Dhanuka Agritech: Rising net profit

Dhanuka Agritech Limited manufactures a wide range of agro-chemicals like herbicides, insecticides, fungicides, miticides, plant growth regulators in various forms – liquid, dust, powder and granules. The Company has a pan-India presence through its marketing offices in all major states in India, with a network of more than 7,000 distributors/ dealers selling to over 75,000 retailers across India and reaching out to more than 10 million farmers. The Company has technical tie-ups with 4 American, 5 Japanese & 2 European Companies.

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Dhanuka’s target customers are primarily farmers. Growth drivers are the intensive marketing network penetrating even the interiors of India, increased farm income, enhanced awareness about the cost-benefit tradeoff of agro-chemicals, highly diverse product range with solution for almost all problems in all crops, innovative marketing strategies and international technical tie-ups. The Company keeps adding new products every year through its collaborations and is continuously on the lookout to bring the latest technology to Indian Farmers.

Dhanuka Agritech with revenue and net profit growth of 17% and 15 % respectively, Dhanuka Agritech's result for the fourth quarter of 2017-18 were better than expected. Net profit growth in the fourth quarter would have been higher had the company's margins not come under pressure due to 28 % jump in raw material prices. Dhanuka's revenue and net profit grew 11% and 7% respectively in 2017-18.

Dhanuka is planning to launch 3-4 products in FY17, thereafter two new products each year. The company is expected to benefit from its pan-India presence, wide distribution network, international tie-ups and robust performance of its existing and new products. Supported by strong growth drivers such as favorable monsoons, production capacity expansion from its recently commissioned Keshwana plant, increasing demand of food grains coinciding with declining farmlands will result in the stock outperforming the market.

We estimate Dhanuka’s total operating income to grow at 14.2% CAGR over FY15-18 to Rs. 11,774.8mn, while reported PAT to grow at 13.5% CAGR over the same period to Rs. 1,551.7mn. Moreover, EBITDA margin to expand by 186bps to 19.2% in FY18E, however due to higher tax incidence, PAT margin is likely to report a modest decline of 25bps to 13.2% in FY18E from 13.4% in FY15. Based on relative valuation, we arrive at the target price of Rs. 793.8 per share, translating into an upside potential of 35.3% from its current level. Thus we recommend a “BUY” rating on the stock.

The company is also benefitting from the structural changes in the industry. For instance, share of herbicide and fungicide in agro chemicals in India is 20% and 16% respectively—the global average is 48% and 26% respectively—and, therefore, the company is expected to see faster growth in these segments. Most of Dhanuka's revenue— around 54% in 2017-18—comes from sale of insecticides. Analysts' views To raise its revenue from fungicides and herbicides, the company will be launching products like rice herbicide, grape fungicide, etc. in 2018-19. Positive industry-wide tailwinds—expected good monsoon in 2018-19, central government's target to double farm income by 2022, etc.—should also help Dhanuka.

Government may also adopt new 'farmer friendly' policies' due to quell ongoing farmer agitations. While measures like loan wavers may not be of much help to the agro chemical industry, steps like increase in the minimum support price (MSP) will result in increased acreage and, therefore, help chemical companies like Dhanuka. Massive underperformance during the past year—stock fell 39% even as the Sensex gained 13%— has brought its valuation to a reasonable level, and this is another reason why analysts are getting bullish on this counter now.

There are several reasons for this expected growth. Dhanuka's strategy of tie-ups with global innovators and launching 3-4 speciality products every year will help this midcap company in the long term. The company has also been launching several innovative products—it launched 11 new products in 2017-18, the most by Dhanuka ever in a financial year.

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