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Revenue mix improvement expands margins

Takeaways from Insecticides India’s Q4FY21: (1) 25.2% increase in Institutional sales and 18.7% increase in other branded sales resulted in revenue growth of 7.1%, YoY. However, branded product sales grew just 3.3%, (2) Insecticides has reduced net working capital days to 131 now vs 147 at FY20-end. The company has also reduced its debt with improvement in cash collections and (3) EBITDA margin improved 1,230bps YoY due to better product mix. 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. We maintain ADD rating on the stock with revised DCF based target price of Rs800 (13x FY23E, Earlier TP-Rs521).

Q4FY21 result:

Revenue was up 7.1% YoY, EBITDA and PAT turned positive, against negative in Q4FY20. Gross and EBITDA margin expanded 1110bps and 1230bps, respectively. Due to improvement in revenue mix (increase in branded products 3% YoY, other branded products 18.7% YoY) and lower input prices, the EBITDA margin expanded 1230bps YoY.

Segment-wise performance:

Sales of branded products increased 3% in Q4FY21, YoY. During FY21, branded products sales were flat, while Maharatna products grew of 3.7% over FY20, contributing 46% of branded sales. Institutional sales were up 19.7% YoY. Exports were flat during FY21. The new products launched from FY13 onwards contributed ~35.7% of the revenues

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 131 compared to 147 at the end of FY20. With improvement in cash collections, the company has reduced its debt.

Aggressive new product launches to drive growth:

The company launched 7 new products in Maharatna category in FY21 and plans to launch 5-6 new products to drive growth in FY22. It secured a new patent in fungicides in FY21. It will be sold under the brand name SOFIA.

Maintain ADD:

We model Insecticides to report revenue and PAT CAGRs of 8.6% and 10.6%, respectively, over FY21-FY23E. Return ratios are also expected to improve over the same timeframe. We maintain ADD rating on the stock. At our DCF-based target price of Rs800, the implied P/E works out to 13x FY23E. Key risk: Weaker-than-expected performance of new product launches and higher competition.

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