Margin improvement continues
Insecticides India (Insecticides) reported revenue and PAT growth of 2.3% and 11.4% YoY, respectively in Q1FY19. However, the heartening factor to note is that the margin expansion continued in Q1FY19 with EBITDA margin expansion of 120bps, YoY. The company has raised EBITDA margin for 9th straight quarter, YoY. We remain positive on Insecticides due to 1) its strategy to weed out low margin products and focus more on high margin products and 2) launch of six new products in FY19. We expect the company’s EBITDA margin to move up from 13.8% in FY18 to 15.6% in FY20 with improving revenue mix. As we expect the company to report earnings CAGR of 17.6% over FY18-20, we retain BUY rating with target price of Rs975 (17x FY20E EPS).
* Volume led growth:
Insecticides India reported revenue growth of 2.3% YoY. Company has not raised prices of any products and entire growth was volume-led. Though the company benefitted from favourable base of Q1FY18 (GST roll out), it indicated that closure of some of the low margin products resulted in lower revenue growth in Q1FY19. It also indicated that some revenue may have shifted to Q2FY19 and the revenue growth in Q2FY19 is likely to be in high teens.
* Higher EBITDA margins despite rising commodity prices:
Despite rising raw material prices, EBITDA margin expanded 120bps YoY due to improving revenue mix. Company has closed some of low profitability products and introduced some high margin products such as Green Label and Kaya Kalp. Effective tax rate was up 160bps and hence net profit growth was restricted to 11.4%, YoY.
* Strong macros and guidance:
Government has raised minimum support prices by 28-42% across the food grains for Kharif season. Also the monsoon is expected to normal in CY18. We believe this augurs well for the company’s revenue growth. The management has maintained its guidance of 15% revenue growth in FY19 with 150bps expansion in PBT margin. Considering strong macros and new product launches, we believe the guidance is achievable.
* To launch six new products in FY19:
Company has indicated that it will introduce six new products in FY19. New products will be a mix of products under 9(3) and 9(4) registrations. Insecticides plans to focus more on combination products which will enjoy better margins than current margins. The company has introduced three insecticides under the brands Encounter, Aikido and Hercules. It has also introduced fungicides under brand name Sofia.
* Maintain BUY:
We expect Insecticides to report revenue and PAT CAGRs of 10% and 17.6% respectively over FY18-FY20. Return ratios are expected to gradually improve over the same timeframe. We reiterate BUY rating on the stock with DCFbased target price of Rs975 (Implied target PE of 17x FY20E EPS).
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