Rating Rationale
November 28, 2018 | Mumbai
PI Industries Limited
Rating outlook revised to 'Positive'; ratings reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.430 Crore
Long Term Rating CRISIL AA/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facility of PI Industries Limited (PI; part of the PI group) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL AA'. The rating on the short-term facility has been reaffirmed at 'CRISIL A1+'.

The outlook revision reflects CRISIL belief that the group will sustain its strong business risk profile driven by healthy growth in custom synthesis and contract manufacturing (CSM), new product launches, scaling up of existing molecules, and higher operating margin due to a favourable product mix. The outlook revision also factors in sustenance of the strong financial risk profile and improving liquidity. 

Revenue is expected to grow at a CAGR of 15% over the medium term while operating profitability is expected to be sustained at 21-22%. A strong order book of USD 1 billion (around Rs 7,000 crore) in the CSM segment from the existing product basket, improving contributions from recent new launches in the domestic market, and revenue from new molecule additions every year in both CSM and the domestic business will support this revenue visibility. The improving scale of operations and stronger product portfolio should translate into sustenance of the operating margin, and lead to cash accrual of Rs 450-500 crore per fiscal over the medium term.

Financial risk profile is strong marked by gearing of 0.04 time as on March 31, 2018. Capital expenditure (capex) of around Rs 250 crore per fiscal expected over the medium term will mainly include increased investments in research and development (R&D) and augmenting capacities. Given the healthy cash accrual and moderate working capital requirement, the capex is likely to be funded through internal cash accruals. The group is expected to become debt-free over the medium term with progressive repayment of long-term debt. Further, surplus liquidity was over Rs 300 crore as on September 30, 2018, and is expected to increase further.

The ratings continue to reflect an established position in the domestic agrochemicals business, and strengthening presence as one of India's major players in CSM exports supported by strong tie-ups with global innovators. The ratings also factor in a healthy financial risk profile. These rating strengths are partially offset by working capital-intensive operations and susceptibility to cyclicality in the agrochemicals industry.

Analytical Approach

For arriving at the ratings, CRISIL 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), and PI Japan Co Ltd (PJCL). 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.

Key Rating Drivers & Detailed Description
* 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. Agricultural inputs accounted for around 44% of revenue in fiscal 2018, led by generic products of own brand and sale of ILCM products.

* 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. The 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 29 molecules up to fiscal 2018.

* Healthy financial risk profile: Financial risk profile is healthy, marked by comfortable gearing and debt protection metrics, supported by large equity infusions in the past and healthy cash generation. Revenue registered a healthy CAGR of 16% between fiscals 2013 and 2018, and operating margin has steadily improved during this period. Despite the sizeable capex of Rs 620 crore undertaken towards capacity additions over the past three years, capital structure and debt protection metrics improved on the back of growing profitability and cash accrual.

* 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 farmers. 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 cyclicality in the agrochemicals industry: With almost half the revenue coming from the domestic agricultural inputs business, the group remains partly exposed to cyclicality in the agrochemicals industry, which is highly dependent on monsoon and level of farm incomes. Fortunes of agrochemicals players are linked to timing and distribution of rainfall during a year. For CSM exports, 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.
Outlook: Positive

CRISIL believes the PI group's business risk profile should continue to benefit from the expanding product portfolio and healthy revenue visibility in both domestic agrochemicals and CSM segments, and steady profitability, leading to healthy cash generation. CRISIL also expects the financial risk profile and liquidity to improve further, supported by prudent working capital management and healthy net cash accrual.

Upside scenario
* Sustained improvement in revenue and profitability, resulting in strong cash flow
* Improving credit metrics
* Build-up and sustenance of healthy liquidity

Downside scenario
* Significantly lower revenue or margin, impacting the group's cash flow
* Large debt-funded capex, acquisition or stretch in the working capital cycle, leading to weak key credit metrics.

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 1978, it diversified into mining and mineral processing; this business was hived off into a separate company, Wolkem India Ltd. In the 1980s, PI entered the energy metering business, which was also hived off into a separate company, Secure Meters Ltd. To overcome cyclicality in the agrochemicals industry, PI diversified into the polymer compounding business in the 1990s; the business was sold to Rhodia SA, France, in April 2011. 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.

Profit after tax (PAT) on a standalone basis was Rs 94.4 crore on revenue of Rs 723.0 crore in the quarter ended September 30, 2018, against Rs 80.3 crore and Rs 561.1 crore, respectively, in the corresponding period of the previous fiscal. For the six month ended September 30, 2018, PAT on a standalone basis was Rs 176.0 crore (Rs 180.5 crore in the corresponding period of the previous fiscal) on revenue of Rs 1,328.6 crore (Rs 1,114.3 crore).

Key Financial Indicators*
As on/for the period ended March 31, Unit 2018 2017
Revenue Rs crore 2279 2277
Profit After Tax (PAT)  Rs crore 368 459
PAT Margin % 16.1 20.2
Adjusted debt/adjusted networth Times 0.36 0.41
Interest coverage Times 74.83 67.17
*CRISIL adjusted numbers 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
Rating assigned with outlook
NA Cash Credit & Working Capital Demand Loan NA NA NA 185.00 CRISIL AA/Positive
NA Letter of credit & Bank Guarantee NA NA NA 245.00 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  185.00  CRISIL AA/Positive      31-10-17  CRISIL AA/Stable  20-07-16  CRISIL AA/Stable  31-07-15  CRISIL AA-/Positive  CRISIL AA-/Stable 
                09-06-16  CRISIL AA/Stable       
Non Fund-based Bank Facilities  LT/ST  245.00  CRISIL A1+      31-10-17  CRISIL A1+  20-07-16  CRISIL A1+  31-07-15  CRISIL A1+  CRISIL A1+ 
                09-06-16  CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit & Working Capital demand loan 185 CRISIL AA/Positive Cash Credit & Working Capital demand loan 185 CRISIL AA/Stable
Letter of credit & Bank Guarantee 245 CRISIL A1+ Letter of credit & Bank Guarantee 245 CRISIL A1+
Total 430 -- Total 430 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Chemical Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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