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Commencement of new units in Q4FY23 and FY24 to result in portfolio premiumization

Insecticides India reported strong set of numbers in Q3FY23 led by (1) 53% growth in B2C sales and 30% higher revenues of Maharatna products, (2) higher B2C sales and Maharatna revenues led to gross and EBITDA margin expansion of 40bps and 60bps, respectively YoY and (3) the company is on track to commence the new production units at Rajasthan and Gujarat in Q4FY23. However, we note with capex of Rs1.6bn in past two years and steady increase in working capital, the debt has increased leading to higher interest cost. We model the debt repayment to begin in FY24E itself with steady OCF generation. We also model the units at Rajasthan and Gujarat to result in strong backward integration as well as launches of new products with higher margin leading to steady improvement in return ratios of the company.

We model an earnings CAGR of 17.3% over FY22-FY25E and RoE to move to 14.5% in FY25E. Maintain ADD on the stock with a revised DCF-based target price of Rs640 (implied P/E of 11x FY25E EPS; Earlier TP: Rs785).

* Q3FY23 result: Insecticides India’s revenue, EBITDA and adjusted PAT registered growth of 13.6%, 25.2% and 14.9%, YoY, respectively. Gross and EBITDA margins expanded 40bps and 60bps, respectively with correction in commodity prices as well as change in revenue mix. Due to higher interest cost, PAT margin was flat YoY.

* Segment-wise performance: B2C sales were 78% of Q3FY23 revenues compared to 58% in Q3FY22. Revenues of Maharatna products were 48% of sales in Q3FY23 compared to 42% in Q3FY22. Exports were just 4% of net sales in Q3FY23 compared to 15% in base quarter. We believe weak global markets and postponement of some orders led to lower exports.

* Capex at Rajasthan and Gujarat to drive growth: Insecticides had invested in Rs1132mn for expanding technical and formulation capacities at Rajasthan and Gujarat. It has further invested Rs490mn in 9MFY23. Some of units are expected to commence production in Q4FY23. We believe the capex will help to introduce new products with higher margins.

* Maintain ADD: We model Insecticides to report revenue and PAT CAGRs of 14.5% and 17.3%, respectively, over FY22-FY25E. Return ratios are also expected to improve over FY22-25. At our revised DCF-based target price of Rs640, implied P/E works out to 11x FY25E EPS. Maintain ADD. Key risks: Weaker-than-expected performance of new product launches and higher competition.

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