Stock pick of the week: Why analysts feel PI Industries will grow fast

PI Industries, a fast-growing agro-science company, fell short of Street expectations of its revenue. The company’s year-on-year (y-o-y) top line growth moderated to 4% in the fourth quarter of 2016-17. Weak global markets and challenges in the domestic markets due to delayed and uneven distribution of rainfall in the last season were the reason for this slow growth.

However, the company’s margin expanded by 350 basis points due to a favourable product mix and better operating leverage. Operating profit zoomed 42% y-o-y. A lower tax incidence helped PI Industries report 48% y-o-y net profit growth, better than the Street expectations.

The company has reported revenue and net profit growth of 18% and 28% respectively between 2010-11 and 2016-17. It is likely to maintain this growth momentum in the coming years as well.

An early and good monsoon, as has been forecast, will also be good for agro companies like PI Industries. Its newly commissioned plant at Jambusar SEZ is operating only at 65%-70% capacity, so production can be increased immediately at no extra costs.

To maintain its high growth rate, PI Industries plans to spend around Rs 200 crore in 2017-18 on research and development and scaling up operations. With a free cash flow of Rs 167 crore in 2016-17, its cash flow position is comfortable and most of it capital expenditure will be met from internal accruals. The company also has a strong balance sheet and it debt–equity ratio stood at 0.05 in March 2017.

Strategic ties-ups will also boost PI Industries’ growth. It has recently entered into a strategic partnership with BASF to comarket BASF’s latest fungicides and herbicides. PI Industries will co-market four molecules, and two products are likely to be launched in 2017-18. This will enhance PI Industries’ product range and market participation.

During 2016-17, the company reported 11% growth in exports. Though this growth may remain subdued in the coming quarters due to a weak global demand, things are expected to better in 2018. PI Industries is also taking up contract manufacturing—it recently entered into a joint venture with Mitsui—to increase its export reach.

The moderation in its valuation due to its recent underperformance—PI Industries fell 5% while Sensex gained by 6% during in the past three months—is another factor that is attracting analysts to this counter.

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We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts.