular product is developed.

Exhibit 15: Life cycle chart

SSource: Industry

Exhibit 16: Example of CSM order flow PI 011

Dec '11 Enquiry received Feb '12 1st sample sent to customer Mar '12 Sample approved by customer and agreement signed May '12 Scale up study undertaken Jun '12 First commercial order (5MT) Aug '12 Second commercial order (57MT)

(Supply upto Mar '13) Nov '12 Third commercial order (200MT)

(Supply upto Mar '14) Apr '14 Fourth commercial order of 1500MT

(USD36m) for 3 years

Source: Company

Key entry barriers:

1. Creating capabilities in process research and building strong infrastructure takes time.

2. Long gestation in creating client relationship and building trust.

3. Participating in patented and early stage of molecule life cycle. The client generally keeps only one

or two suppliers due to confidential data.

Robust order book gives revenue visibility over next two years The latest order book stands at USD600mn, which is 3.1x its FY15 revenue (USD187m) from CSM exports. The strong growth in order book is on account of

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new molecules that were commercialized in the last 3-4 years and comprises 5-7 molecules. Currently, the total number of molecules commercialized is 18 and the company expects to commercialize two more in the next two quarters. PI is confident of commercializing 2-3 molecules every year and this will continue to provide revenue visibility.

Exhibit 17: Order book to revenue ratio

Source: MOSL, Company

Order book to be complemented by the upcoming Jambusar facility The company expects to commission two new plants at Jambusar during FY16. The work at the plants is progressing as per schedule and the PI expects to commission the first plant by October 2015 and the second by December 2015. The plants will be fully automated, unlike the previous plants (which involved higher manual intervention). Both plants are multipurpose and can produce various molecules with a downtime of two weeks between switching.

The total capex incurred on the plants is expected to be around INR2,500m-3,000m while the asset turnover on maturity is expected to be 2-2.5x the capex; this will convert into additional revenue of INR5,000m-6,000m. Considering that order visibility is already there, the estimated time to scale up these plants to full capacity utilization is around 1-1.5 years. The revenue from Jambusar facility, where one plant is already operational, was INR300mn in 1QFY16; the total capex incurred in the plant was INR1,800m, including supporting infrastructure.

The new plants in Jambusar will have a 10-year tax break on all products manufactured. We expect these plants to contribute majorly to the revenue going ahead, leading to margin expansion and tax savings.

78 110 153 187 300 305

395

578

3.85

2.77 2.58 3.09

FY12 FY13 FY14 FY15

Revenue USD mn Order book USD mn Order book to revenue

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10 October 2015 17

Exhibit 18: Attractive RoCEs on core investments in CSM model overshadow capital intensity (only for new capacities) Capital Investment 100

Working capital 33 60 days of sales based on FY15

Total capital employed 136

Sales 200 Asset turnover - 2x of capital employed

EBITDA 44 22% EBITDA margins

Less: Depreciation 6 average 6% depreciation rate

EBIT 38

RoCE % 29 Source: MOSL, Company

Leveraging its existing capabilities to diversify beyond agrochemicals PI has created strong capabilities in R&D. The general nature of the intermediates that it manufactures is such that they can be applied to other verticals of the chemicals sector (like pharmaceuticals or fine chemicals used in the electronics sector) with some modification; these verticals can be new growth opportunities for PI and will in turn expand its customer base and geographical reach.

Exhibit 19: Revenues in CSM business to post a CAGR of 27% over FY15-17

Source: MOSL, Company

Exhibit 20: EBITDA in CSM to post a CAGR of 30% over FY15-17

Source: MOSL, Company

3,731 6,001 9,250 11,430 14,605 18,517

59% 61% 54%

24% 28% 27%

FY12 FY13 FY14 FY15 FY16E FY17E

Revenues (INR m) Growth (%)

672 1,132 1,785 2,400 3,213 4,074

18% 19% 19% 21% 22% 22%

FY12 FY13 FY14 FY15 FY16E FY17E

EBITDA (INR m) Margins (%)

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10 October 2015 18

Earnings to post 26% CAGR over FY15-17

Robust growth in revenues led by CSM business We expect revenues to post 23% CAGR over FY15-17, led by 17% revenue CAGR in the domestic agro-chemicals business and 27% revenue CAGR in the CSM business over FY15-17. We expect EBITDA margins to expand 80bp over FY15-17, led by a mix change in favor of CSM business. Consequently, we expect 26% PAT CAGR over FY15-17.

Exhibit 21: Revenues to post 23% CAGR over FY15-17

Source: Company, MOSL

Exhibit 22: EBITDA to post 26% CAGR over FY15-17

Source: Company, MOSL

Exhibit 23: PAT to post 26% CAGR over FY15-17

Source: Company, MOSL

Exhibit 24: Consistently strong asset turnover

Source: Company, MOSL

Exhibit 25: RoCE to improve to 42.5% by FY17

Source: Company, MOSL

Exhibit 26: Free cash generation on cards

Source: Company, MOSL

8,791 11,514 15,955 19,403 23,694 29,424

22% 31%

39%

22% 22% 24%

FY12 FY13 FY14 FY15 FY16E FY17E

Revenues (INR m) Growth (%)

1,434 1,806 2,889 3,727 4,595 5,894

16% 16% 18% 19% 19% 20%

FY12 FY13 FY14 FY15 FY16E FY17E

EBITDA (INR m) Margins (%)

804 973 1,880 2,459 2,939 3,895

24% 21%

93%

31% 20%

33%

FY12 FY13 FY14 FY15 FY16E FY17E

PAT (INR m) Growth (%)

1.4 1.4

1.8 1.8 1.9 2.0

FY12 FY13 FY14 FY15 FY16E FY17E

Asset Turnover (x)

25.6 25.3

34.9 39.9 39.4 42.5

FY12 FY13 FY14 FY15 FY16E FY17E

RoCE (x)

(47) (490)

1,548

156

1,253

2,455

FY12 FY13 FY14 FY15 FY16E FY17E

Free cash flow (INR m)

PI Industries

10 October 2015 19

Valuation and view Initiate with a Buy

PI boasts of a unique business model—a strong R&D-led custom synthesis business(59% of revenues) build over the last two decades, and an equally compellingdomestic agro-chemicals business (41% of revenues), largely built by in-licensingarrangements with major global agro-chemicals innovators.

With a mere 10% penetration, we believe there is untapped growth potential in PI’slargest product—Nominee Gold, which (along with new products like Osheen, Vibrant)will continue to drive growth momentum for the domestic agro-chemicals business.

With a strong order book amounting to USD600m, the CSM business has robustrevenue visibility—book-to-bill of 3.2x; we thus expect 23% revenue CAGR over FY15-17. We believe the foray into new segments like pharmaceuticals and electronicschemicals will be the next key growth drivers for the CSM business.

With best-in-class capital efficiency (40% RoCE, debt-free balance sheet, robust growthoutlook—23% revenue CAGR and 26% PAT CAGR), we believe PI is one of the bestplays on India’s agri sector and CSM opportunities. Initiate coverage with a Buy.

Exhibit 27: Price-to-earnings (one-year forward)

Source: Company, MOSL

Exhibit 28: Price-to-book (one-year forward)

Source: Company, MOSL

Exhibit 29: Assumption sheet FY12 FY13 FY14 FY15 FY16E FY17E

Revenues (INR m) 8,791 11,515 15,955 19,403 23,694 29,424

Domestic agro-chemicals 5,052 5,500 6,700 7,973 9,089 10,907

CSM 3,731 6,001 9,250 11,430 14,605 18,517

Revenues growth (%)

Domestic agro-chemicals 23% 9% 22% 19% 14% 20%

CSM 59% 61% 54% 24% 20% 23%

EBITDA (INR m) 1,434 1,806 2,889 3,727 4,576 5,873

Domestic agro-chemicals 783 664 1,039 1,276 1,363 1,800

CSM 672 1,132 1,785 2,400 3,213 4,074

EBITDA margins (%)

Domestic agro-chemicals 16% 12% 16% 16% 15% 17%

CSM 18% 19% 19% 21% 22% 22%

Source: Company, MOSL

28.3

6.9

15.4

9.3

0

8

16

24

32

Apr-0

1

Jun-

02

Jul-0

3

Aug-

04

Oct

-05

Nov

-06

Dec

-07

Feb-

09

Mar

-10

May

-11

Jun-

12

Jul-1

3

Sep-

14

Oct

-15

P/E (x) 15 Yrs Avg(x)

5 Yrs Avg(x) 10 Yrs Avg(x)7.5

1.5

3.8 2.2

0.0

3.0

6.0

9.0

Mar

-01

May

-02

Jun-

03

Jul-0

4

Sep-

05

Oct

-06

Dec

-07

Jan-

09

Feb-

10

Apr-1

1

May

-12

Jun-

13

Aug-

14

Sep-

15

P/B (x) 15 Yrs Avg(x)5 Yrs Avg(x) 10 Yrs Avg(x)

PI Industries

10 October 2015 20

Key risks

Uncertain monsoon Unfavorable monsoon is the biggest risk for the domestic agro-chemicals sector. Delayed or deficient rainfall hurts sales return and, thus, negatively impacts growth. Similarly, unseasonal rainfall can damage standing crops, resulting in income loss for farmers.

Lower prices of agricultural produce Decline in prices of agricultural commodities or lower MSP (minimum support price) can reduce farm incomes and, consequently, demand for agri-inputs. Unlike fertilizers, prices of agrochemicals are not subsidized and farmers may choose to decrease their purchase of agro-chemicals to lower their production cost.

Delay in getting approvals for new products Registration of pesticides is a time-consuming process in India. It can take 2-4 years to launch a new molecule. Delay approvals could lead to loss of potential profit opportunity.

Delay in capacity expansion or utilization Delay in commissioning a plant or ramping it up within expected timelines post-commissioning can adversely impact CSM exports revenue growth prospects.

PI Industries

10 October 2015 21

Management overview

Mr. Salil Singhal, Chairman and Managing Director Mr. Salil Singhal serves as the CMD of PI and has been leading the company since July 1979. Mr. Singhal is a highly reputed and well-known agro-chemicals industry leader and was the Chairman of the Pesticides Association of India (now Crop Care Federation of India) for 20 years.

Mr Mayank Singhal, Managing Director and CEO Mr. Mayank Singhal serves as the Managing Director and CEO of PI. An Engineering Management Graduate from the UK, Mr. Singhal joined PI in 1996; he was appointed as Joint Managing Director in 2004 and as CEO and MD on December 1, 2009. He has worked at the plant level for two years and has been responsible for the rapid growth and expansion of the company’s manufacturing and marketing capacities.

Mr. Rajnish Sarna, Executive Director Mr. Sarna is the Executive Director at PI. He is a Chartered Accountant and brings to table his diverse experience of over two decades in the areas of Business Development & Strategy, Customer Relationship Management, Operations, Finance & Risk Management, Legal Contracting & Compliances, Investor relations, Corporate Planning & Reporting, Information Technology & Process Re-engineering, etc.

Mr. Sarna has been associated with PI for more than 16 years has held several senior leadership roles (including that of Executive Director, CFO and CIO) over the years.

PI Industries

10 October 2015 22

Industry overview

Strong growth potential for Indian agro-chemicals sector India’s crop protection industry is estimated at USD4.3b, of which domestic industry forms 52% (USD2.3b) and exports 48% (USD2b). According to CRISIL, the industry is expected to post 12% CAGR over FY14-19 to reach USD7.5b. Domestic/exports expected to grow at 8% (to USD3.3b) and 16% (to USD4.2b). Given the minimal pesticide penetration in India (0.75 kgs/Ha as against the global average of 10kgs/Ha), growth prospects for Indian industry are strong. Over 400 companies operate in the domestic market and can be broadly categorized under three heads: a) MNCs—30% market share, b) Indian organized—50% market share, and c)unorganized—20% market share.

Exhibit 30: India’s agro-chem market valued at USD4.3b

Source: Company, MOSL

Exhibit 31: Pesticide consumption lowest in India

Source: Company, MOSL

Exhibit 32: Indian organized sector dominates the domestic agro-chem market

Source: Company, MOSL

Key growth drivers Growing food demand with limited land availability will lead to higher focus on

crop yields. Escalating labor costs are driving demand for herbicides (as againstmanual weed cutting), thus ensuring higher agrochemicals usage. India’spesticide consumption (0.75 Kgs/Ha) is amongst the lowest globally.

Strong export opportunity: Low-cost manufacturing, availability of technicallyskilled manpower, seasonal domestic demand, available capacity, better pricerealization globally and strong presence in generic pesticide manufacturing.

Agro-chemicals worth USD6.3b are expected to be off patent by 2020; thispresents a large opportunity for Indian companies to participate in the globalgenerics business.

Domestic market,

52%

Exports, 48% 0.75

5 5 7 7

12 13

17

India UK France Korea USA Japan China Taiwan

Pesticides consumption (Kgs/Ha)

MNCs, 30%

Indian Organized, 50%

Indian Unorganized, 20%

PI Industries

10 October 2015 23

Financials and valuations

Income Statement (Consolidated) (INR Million) Y/E March FY14 FY15 FY16E FY17E Income from Operations 16,812 20,332 24,828 30,832 Less: Excise Duty 857 929 1,134 1,409 Total Income from Operations 15,955 19,403 23,694 29,424 Change (%) 38.6 21.6 22.1 24.2 Total Expenditure 13,066 15,675 19,099 23,530

% of Sales 81.9 80.8 80.6 80.0 EBITDA 2,889 3,727 4,595 5,894 Margin (%) 18.1 19.2 19.4 20.0 Depreciation 316 498 555 660 EBIT 2,573 3,229 4,041 5,234 Int. and Finance Charges 118 97 60 18 Other Income 158 420 279 348 PBT 2,613 3,552 4,259 5,564 Current Tax 779 1,147 1,320 1,669 Deferred Tax -46 -54 0 0 Tax Rate (%) 28.1 30.8 31.0 30.0 Reported PAT 1,880 2,459 2,939 3,895 Adjusted PAT 1,880 2,459 2,939 3,895 Change (%) 93.2 30.8 19.5 32.5 Margin (%) 11.8 12.7 12.4 13.2

Balance Sheet (Consolidated) (INR Million) Y/E March FY14 FY15 FY16E FY17E Equity Share Capital 136 137 137 137 Total Reserves 6,809 8,828 11,184 14,330 Net Worth 6,945 8,965 11,321 14,467 Deferred Liabilities 485 434 434 434 Total Loans 1,223 1,148 498 0 Capital Employed 8,653 10,546 12,253 14,901

Gross Block 6,829 7,050 8,800 10,050 Less: Accum. Deprn. 1,563 1,724 2,278 2,938 Net Fixed Assets 5,267 5,326 6,522 7,112 Capital WIP 425 1,332 1,461 1,609 Total Investments 5 5 5 5

Curr. Assets, Loans&Adv. 7,482 9,668 11,047 14,701 Inventory 3,188 3,782 4,464 5,495 Account Receivables 2,568 3,826 4,220 5,240 Cash and Bank Balance 438 341 302 1,492 Loans and Advances 1,289 1,719 2,062 2,475 Curr. Liability & Prov. 4,574 5,851 6,848 8,591 Account Payables 4,251 5,437 6,026 7,555 Provisions 324 413 822 1,036 Net Current Assets 2,908 3,817 4,199 6,110 Deferred Tax assets 48 65 65 65 Appl. of Funds 8,653 10,546 12,253 14,901 E: MOSL Estimates

PI Industries

10 October 2015 24

Financials and valuations Ratios Y/E March FY14 FY15 FY16E FY17E Basic (INR) EPS 13.8 18.0 21.5 28.5 Cash EPS 16.1 21.6 25.6 33.3 BV/Share 51.0 65.6 82.9 105.9 DPS 2.0 2.5 3.5 4.5 Payout (%) 17.0 16.9 19.8 19.2 Valuation (x) P/E 47.8 36.7 30.7 23.1 Cash P/E 40.9 30.5 25.8 19.8 P/BV 12.9 10.1 8.0 6.2 EV/Sales 5.5 4.5 3.7 2.9 EV/EBITDA 30.3 23.5 18.9 14.5 Dividend Yield (%) 0.3 0.4 0.5 0.7 FCF per share 11.4 1.1 9.2 18.0 Return Ratios (%) RoE 30.7 30.9 29.0 30.2 RoCE 34.9 39.9 39.4 42.5 Working Capital Ratios Asset Turnover (x) 1.8 1.8 1.9 2.0 Inventory (Days) 126 124 120 120 Debtor (Days) 56 69 62 62 Creditor (Days) 169 178 162 165 Working Cap. Turnover (Days) 57 65 60 57 Leverage Ratio (x) Current Ratio 1.6 1.7 1.6 1.7 Debt/Equity 0.2 0.1 0.0 0.0 Cash Flow Statement (Consolidated) (INR Million) Y/E March FY14 FY15 FY16E FY17E OP/(Loss) before Tax 2,613 3,552 4,259 5,564 Depreciation 316 498 555 660 Interest & Finance Charges -20 -126 60 18 Direct Taxes Paid -743 -1,195 -1,320 -1,669(Inc)/Dec in WC -81 -971 -422 -720CF from Operations 2,084 1,759 3,132 3,852 Others 104 83 0 0 CF from Operating incl EO 2,188 1,841 3,132 3,852 (inc)/dec in FA -640 -1,685 -1,879 -1,397Free Cash Flow 1,548 156 1,253 2,455 Others 179 274 0 0 CF from Investments -461 -1,412 -1,879 -1,397Issue of Shares 40 38 0 0 Inc/(Dec) in Debt -1,097 -153 -650 -498Interest Paid -115 -111 -60 -18Dividend Paid -272 -300 -583 -749Others -7 0 0 0 CF from Fin. Activity -1,451 -526 -1,293 -1,265Inc/Dec of Cash 276 -96 -40 1,190 Opening Balance 161 437 341 302 Closing Balance 437 341 302 1,492 E: MOSL Estimates

RECENT INITIATING COVERAGE REPORTS

REPORT GALLERY

PI Industries

10 October 2015 26

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