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Revenue mix deterioration impacts margins

Takeaways from Insecticides India’s Q3FY21: (1) 58% increase in Institutional sales resulted in revenue growth of 13.8%. However, branded product sales grew just 4%, (2) Insecticides has reduced net working capital days to ~115 now vs 184 at FY20-end. The company has also repaid its entire debt with better cash collections and (3) EBITDA margin declined 750bps YoY due to inferior product mix and negative operating leverage. We remain positive on Insecticides due to (1) steady launches of high-margin products, (2) removal of generic products from the portfolio and (3) backward integration of technical. However, post 20% stock price performance over past three months, we downgrade the stock to ADD with revised DCF based target price of Rs521 (8x FY23E, Earlier TP-Rs535).

* Q3FY21 result: Revenue was up 13.8% YoY but EBITDA and PAT declined 54.3% and 62.5%, respectively. Gross and EBITDA margin contracted 60bps and 170bps, respectively. Due to change in revenue mix (higher decline in premium products), higher revenues of Institutional products and increase in input prices, the EBITDA margin contracted 750bps YoY.

* Segment-wise performance: Sales of branded products increased 4% YoY. While Maharatna product revenues increased 6.8%, revenues of other branded products increased 1.4%, YoY. Institutional sales were up 58% YoY. Exports were up 14.2% in 9MFY21. The revenue contribution of products launched FY13 onwards (i.e. Freshness index) was 34.7% during 9MFY21.

* Higher focus on cash collections: The company has focussed on reducing the investments in net working capital and higher cash collection during the quarter. Net working capital days of the company now stands at ~115 compared to 184 at the end of FY20. With improvement in cash collections, the company has repaid its entire debt now.

* Aggressive new product launches to drive growth: The company plans to launch new products to drive growth in FY22. It had introduced Dominant (Dinotefuran 20% SG) insecticide during Q2FY21. It has also introduced two new products as Master stroke and Mahir during Q2FY21. Insecticides has introduced two new products as Tadaaki and Avval in Q3FY21.

* Maintain BUY: We model Insecticides to report revenue and PAT CAGRs of 7% and 15.7%, respectively, over FY20-FY23E. Return ratios are also expected to improve over the same timeframe. We downgrade the stock to ADD from BUY post 20% stock price performance over past three months. At our DCF-based target price of Rs521, the implied P/E works out to 8x FY23E. Key risk: Weaker-than-expected performance of new product launches and higher competition.

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