PI Industries Limited (523642) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the PI Industries Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and thank you for joining us on PI Industries Q2 FY '26 Earnings Conference Call. Today, we are joined by senior members of the management team, including Mr. Mayank Singhal, Executive Vice Chairman and Managing Director; Mr. Rajnish Sarna, Joint Managing Director; Mr. Sanjay Agarwal, Group Chief Financial Officer; Dr. Atul Gupta, CEO, CSM AgChem; Mr. Prashant Hegde, CEO AgChem Brands; Dr. Ramesh Subramanian, Global CEO, PI Health Sciences; and Mr. Jagresh Rana, Global CEO, Biologicals. We will begin the call with key perspectives from Mr. Singhal. Following that, Mr. Agarwal will take us through his views on the financial performance. Thereafter, the forum will be open for an interactive question-and-answer session. Before we begin, I would like to underline that certain statements made on today's conference call may be forward-looking in nature. A disclaimer to this effect has been included in the investor presentation shared with you earlier and also uploaded on stock exchange websites. I would now like to request Mr. Singhal to share his perspective. Thank you, and over to you, sir.

Thank you, and thank you, and good morning to everyone. Let us begin by sharing my views on the global AgChem industry scenario and then on the performance of PI in this context. The global crop protection industry has been passing through a prolonged down cycle driven by distributor and farmer destocking, sharp price deflations and Chinese overcapacity, low commodity prices, rising interest rate, on top of this weather disruptions that cut the sprays in several regions. 2025, is expected to see a modest recovery in Q4. A full recovery is not expected to realize before the second half of 2026 or later. The silver lining is that input prices are stable, the volume increase is driving gradual normalization of inventory levels. Most of the global innovators have been reporting 3% to 5% decline in H1, revenues with cautious volumes led to recovery in the second half. On the domestic side, Q2 witnessed erratic prolonged rain, which negated the positive start of the Kharif season, while we have seen largely a favorable monsoon and a positive sowing trend in the major crops, excessive rainfall, abrupt regulatory changes on biologicals and fertilizer shortfalls have played a spoiled spot for the growing momentum in Kharif. Over 1.2 million hectares of crop have been damaged in Punjab and Maharashtra due to excessive rain and consequent flooding. As a result, we are seeing high inventories and credit levels and as the industry has sought to support channel partners and market liquidity constraints. On a positive note, the plentiful rainfall will help paddy crop and also Rabi is good so far with replenishment of healthy reservoir levels. Over the medium to long term, the push to develop next-generation crop protection enhancement technologies remain vital global agriculture due to ergonomic, environment and economic pressures. Customers are seeing new products that are environmentally friendly, can overcome diseases pest resistance in existing chemicals and produce high yields to meet increasing demands of food, fiber and biofuels. At the same time, the demand of biologicals for an integrated crop health management is growing faster than the challenge posed by climate change. In the current landscape, global companies continue to elevate the strategic partnerships across the value chain in the pursuit of cost optimization and build resilient business models amidst of heightened regulatory challenges and partner with innovation. I shall now move on to the business highlights. During Q2 of FY '26, our performance drawing different with the current market conditions in line with our plans expected for domestic end markets where excessive and uneven rainfall erupted and regulatory actions in the biological area impacted the demand scenario. On the Agchem export side, we have seen a decline in line with the customer delivery schedules to balance the overall inventory level. As explained before, we built this additional softness in our '26 plans. However, it is also important to highlight that the growth of the new products commercialized over the last 3 years have registered a decent 38% growth year-on-year in H1. We remain on track to commercialize 8 to 10 new molecules in the coming fiscal, having commercialized 5 in H1. I'm pleased to share our current pipeline includes non-agchem molecules in the categories of specialty and fine chems. On the domestic side, we have seen a 5% year-on-year decline during H1. Domestic revenues are negatively affected in Q2 offset the growth seen in Q1. Thanks to advanced product mix and solution-oriented approach, the momentum of new product launch remains strong. We introduced 3 new brands in the first half of the year and plan to launch an additional 2 to 3 in the later parts of the year. Our development pipelines include over 20-plus new products scheduled for future development and regulatory registrations. During the quarter, our Pharma business showed a 50% year-on-year growth. We've onboarded 2 new customers to build pipelines with our business development teams in the U.S. and Europe, although our Pharma business is modest, with significant headrooms for growth, there is a slowdown in the biotech funding and geopolitical challenges are impacting the conversion of proposals in the pipeline. In the meantime, we continue to invest in capability building people, process, assets and integrated CRDMO platform. We've also carried our plans to upgrade the additional assets to continue to support for the strategic growth. Last year, as you're aware, we -- at the acquisition of Plant Healthcare, PI took a significant step of scaling biological business globally, bringing innovation of sustainable solutions to farmers across the world. In India, we are well on our way to becoming a leading player, if not the largest player in biological company, both in terms of product portfolio and revenue. Our peptide-based biological technology platform is unique and offers biological solutions to many unmet needs of the growers across the world. The platform has the potential to develop many new products for varied crop solutions. During this quarter, we have commissioned new biological research center in Hyderabad with the Plant Systems lab to study plant systems and support global biological research out of Seattle. We continue to make investments in the market and product development to focus geographies across U.S., Brazil, Europe, Mexico and India and partnering with crop solution companies. We continue to seize the growth opportunities across the ag science, pharma, CRDMO and specialty chemicals, transforming our company from ag science into a diversified life science enterprise. Each of these segments presents considerable potential to expand our global presence and leadership led by science. Our ongoing investments in these growth sectors are creating a solid base for the next stage of growth and sustainable growth. On long term, outlook remains intact, while in the short term, global and local industries are still facing macro headwinds, climate change, geopolitical uncertainties. Our long-term strategic initiatives are on track aligned to the strength of our leadership positions in the market and achieve scale across new platforms. We remain committed to harnessing cutting-edge technologies and leveraging our integrated model to drive niche offerings. Furthermore, financial discipline to ensure that these growth is balanced with robust cash flows and sustainable return on capital. Now with this, I would like to hand over the discussion to our group CFO, Sanjay. Thank you very much, and over to you, Sanjay. Thank you.

Thank you, Mr. Singhal, and good morning, everyone. I'll summarize the company's financial highlights for the quarter ended 30th September 2025. We have been delivering resilient performance amid headwinds in the global agrochemical industry, which have been driven by factors such as low commodity prices, rising interest rates, inventory destocking and extreme weather challenges. This demand softness has been coupled with excess capacity in China causing value erosion, particularly in the generic products. Back home in Q2, as you all know, uneven rains created huge crop losses impacting our key focus crops. However, we expect better Rabi season and an increase in rice and corn acreages give us the confidence that, that should lead to a positive market scenario in H2. To share the financial performance highlights for quarter 2, we reported a revenue of INR 18,723 million, a 16% decline from the high base of the same period last year and a 1% sequential decline. On a 3-year CAGR basis, the growth is -- in Q2 is 2% as we had registered a growth of 5% in quarter 2 FY '25 and a 20% in quarter 2 FY '24, making it a high base. On an H1 basis, there is a 12% decline in revenue, which is broadly in line with the plan, except for domestic revenues, which were impacted due to excessive rainfall and abrupt regulatory actions. We have delivered on a H1 4% 3-year CAGR basis, which continues to out beat the industry. We have also commercialized 5 new products in AgChem exports and 3 in domestic agri brands. The new products in AgChem exports have seen a 38% growth on a year-on-year basis in H1, which clearly demonstrates that our derisking strategy and focused approach to gain new businesses in this tough environment. Decline in AgChem exports business is primarily volume-led and driven by slow demand and customer delivery schedule deferments. The domestic business, despite a strong product portfolio and new product launches declined due to erratic rainfall, which disrupted demand and the biological business was impacted by abrupt regulatory changes. We expect both these businesses, these issues, which I just spoke to be transitionary, and we are confident in driving the business to a higher growth trajectory in the coming quarters. Our Pharma platform doubled its revenue over H1 of the previous year, driven by deepening relationship with biotech and big pharma innovators. Our development spend into creating a fully integrated pharma CRDMO platform has helped to create an accelerated pathway for strong future growth. We are currently in the investment phase in this business, building capabilities, strengthening people and processes, which is reflected in higher overheads and is expected to be absorbed with higher scale over the next few years. Our Global Biologicals business has also been performing in line with the long-term business plan, and we are focused on new product development, strengthening our go-to-market in U.S., Brazil and other markets and filing for registration of new products and label expansions for peptides. Moving on to the margin profile. Due to the favorable product mix and operational efficiencies, our gross margin for the quarter has expanded and our EBITDA margin remained resilient. While the revenue has been affected by industry headwinds, we are adopting a focused approach to maintain healthy margins, which allow us to withstand industry challenges and also invest for the future. We expect the ETR to be in the range of 22% to 23% for the next 2 to 3 years. Furthermore, the trade working capital in terms of days of sale has risen to 115 days and -- which reflects the current market conditions. We expect to improve this as the market scenario normalizes in the coming quarters. We remain very positive about the company's long-term growth outlook and expect to regain the growth momentum in the coming years. We also anticipate a recovery in our Domestic and AgChem exports, particularly in -- from Q4 to offset the decline in revenue and profitability in the first half. With this friends, I will conclude my opening remarks. I will now request the moderator to open the forum for Q&A. Thank you.

[Operator Instructions] The first question is from Saurabh Jain from HSBC.

My first question is on the guidance. You were vocal about saying that you expect a mid-single-digit kind of a -- maybe a single-digit kind of a growth possibilities for this year. How would you look at your H2 given such a sharp decline in the first half? What -- could you give us more details around what kind of growth you're expecting in your Exports, your Domestic and your Pharma business for the remainder of the year?

So as we mentioned in the earlier part of our talk today, as you've seen, the climatical challenge and the expected growth rate have not kept up to the mark in the H1. But as we see, at least in the Domestic and the Exports, ag exports, we see early shoots of the positive trajectory. Clearly, we see good potential for the coming H2 coming from the Rabi season given the water levels. But again, I must put a cautious to say that today, looking at the climatical situations will be very much dependent on that. But the positivity of the moisture, the level of water gives us to look at a positive outlook for Rabi.

I mean, again, on the export side, what we understand is that U.S., we are seeing a good amount of destocking that is happening. And some of the products that you do, the competing products of those portfolio of yours are doing really well in U.S. When do you expect those kind of positive tailwinds also reflecting in your portfolio, whether it's going to happen in Q3 or Q4 because now the season is closing by. Any thoughts on that?

As we said that we see those positivities coming through Q4, yes.

So can it really open up in a very big way because can you go back to those double-digit kind of growth in the second half is where I'm coming from?

Well, it's picking up but one market is not going to drive that as you well understand. There's U.S., Brazil, there is India. So we expect to see that come up. But as we said -- as I said earlier, in '26.

Sure. The second question would be on -- sorry.

No, go ahead.

Yes, sure. So I was asking about one of the competitors, the global players. They have been vocal about talking they exiting the Indian markets, right? I can call it FMC is talking about exiting Indian markets for which they have also taken a write-down on their Indian business. And PI in the past has been talking about looking at several inorganic opportunities if they come their way. So any comments on that side? What would be your outlook when you look at such opportunities that would be very useful for us.

Well, I don't think this kind of a comment can be given. We are as always open to looking at opportunities but we are not very clear about this specific opportunity, yes.

Okay. If I may just rephrase it, do you think there is enough merit in this business because the pressure that CTBR has been witnessing in the Indian market, if they kind of take back their stocks or if they look to exit the Indian market, does it at least help the competitors or the peers in India get into more market share opportunities? Does it bring health of the Indian market back?

I don't think it will be very fair, sorry, for me to comment on somebody else's business at this point, please.

The next question is from Abhijit Akella from Kotak Institutional Equities.

So just on the cash flow statement, there's a significant increase in contract assets of about INR 450 crores. If you could please just specify what that might be due to?

Sure. So as you know, the increase in contract asset is in line with the customer delivery schedules, which are lined up for H2. And those are in line or in accordance with the accounting standards. So there is -- there has been an increase but this is keeping in line with the customer delivery schedule, which is arising again from the global agrochemical industry situation today.

So yes, I'm sorry, if you could please just help me understand the accounting here. I mean, what exactly does this asset represent on the balance sheet?

So these are the finished goods, what we have produced, which is to be delivered to the customers. And as we have confirmed orders from them and they have been produced only for them, the deliveries will happen over a period of time in the next 1 to 2 quarters. And therefore, as per accounting standard, we would have to recognize the revenue and create a corresponding asset on the balance sheet side.

Okay. So this does not get shown under inventories, is that? You have to separately break it out as contract assets?

Correct. That's right.

I see. Okay. And then just on the outlook front, if I may. So Pharma, we were expecting to grow 75% this year. And yet there does seem to be some headwinds from the biotech slowdown, funding slowdown and those sorts of things. So if you could please just update us on what our new expectations might be over there. And Plant Healthcare, would it be possible to just break out the revenue number for the first half of the year that's gone by?

Yes. So Pharma, we spoke in the past also directionally -- or in the call today by Mayank and myself, the business directionally has been doing well. We have a positive outlook. It's a business for long term, and we are doing well there. On the Plant Healthcare, the yearly revenues are in the range of $10 million to $12 million, and we have been doing well there as well.

Yes. Sorry, just on Pharma, so 75% is still something you can hold on to or that might be a bit out of...

Right now, you see the CDMOs, they are in the different development phases. As things mature, the numbers come close. And right now, we are really in need significant space for that growth. But we are positive about long-term outcomes for that.

Yes. Sure. And the EBITDA margins have been very strong. They've been significantly higher than your guidance range of 26%, 27%. So should we expect them to remain around this range of 28%, 29% going forward?

Well, I wish but I think as we've given the annual guidance given the top line challenges but this quarter has been good because of the given product mix, as we mentioned, yes. So we will keep to our guidance as earlier.

The next question is from Rohit Nagraj from [ 361 Capital. ]

So first question is, what has been the contribution of new CSM products in the overall CSM revenues during the first half of this financial year?

So as we mentioned, we don't have the numbers here, but I think we've given about a 38% growth on new products on our new product pipeline over the last year. Yes.

Right. Fair enough. problem. Sir, second, on the biologicals front. So on PHC, we have just indicated that we have about $10 million to $12 million of revenues. When do we see a significant scale up in this opportunity? Would it be more like FY '28 given that there are multiple registrations, which are currently ongoing across different markets? And what could be the potential sometime maybe FY '28, '29 from this biologicals acquisition?

Jagresh, would you like to comment that, please?

Yes, absolutely. So see, the biological phase, we are in the situation where we are investing in the market, creating distribution as well as launching our new product and getting label expansion for the product. So we are into that kind of a phase. We expect our -- based on the performance of product, what we are seeing, we expect our growth to start from -- we are growing this year as well and continue to grow basically from the next year onwards. We see a significant growth from this business in the years to come.

And is this business again generating profitability at the EBITDA level? Or will it have some time to break...

Yes. This is a business, as you know, as we are in the investment phase. So once the scale has been -- will be achieved, the profitability will also follow.

[Operator Instructions] The next question is from Navid Virani from Bastion Research.

I have 2, 3 questions. First one is on the newly commercialized products. So we can see that there are 5 new products, which we have commercialized in H1 FY '26. And I'm sure there will be a couple of products planned in the 2 quarters, which are expected to come. What I wanted to understand was what is the agri versus non-agri mix in these newly commercialized products, be it H1 or coming H2?

Sanjay, do you want to answer that? I don't have that with me right now.

Yes, these are primarily in the agri side of it. And sorry...

Sure, sure. Please go ahead.

Yes, these are primarily in the agri side of the business, the new commercial products in the H1.

So it will be 100% on the agri side? Or are we looking at something. So the reason why I'm asking this question is just wanted to understand how are we progressing on the diversification aspect of the CSM business?

Yes for the CSM business, just to answer that, in the CSM business, yes, there have been a few products commercialized in H2, and it takes about 3 to 5 years to really get to the ramp-up stage, yes. So just to give you a sense of what it takes because you get into the evaluation, you get into the early stage and as the molecules pick up, the values go up, yes.

Atul is there. Atul can explain that how many of CSM or non-CSM are there in the first half?

Yes. So I'll just to answer at this point of time, we have...

Your audio is not good. I think that's the challenge is having..

Is it better now?

Yes, yes. Yes, go ahead.

So yes, so this year, in the H1, we have been able to commercialize 5 to 6 products, new products, another 5 to 6 new products are planned, which has got the mix of both agrochemicals as well as the non-agchem products. We are ramping up our capacity with the expansions wherein we had a plan to start the new plant. Out of the 2 plants, which are in the process of getting commissioned, one is of the crop chemical plant where we intend to take up these products. So that's where we stand today from the new products commercialization point of view and the assets which are being...

Next up, I just wanted to have a long-term view on the biologicals business since we are so bullish and are investing heavily in this business. So sir, if we take, let's say, a 5-year view, given the visibility which we have right now, how big do we see the biologicals business becoming for PI? And if you can give some numeric sense to give us an understanding, that would be very helpful, sir.

Yes. So today, as you look at the biological business to where we are today, we expect it to at least have it three - to four-fold because that's an area where we've invested. We have shown that kind of growth. If you look at the past, we've given a 25-plus percent CAGR on the domestic business. Now with global platforms and with the development regulatory timelines, once we are able to cross those hurdles, we see at least achieving that level of growth.

Sure. If I can squeeze in one more. I wanted to understand regarding the pharmaceutical business. So we -- in the past, we have talked about onboarding 3 to 4 large pharmaceutical clients in the segment. So where are we on that particular journey, sir?

Yes. So we -- as we have mentioned in my earlier talk today, we've onboarded a couple of pharma companies and onboarding is one process, but then moving into the next phase of the journey, and that's where we are right now.

The next question is from Vivek Rajamani from Morgan Stanley.

Apologies if this was addressed in the previous questions. But just wanted to clarify where exactly are we with respect to the regulatory challenges that you were alluding to on biologicals. Have we seen the resolution for that or that would continue for maybe one more quarter? And in that case, how should we think about the scale-up of the biologicals segment in the next 2 quarters and potentially fiscal '27? That's the first question.

Sorry, I didn't get the first part of your question clearly.

Just wanted to get a sense of with respect to the ongoing industry regulatory challenges on the biologicals with respect to registrations and everything else. I just wanted to get your sense where we are in the resolution of that, if it's been fully resolved and we could get some normalization from the next quarter? Or how should we think about the -- about that process for the rest of the fiscal '26 and fiscal '27?

So if you look at it from what was mentioned earlier for the Indian regulatory context, there has been disruptions. We're expecting to see in this coming quarter or the next quarter for that to somewhere wind out and get sorted. So -- and regarding the global perspective, Jagresh gave an outlook to say that some of these are there and by '28 or so, we see some of these things moving well.

Sure, sir. Just one clarification there. I think in the previous quarter, you mentioned that because of this, you could not make any sales in the previous quarter. Would it be fair to say that at least we started to see some traction come back? Or that is still some time away?

Yes. As you know, there were banks put on biologicals with the regulatory framework in India. Those have now been sorted out, but now we're in the regulatory phases of getting the documentation procedures, which government is taking their own time. And once that comes, we see that move at least in the fourth quarter. If that's specific to India.

That's very clear. And the second question that I had was just some color with respect to the U.S. tariff, if that's been having any sort of impact on the business or the conversations that you may have with prospective customers? Any color on that will be super helpful.

Yes. U.S. tariffs is a complicated conversation. For the present, we are not seeing much, but clearly, we are seeing confusion in all the takeoffs and understandings, both in the ag and the ag in the Pharma sector to have a long-term clarity and which is creating slowdown, I would say, in decision-making, yes.

The next question is from Tejas Pradhan from Citigroup.

Yes. Just to clarify on the domestic biologicals business, could you split out what would have been the impact of the regulatory changes from this quarter revenue perspective?

So for half part of the year, the business was under restricted category. And then post, as Mayank mentioned, we are still in the process of getting approvals from the state level to continue the sales. So yes, it has impacted significantly, and that's why you're seeing the overall agri business being significantly down in this particular quarter.

To be honest, we don't have that exact number on hand but [indiscernible] the Sanjay.

Sure, sure. No problems. And apologies if this was clarified earlier, but just on the FY '26 overall guidance, we still maintain the guidance that we had initially provided?

No, we had said that looking at how the H1 has gone, and I think we had a conversation as you rightly gathered, we expect the positive trajectory now coming from Q4 on the Exports, the Domestic business, we expect a good Rabi and I would put a cautious statement given the weather situations of climate change, which we're expecting very good in the first half, have grained out. And I'm hoping that this quarter, if things go well, we should be well on that path, yes. But I would keep those guided muted, yes.

The next question is from Sumant Kumar from Motilal Oswal.

My question is regarding [Technical Difficulty] EBITDA loss. So when we can expect a positive trajectory in the coming year?

Sorry, I think your line is dropping off. Could you just repeat again?

So I'm [Technical Difficulty]

Mr. Sumant, I am really sorry to interrupt but your voice is breaking. If you are on a headset request to use the handset.