{LONGTERMINVESTORS} Stock Update-PI Industries

March 28, 2016   Stock Update PI Industries Reco: Buy PT: Rs800 CMP: Rs562 Change in licencing regime, marginal impact on PI   Key points CIB to relook at framework for deemed registration regime: As per the order of the Gujarat High Court, the Central Insecticide Board (CIB) has decided to relook at the guidelines of the deemed registration (exclusivity and also started registration of exiting generic products, which are out of exclusivity period; stricter norms to follow three-year exclusivity). As per the earlier guidelines, deemed registration does not require technical registration for three years. Due to non-availability of the technical registration (formula of active ingredients) competitors were unable to launch this type of products which resulted in high-profit margins for incumbent companies. New regime to affect players with exclusivity licencing; will intensify competition: Uncertainty of time period under deemed registration has restricted competition, which has resulted in high margins for existing players in exclusive products. However, after transparency in policy framework (for time-bound registration) it will result in increased competition and there can be price erosion (exclusive products) of around 20-30% over three to five years (as per our interaction with industrial players). Also, the definition of the new molecule will be shortened which will reduce the benefits derived from in-licencing model going forward. However, there is ample of opportunity available for in-licencing companies in India due to lower penetration of agrochemicals. PI Industries to face competition, but impact will be marginal: The domestic model of the PI Industries is depended on in-licenced products which the company acquires from global innovators. Nominee Gold (one of the company's blockbuster products) is under deemed registration hence the High Court order may have marginal effect on the revenue and profitability (around 4-5% respectively in FY2018) of the company. However, looking at the brand advantage of Nominee Gold coupled with huge demography of India and the company's presence in terms of geographical reach (strong distribution network), it's unlikely to lose market share to a great extent. Apart from this very strong brand name, the company will also restrict the migration of farmers towards same product by competitors (it will take time for competitors to motivate farmer to buy their products) and over a period of time introduction of other innovative products will reduce the dependency on single products. Retain Buy with price target of Rs800: We continue to like PI Industries in the agrochemicals space due to its strong brand, ability to introduce new innovative products, sooner or later revival in exports business and limited impact of the High Court order. Hence, we reiterate our Buy rating on the stock with a price target of Rs800.     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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