Re: P.I. Industries (1100 cr. Order-Book + Unique Bus.Model)- Concall Key Takeaways-
Hi Aziz,
Will reply to your queries 1-by-1,
The quantity of companies I track in same manner depends on how many companies I can find which have appealing story like PI and Jubilant....As you must be aware, many companies come across us and we need to go deep into each company to assess its prospect as a good IO but very few companies pass the test..... Those companies who pass the test, I go into detail rgdg. its operational segment, co.'s positioning in each segment, history of execution of company, management bandwidth & credibility, prospect of operational segments, company's financials, BS, parameters, etc.
Now, rgdg. the points you raised specifically on PI Ind., rgdg. gearing, roi & cf.... you are right in your saying that these points are extremely important but when you look at them, you can't look at them in isolation...
You need to go into the history of a company to look at what will be its future ROI, Surplus Cash Flow as well approximate gearing it will require....If I talk rgdg. Pi Ind., this company has built a strong foundation over last 10 years in CSM business by building strong relationship with global innovators which is critical for success of CSM business which is focussed on patented molecules......Once the relationship and trust is buolt over many years the next phase is scale-up which is a capital-intensive phase as its an asset-heavy business.... Once the scale-up infra is set-up the scale-up is very fast as working capital requirement is almost nil in CSM business and there will be robust cash generation accompanied with exponential growth in revenues....
The gearing that you are seeing right now will not remain here and improve considerably from Fy13 onwards once the new plant of CSM segment starts in Q4Fy12....
Your point that 'look at the money required to generate' 40 % ROI.......this is normal for a business model like this and if you closely study the business model you yourself will understand that..... If even with the money deployed growth would have not come then that would have been a concern as then the company would have gone into a trap which was a chance till FY11.... But now, as at FY12 if you ask me then I will say thats not atall a concern as the management is now focussing on reducing its debt by robust cash generated internally.... Even if you look at the whole picture, with expected revenues of Rs. 1000 cr. for FY12 with PAT of Rs. 110 cr. +, a debt of Rs. 200 odd cr. on an equity capital of just 12.52 cr. is not atall bad and it actually depicts an excellent management of business.....
Your third point rgdg. low cash generation.... again you are looking it in isolation.... For setting up a CSM plant the company had a CAPEX of Rs. 140 odd cr. of which 80 cr. was spent last year.... this is the reason why cash generated got depressed...... With the plant getting commisioned in Q4FY12 and no major CAPEX required for Fy12 and FY13, you will see significant improvement in Cash Flow Generation from current FY12 onwards.....
Lastly, I don't know whether you have gone through all my postings or not but still to explain you briefly, PI's CSM business has an order book of more than 1500 cr.... It is worthwhile to note here that revenues of CSM business for FY12 are expected to be only Rs. 300-320 cr. which means 5 times current revenues are already bookled to be executed for next 3 years..... In other words, it means that the CAPEX which is incurred over last 2 years the offtake of that is already tied up and I don't think many other companies we find in which CAPEX is secured in such a way........ Rgdg, the risks to order-book, they are minimal as it is comprises of patented molecules for which only there are 2 vendors world-wide of which PI is the one...
To go further, the margins of CSM business are upwards of 22-23 % which means once the scale up starts in FY13, it will mean a robust cash generation.... Accompanied with it will be the steadily growing Agri-input business for which already 8 products slate is ready to be launched in next 3 years..... Here we are not including any upsides from PI-Sony relationship for which PI Industries will be a joint patent holder and an exclusive supplier....
To conclude, the 3 parameteres you look at are critical for any investment opportunity but if you look at them in isolation then you run the risk of not investing in a solid safe investment opportunity..... You just go through all the past 10 years annual reports of Pi Ind as well as concall transcripts of PI Ind. and I am sure you will come out much more convinced and have a better understanding of Pi Ind.'s business.... If you want I can mail you all the materials....
Feel free to get back to me in case of any query
Rgds.
Hi Maheshi,
I am really impressed the way you have digged all the information. I can also make it out that you tracking this business very closely from long time.
Few questions for you... how many companies do you track in same manner?
This business never came in my net to do further research. I thought to share with you my views in regards to this.
I do 3 simple test to filter the company as I don't want to invest in poor quality companies.
- Net gearing Ratio
- Return on Equity
- Surplus Cash flow
I don't like companies with lot of borrowings as I see a risk of equity dilution, default etc. PI industries gearing ratio is 1.10 times! Not a good sign.
Return on equity is really good (40%) but look at total money (Equity+Debt) required to generate that.
Finally with cash flow they generated net cash flow of only 16.40 Crore. And they spent 91 Crore. Nothing wrong in that but low cash generation by business is a concern.
I would like to know your findings in regards to the above points. Don't you think they are more important to do more research on then on any other thing?
Cheers
Aziz
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