Investment Outlook – When a Strong Roots & Wings Company Gets Hit by a Curve Ball

Every once in a while, long term investors who adopt an investment philosophy like Root & Wings, believe in the fundamentals of strong stocks are hit by a curve ball. Without these surprises, investing would be very straight forward. The recent fall in the stock price of PI Industries is one such case study. While we refrain from commenting on specific stocks, the inferences here are something worth sharing.

PI Industries is clearly facing short-term challenges, particularly in the US market with the introduction of Pyroxasulfone (Pyroxa) generics. The news about increased Chinese capacity for Pyroxasulfone (Pyroxa) has hit its market price. However we believe that its long-term growth strategies present compelling reasons for investors to maintain their positions in the stock (as on 15 Dec 2023, this may change if other events unfold).

Short-Term Challenges faced by PI Industries’ Stock

The supply-demand dynamics for Pyroxasulfone (Pyroxa) indicate a looming challenge: the global supply is poised to outstrip demand from the second half of the calendar year 2025. This imbalance risks precipitating price erosion in the market, a development that could potentially neutralize the volume growth seen in markets such as Argentina and Brazil.

The anticipated influx of Pyroxa generics into the US market from FY26 is another concern. This development could dampen PI Industries’ sales of Pyroxa, potentially leading to stagnant sales growth post-FY26. It’s a situation that demands close monitoring, as the market dynamics could shift rapidly, affecting the company’s revenue trajectory.

From an analytical standpoint, the projections of a 16% compounded annual growth rate for Pyroxa sales over FY24E-26E, down from the previously estimated 19%, is a significant point to consider. This downward adjustment, while notable, is somewhat mitigated by the expectation that ex-Pyroxa growth will maintain a robust 22% CAGR during the same period.

The key risk here is the possibility of more severe price erosion or a shortfall in volume growth for Pyroxa than currently anticipated. However, on the upside, there lies a potential for sustained momentum in both Pyroxa and ex-Pyroxa businesses, which could offset some of the challenges.?

As an investor, balancing these factors while staying attuned to market developments will be crucial in making informed decisions about the future of investments in PI Industries.?

Long term plans of PI Industries‘ Stock

This requires us to take a look at what the company is playing in its larger canvas. Let’s dissect PI Industries’ strategic maneuvers, acknowledging both their potential and the hurdles they must overcome.

1. Diverse Portfolio & Expansion Plans: PI Industries is not reliant on just one product. With over 25 export products and 35-40 domestic products, plus the addition of 4-5 new products annually, the company has a diversified portfolio that mitigates risks associated with any single product. PI Industries is not resting on its past laurels despite facing headwinds. The company’s aggressive expansion in its Custom Synthesis and Manufacturing (CSM) AgChem segment is notable. With a robust order book valued at approximately $1.8 billion and an ongoing initiative to develop new molecules, the firm is clearly positioning itself for future growth.
2. Competition Adding Capacity: The news about increased Chinese capacity for Pyroxasulfone (Pyroxa) is not new, and such announcements often don’t immediately translate into actual capacity increases. Historical trends show that announced capacity additions in China often do not materialize to the extent announced. Actual market impacts from these additions will become clearer over time. In fact the company management said that the company does not foresee any significant immediate or midterm threat to its business from these developments, due to patent protections and data protections in key markets like the US, Brazil, and Japan that prevent generic entry until 2025-2030. The competition's impact in pyroxasulfone will likely diminish due to intermediate patent protection in developed markets.
3. Market Potential in Pyroxa: Pyroxa is still in its early growth stages, with significant potential for expansion across geographies and crops. Its market is estimated to be multi-billion dollars, much larger than its current size of around $700 million.
4. Pharmaceutical Focus and Capex: PI Industries is channeling significant resources into Capex, a substantial portion of which is earmarked for bolstering its pharmaceutical division. This strategic pivot not only diversifies its portfolio but is also projected to be a key revenue driver in the years ahead.
5. Innovative Product Launches: The company’s strategy to continuously roll out new products, coupled with a shift towards an integrated crop solution approach, demonstrates its commitment to deepening market penetration and staying ahead of industry trends.
6. R&D and Global Partnerships: PI Industries is reinforcing its R&D capabilities, a move indicative of its focus on sustainable growth. The firm’s robust partnerships with global innovators further underscore its commitment to staying at the forefront of technological and market developments.

A call for a Balanced View for Investment

1. Navigating Short-Term Headwinds: Investors should be aware of the immediate challenges PI Industries faces, especially concerning Pyroxa sales in the US market. The company’s ability to navigate these headwinds will be critical in the short term.
2. Long-Term Growth Potential: The comprehensive growth strategy, including expansion in the CSM sector, forays into the pharmaceutical industry, and focus on R&D and new product development, suggests strong long-term growth potential.
3. Company confirms Financial Projections: The company management reiterated its revenue growth guidance of 18-20% for FY24 and expects similar growth trends in the following years. Despite guidance cuts by major clients due to industry headwinds, PI Industries remains confident in its product demand and growth prospects. Current inventory and working capital issues at the client level do not impact PI Industries’ supply schedules. The company maintains regular communication with clients to manage these situations.The current market situation is seen as a temporary adjustment, not a long-term decline.The Agrisciences Company already reported an impressive 20% year-on-year revenue growth in the September 2023 quarter. This surge was primarily driven by the robust performance of their Custom Synthesis Manufacturing (CM) business. The segment is anticipated to continue its growth momentum, backed by a strong order book, the ramp-up of existing molecules, and the commercialization of new ones. Additionally, the pharmaceutical and Contract Development and Manufacturing Organisation (CDMO) segments are poised to be significant contributors to future growth.

Conclusion

In summary, PI Industries is confident in its growth trajectory and diversified portfolio, seeing the current market developments as temporary adjustments rather than long-term threats. The company remains focused on sustaining its growth momentum and navigating industry dynamics effectively. Given the robust long-term strategies in place, staying invested in PI Industries can be justified. The company’s diverse growth avenues, strong order book, and commitment to innovation and market expansion indicate that the company will fight out the headwinds. While these short-term market dynamics and competition pose challenges, PI Industries’ strategic growth initiatives and strong fundamentals provide a solid basis for long-term growth, making a case for investors to stay put in the stock.

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