dhanuka agritech

14 Pages·2017·0.91 MB·English

ps RESULT UPDATE
a
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d DHANUKA AGRI TECH
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a Growth stutters; margins also a dampener
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I India Equity Research| Midcap Agri

Dhanuka Agritech (DAL) reported weaker-than-expected Q1FY19 with EDELWEISS RATINGS

revenue growth of just 2.4% YoY (3ppt below estimate) primarily due to Absolute Rating BUY

deficient monsoon and lower channel-push. Besides, higher raw material Investment Characteristics Growth
prices along with deterioration of product mix dented margins with
EBITDA plunging 35% YoY to INR159mn. While DAL has been at the
forefront of product launches, the latter must show traction either in MARKET DATA (R: DHNP.BO, B: DAGRI IN)

growth or margin. Factoring in the pressure on margins and lacklustre CMP : INR 562

growth trend, we adjust our FY20E P/E to 22x (from 25x; highest in Target Price : INR 728
agrochemical coverage) that yields a revised TP of INR728 (INR843 52-week range (INR) : 804 / 508
earlier). Maintain ‘BUY’. Share in issue (mn) : 49.1
M cap (INR bn/USD mn) : 28 / 395

Avg. Daily Vol. BSE/NSE (‘000) : 25.7
Q1FY19: Growth muted along with margin pressure

After a strong Q4FY18 (17% YoY revenue growth), Q1FY19 began with a slow start to

SHARE HOLDING PATTERN (%)
FY19 with revenue growing at a mere 2.4% YoY (estimate: 5%) and volume 5%, and a

marginal mix change. The lower growth is attributable to: 1) deficient monsoon, as per Current Q4FY18 Q3FY18
management, in key areas; 2) unlike competition, DAL has not pushed inventory in the Promoters * 75.0 75.0 75.0

channel; 3) limited scope to take price hikes as majority of the portfolio is generics- MF's, FI's & BKs 11.8 11.8 11.2
based in Q1. Besides lower growth, margins too were impacted due to an adverse FII's - - -
product mix and rise in costs of raw material from China. A sharp INR depreciation Others 13.2 13.2 13.8

* Promoters pledged shares : NIL
aggravated the pain. Overall, EBITDA margin contracted more than 400bps to 7.4%
(% of share in issue)

with EBITDA at INR159mn, down 35% YoY (36% below estimate). However, a

significant rise in other income to INR86mn versus INR20mn in Q1FY18 saw PBT falling PRICE PERFORMANCE (%)
only 8% YoY. A lower tax rate kept PAT flat YoY at INR162mn (9% below estimate). DAL
BSE Midcap Stock over
Stock
estimates FY19E growth will be 10–15% (versus earlier guidance of 15%). Index Index

1 month 5.4 11.7 6.4
Products: Generic-focused quarter; Q2 to be key for new launches
3 months (2.6) 2.8 5.4

DAL has been among the most aggressive in terms of launches (11 in FY18). It 12 months 4.0 (19.1) (23.0)

mentioned that the performance of the majority of launches will be visible in Q2FY19.

Outlook and valuations: Product momentum intact; maintain ‘BUY’

Factoring in the pressure on margins and building in higher other income, we are

cutting FY19/20E EPS by 3%/2%. Despite robust launches, DAL’s growth has been

lower than industry (FY18: 9% versus FY14:16 average of 13%) with persistent margin
pressure. Therefore, given uncertainty around margins and sub-par growth, we are
cutting FY20E P/E to 25x (from 22x). Our revised TP stands at INR728 (INR843 earlier).

Financials (Consolidated)

Year to March Q1FY19 Q1FY18 % change Q4FY18 % change FY18 FY19E FY20E

Net rev. (INR mn) 2,130 2,080 2.4 1,851 15.1 9,626 10,934 12,574 Rohan Gupta
[phone]
EBITDA (INR mn) 159 244 (35.1) 314 (49.6) 1,662 1,870 2,213 [email protected]
Adj. PAT (INR mn) 162 161 0.3 286 (43.5) 1,262 1,429 1,624
Nihal Mahesh Jham
Adj. Dil. EPS (INR) 3.2 3.2 0.3 5.7 (43.5) 25.7 29.1 33.1
[phone]
Diluted P/E (x) 21.7 19.2 16.9 [email protected]

EV/EBITDA (x) 15.9 14.0 11.6

ROAE (%) 21.8 21.1 21.1 August 13, 2018

Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. E delweiss Securities Limited
Midcap Agri

Q1FY19 conference call highlights
Industry situation
 No evident resolution for the pink bollworm disease found in Cotton crops.
 The monsoon is 10% deficient based on latest IMD data. States such as Andhra Pradesh,
Gujarat have been most affected by the scarcity of rains.
Q1FY19 highlights
o The company was not able to hike prices. In fact, most products have seen a price
decline.
o North India: Institutional business done in Q1 North India has taken a hit
o Higher other expenses were related to a) Higher travelling and vehicle
maintenance b) Higher spend on initiatives such as Dhanuka Doctor
o Other income
o Interest and dividend income increased by INR46mn
o Encashment of key man policy in 2018 (INR40mn)
o Q1 is generally a quarter for generics and not for price hikes. For Dhanuka, the
product portfolio is more focused towards Q2.
o The company was able to generate volume growth of more than 5%.
o Q1FY19 market demand was muted. The slower growth is attributed to uneven
rainfall distribution.
o Product mix further impacted margins.
Raw Material
o The price hike taken by the company in July has been accepted by channel. The
company will derive better realization as the channel inventory gets cleared.
o Prices of raw material from China have peaked and should fall from the coming
rabi season.
o In many molecules, the price increase has been disproportionate. This is based on
several discussions by management with Chinese suppliers.
o 25% of raw material is imported, out of which nearly 33% comes from China.
Key factors impacting profitability
o INR depreciation: As 25% of raw material is imported, the fall in exchange rate
affected bottom line.
o The company was not able to pass on the price hikes.
o Lower benefits due to GST (INR20mn impact)
o Benefits will reduce by INR60–70mn. The Company received INR100mn in the FY18.
o Adverse product mix also impacted profitability.
Working Capital Days
o No. of payable days at 30 is lower than the industry average. The company gets
~1.5% cash discount from suppliers and prefers to pay in cash

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Dhanuka Agritech

 There hasn’t been any change in the credit policy.
Products launched
o Dhanuka has tied up with six globally known Japanese innovators. The company
will launch one product in the patent category in March next year (fungicides)
o In the Specialty segment, the company hasn’t taken any price hike. In generics, a
partial hike was taken in Q1FY19, and the company is confident of passing through
the entire hike next quarter.
o Post-Q4, the company will launch of 9(3) products
o Sempra
 Sugarcane has remained stressful affecting the consumption in Q1FY19.
 The company has expanded the product for Maize Crop. Maize consumption
started from July.
 Trying to increase the product applicability in different crops.
o Cover
 Q1 is not a very important quarter for cover and for this quarter the
performance has picked up
o Targa Super
 Targa Super has performed really well
 The company has been able to maintain margins.
 D1: Q1 is most important for D1 in North India.
o The company has not been looking at major launches. A couple of launches will
take place in Q4FY19.The company would bring a new fungicide for Grape in June
next year.
 Guidance
o Revenue growth guidance of 15% is subject to normal monsoon. However,
management is confident of achieving double-digit growth.
o Management expects gross margin on generic product portfolio to improve from
Q2 onwards driven by stability in raw material prices along with cost pass-through
o The company expects margin to remain in line with that of FY18 with EBITDA
margin likely to remain at 18.5% (including other income).
o Tax rate
o FY19: 30%
o FY20: 30%

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Table 1: Product mix (%)
Product Q1FY19 Q1FY18
Insecticides 30 26
Fungicides 12 11
Herbicides 47 47
Plant Nutrients 10 13
Source: Company, Edelweiss research

Table 2: Share by zone (%)
Zone Q1FY19 Q1FY18
North 29 36
West 43 37
East 11 11
South 17 16
Source: Company, Edelweiss research

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Dhanuka Agritech

Financial snapshot (INR mn)
Year to March Q1FY19 Q1FY18 % change Q4FY18 % change FY18 FY19E FY20E
Net revenues 2,130 2,080 2.4 1,851 15.1 9,626 10,934 12,574
Raw material 1,380 1,298 6.3 1,016 35.9 5,092 6,057 6,903
Staff costs 256 234 9.4 279 (8.5) 1,065 1,203 1,383
Other expenses 335 303 10.4 241 38.9 1,808 1,804 2,075
Total expenditure 1,971 1,836 7.4 1,536 28.3 7,964 9,064 10,361
EBITDA 159 244 (35.1) 314 (49.6) 1,662 1,870 2,213
Depreciation 31 34 (8.8) 36 (13.6) 142 150 159
EBIT 128 210 (39.4) 279 (54.2) 1,520 1,719 2,054
Interest 2 2 (5.2) 2 (11.6) 11 5 5
Other income 86 20 320.7 69 24.8 160 243 272
Profit before tax 211 229 (7.6) 345 (38.8) 1,670 1,957 2,321
Provision for taxes 49 67 (26.5) 59 (15.6) 408 528 696
Minority interest
Associate profit share
Profit- Discontinued Ops
Exceptional Items
Reported net profit 162 161 0.3 286 (43.5) 1,262 1,429 1,624
Adjusted Profit 162 161 0.3 286 (43.5) 1,262 1,429 1,624
Equity capital(FV INR 1) 98 98 98 100 100 100
Diluted shares (mn) 50 50 50 50 50 50
Adjusted Diluted EPS 3.2 3.2 0.3 5.7 (43.5) 25.2 28.6 32.5
Diluted P/E (x) - - - 21.7 19.2 16.9
EV/EBITDA (x) - - - 15.9 14.0 11.6
ROAE (%) - - - 21.8 21.1 21.1

As % of net revenues
Raw material 64.8 62.4 54.9 52.9 55.4 54.9
Employee cost 12.0 11.2 15.1 11.1 11.0 11.0
Other expenses 15.7 14.6 13.0 18.8 16.5 16.5
EBITDA 7.4 11.8 17.0 17.3 17.1 17.6
Reported net profit 7.6 7.8 15.5 13.1 13.1 12.9

Change in Estimates
FY19E FY20E
New Old % change New Old % change Comments
Net Revenue 10,934 11,227 (2.6) 12,574 12,799 (1.8) Lower growth assumptions
EBITDA 1,870 1,965 (4.8) 2,213 2,278 (2.9)
EBITDA Margin 17.1 17.5 17.6 17.8
Adjusted PAT 1,429 1,469 (2.7) 1,624 1,655 (1.9)
Net Profit Margin 13.1 13.1 12.9 12.9
Capex 100 69 44.4 100 60 66.7

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Midcap Agri

Company Description
DAL manufactures a wide range of agrochemicals covering herbicides/weedicides,
insecticides, fungicides, plant growth regulators in various forms—liquid, dust, powder and
granules—and reaches out to more than 10mn farmers. The company has a pan-India
presence via marketing offices in all the major states of the country, with a network of more
than 8,000 distributors/ dealers selling to over 75,000 retailers. It has technical tie-ups with
three US and four Japanese companies. DAL has three manufacturing units located at
Gurgaon (Haryana), Sanand (Gujarat) and Udhampur (J&K).

Investment Theme
DAL, an established agrochemical player in India, boasts a unique asset-light business model
underpinned by core focus on marketing and distribution network, giving it an edge over
competitors. The company’s unique business model makes it the preferred partner for
global innovators to venture into the rapidly surging Indian agrochemicals market.
Moreover, a promising pipeline of six exclusive products over the next three years is bound
to propel the company’s growth into higher gear. Of these, three products will be in
herbicides, the fastest-growing category in domestic agrochemicals industry. Thus, a vibrant
distribution network, tie-ups with innovators and launch of products place DAL in a sweet
spot to capture emerging opportunities in the domestic agrochemicals market.

Key Risks
Weather: The crop protection industry faces risk of seasonal weather. Weather can trigger
pest infestations as well as affect demand for crop-protection products. In the domestic
market, sales are highly seasonal, primarily during the monsoon. Any adverse weather
changes will negatively affect DAL’s sales.

Genetically modified (GM) crops: The use of crop protection products is significantly less for
GM crops. Hence, growth and acceptance of GM crops by consumers may adversely affect
DAL’s business.

Dependency on global innovators for technical sourcing: DAL is dependent on global
innovators for the supply of technical/active ingredients in its key products. Technicals’
supply disruption could adversely impact the company’s earnings.

Adverse currency movement: 30% of raw material costs are imported for DAL. Hence, any
sharp INR movement could impact the company’s earnings adversely. We believe DAL can
pass through costs with a lag.

Regulatory risks: DAL must register products in India before launch. Hence, any negative
regulatory changes could adversely impact the industry as well as DAL.

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Dhanuka Agritech

Financial Statements

Key Assumptions
Income statement (INR mn)
Year to March FY17 FY18 FY19E FY20E
Year to March FY17 FY18 FY19E FY20E
Macro
Net revenue 8,833 9,626 10,934 12,574
GDP(Y-o-Y %) 6.6 6.5 7.1 7.6 Materials costs 4,353 5,092 6,057 6,903
Inflation (Avg) 4.5 3.6 4.5 5.0 Gross profit 4,480 4,535 4,877 5,671
Repo rate (exit rate) 6.3 6.0 6.3 6.5 Employee costs 969 1,065 1,203 1,383
USD/INR (Avg) 67.1 64.5 68.0 69.0 Other Expenses 1,812 1,808 1,804 2,075
Company
Operating expenses 2,781 2,872 3,007 3,458
Employee (% of net rev) 11.0 11.1 11.0 11.0
Total operating expenses 7,134 7,964 9,064 10,361
Admin exp (% of rev) 20.5 18.8 16.5 16.5
EBITDA 1,700 1,662 1,870 2,213
Net sales growth 22.0 15.0 15.0 15.0
Depreciation 148 142 150 159
Cost assumptions
EBIT 1,551 1,520 1,719 2,054
RM(% of net sales) 49.3 52.9 55.4 54.9
Less: Interest Expense 11 11 5 5
Financial assumptions
Add: Other income 175.13 160.31 243.26 271.85
Tax rate as % of PBT 29.0 29.0 28.0 28.0
Profit Before Tax 1,715 1,670 1,957 2,321
Capex (INR mn) 199 70 100 100
Less: Provision for Tax 497 408 528 696
Net borrowings (INR mn) (138) (992) (1,186) (1,698)
Reported Profit 1,219 1,262 1,429 1,624
Debtor days 76 74 75 75
Adjusted Profit 1,219 1,262 1,429 1,624
Inventory days 183 168 144 154
Shares o /s (mn) 49 49 49 49
Payable days 51 50 52 51
Adjusted Basic EPS 24.8 25.7 29.1 33.1
Cash conversion cycle 209 192 166 178
Diluted shares o/s (mn) 49 49 49 49
Dep. (% gross block) 6.0 6.0 6.0 6.0
Adjusted Diluted EPS 24.8 25.7 29.1 33.1

Adjusted Cash EPS 28.1 39.9 45.6 47.1
Dividend per share (DPS) 0.6 8.5 9.5 10.5
Dividend Payout Ratio(%) 2.9 39.8 39.3 38.2

Common size metrics
Year to March FY17 FY18 FY19E FY20E
Gross margin 50.7 47.1 44.6 45.1
Operating expenses 31.5 29.8 27.5 27.5
Interest Expense 0.1 0.1 0.1 -
EBITDA margins 19.2 17.3 17.1 17.6
EBIT margins 17.6 15.8 15.7 16.3
Net Profit margins 13.8 13.1 13.1 12.9

Growth ratios (%)
Year to March FY17 FY18 FY19E FY20E
Revenues 6.3 9.0 13.6 15.0
EBITDA 19.6 (2.2) 12.5 18.4
PBT 16.2 (2.6) 17.2 18.6
Adjusted Profit 11.2 3.5 13.2 13.7
EPS 13.4 3.5 13.2 13.7

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Balance sheet (INR mn) Cash flow metrics
As on 31st March FY17 FY18 FY19E FY20E Year to March FY17 FY18 FY19E FY20E
Share capital 98 98 98 98 Operating cash flow 631 1,385 618 965
Reserves & Surplus 5,119 6,235 7,103 8,107 Financing cash flow (806) (196) (559) (617)
Shareholders' funds 5,217 6,334 7,201 8,205 Investing cash flow (806) (196) (559) (617)
Short term borrowings 79 47 55 63 Net cash Flow (981) 993 (501) (269)
Total Borrowings 79 47 55 63 Capex (199) (70) (100) (100)
Long Term Liabilities 330 254 297 342 Dividend paid - (128) (466) (515)
Def. Tax Liability (net) 126 133 133 133
Sources of funds 5,752 6,768 7,686 8,743 Profitability and efficiency ratios
Gross Block 1,498 1,570 1,670 1,770 Year to March FY17 FY18 FY19E FY20E
Accumulated depreciation 148 290 440 600 ROAE (%) 24.3 21.8 21.1 21.1
Capital work in progress 4 1 1 1 ROACE (%) 33.9 28.8 28.8 30.0
Tangible assets 1,350 1,280 1,229 1,170 Inventory Days 183 168 144 154
Intangible Assets 28 30 30 30 ROA 22.2 20.2 19.8 19.8
Total net fixed assets 1,383 1,310 1,260 1,201 Debtors Days 76 74 75 75
Non current investments 490 895 895 895 Payable Days 51 50 52 51
Cash and Equivalents 217 1,039 1,241 1,761 Cash Conversion Cycle 209 192 166 178
Inventories 2,645 2,050 2,726 3,106 Current Ratio 3.8 4.1 4.1 4.2
Sundry Debtors 1,838 2,080 2,405 2,766 Gross Debt/EBITDA - - - -
Loans & Advances 481 772 820 943 Gross Debt/Equity - - - -
Other Current Assets 94 81 128 147 Adjusted Debt/Equity - - - -
Current Assets (ex cash) 5,058 4,982 6,079 6,963 Interest Coverage Ratio 141.7 144.1 314.5 408.3
Trade payable 570 830 909 1,035 LT debt /Cap empl. (%) 1.4 0.7 0.7 0.7
Other Current Liab 826 629 880 1,041 Debt / Cap employed (%) 27.8 24.2 25.7 26.0
Total Current Liab 1,396 1,459 1,789 2,076
Net Curr Assets-ex cash 3,662 3,523 4,291 4,887 Operating ratios
Uses of funds 5,752 6,768 7,686 8,743 Year to March FY17 FY18 FY19E FY20E
BVPS (INR) 106.3 129.1 146.7 167.2 Total Asset Turnover 1.6 1.5 1.5 1.5
Fixed Asset Turnover 6.5 7.2 8.5 10.2
Free cash flow (INR mn) Equity Turnover 1.8 1.7 1.6 1.6
Year to March FY17 FY18 FY19E FY20E
Reported Profit 1,219 1,262 1,429 1,624 Valuation parameters
Add: Depreciation 148 142 150 159 Year to March FY17 FY18 FY19E FY20E
Interest (Net of Tax) 7 7 4 4 Adj. Diluted EPS (INR) 24.8 25.7 29.1 33.1
Others (93) (84) (242) (270) Y-o-Y growth (%) 13.4 3.5 13.2 13.7
Less: Changes in WC 650 (58) 724 552 Adjusted Cash EPS (INR) 28.1 39.9 45.6 47.1
Operating cash flow 631 1,385 618 965 Diluted P/E (x) 22.6 21.9 19.3 17.0
Less: Capex 199 70 100 100 P/B (x) 5.3 4.4 3.8 3.4
Free Cash Flow 432 1,315 518 865 EV / Sales (x) 3.1 2.7 2.4 2.0
EV / EBITDA (x) 16.2 16.0 14.1 11.7
Dividend Yield (%) 0.1 1.5 1.7 1.9

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Dhanuka Agritech

Peer comparison valuation
Market cap Diluted P/E (X) EV / EBITDA (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Dhanuka Agritech 395 19.3 17.0 14.1 11.7 21.1 21.1
Bayer Cropscience 2,367 25.5 29.5 16.4 18.1 21.8 16.3
PI Industries - 25.3 20.4 19.1 14.3 19.8 20.2
Rallis India - 17.7 14.3 11.1 8.7 17.1 18.9
UPL 317,088,432 13.9 11.5 8.5 7.0 22.7 19.8
Median - 19.3 17.0 14.1 11.7 21.1 19.8
AVERAGE - 20.4 18.5 13.8 12.0 20.5 19.3
Source: Edelweiss research

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Additional Data

Directors Data
Ram Gopal Agarwal Chairman Mahendra Kumar Dhanuka Managing Director
Arun Kumar Dhanuka Executive Director Rahul Dhanuka Executive Director
Mridul Dhanuka Executive Director Indresh Narain Non Executive Director
Priya Brat Non Executive Director Vinod Jain Non Executive Director
Asha Mundra Non Executive Director Om Prakash Khetan Non Executive Director
Sachin Kumar Bhartiya Independent Director Balvinder Singh Kalsi Independent Director
Ashish Sharaf Executive Director

Auditors - Dinesh Mehta & Co
*as per last available data

Holding Top -10 Q1FY19
Perc. Holding Perc. Holding
DSP Black Rock 0.26 Mahindra Asset Mgmt Co Pvt Ltd 0.25
HDFC Asset Management Co Ltd 2.10 BNP Paribas Asset Management Ltd 0.20
Aditya Birla Sun Life Asset Management 0.69 Wisdomtree Investments Inc 0.12
Dimensional Fund Advisors 0.28 Blackrock 0.08
Union Mutual Fund 0.26 TIAA-CRF 0.02
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded

No Data Available
*as per last available data

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