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Higher profitability despite input inflation

Takeaways from Insecticides India’s Q2FY22: (1) revenue declined 2.6% YoY; EBITDA and adj. PAT grew 11.1% and 0.9% YoY, respectively, (2) working capital investments increased due to higher inventory and debtor levels and (3) EBITDA margin was up 179bps YoY in-spite of higher input prices. The company received a patent for an herbicide formulation for 20 years. We remain positive on Insecticides due to (1) focus on increasing farmers’ penetration, (2) removal of generic products from the portfolio and (3) backward integration of technical. We model the company for earnings CAGR of 11.4% over FY21-24E and RoE to move to 12.9% in FY24E. We cut FY22-23 earnings estimates by ~5% to factor in inflation in input prices. Maintain ADD rating on the stock with a revised DCFbased target price of Rs710 (implied P/E of 10x FY24E EPS; prior TP: Rs800).

* Q2FY22 result: While revenue declined 2.6% YoY, EBITDA and adj. PAT grew 11.1% and 0.9% YoY, respectively, led by higher gross and EBITDA margins, up 267bps and 179bps YoY, respectively. However, adjusted PAT margin was up only 28bps due to lower other income. Staff costs and other expenditure as a % of sales also increased 68bps and 20bps YoY, respectively.

* Higher working capital investments: Debtor levels increased 20.7% YoY in Q2FY22, resulting in higher working capital requirements. Inventory levels are also up 16.9% attributed to higher stocking of raw materials, due to supply disruption. We expect the situation to normalize in coming quarters.

* Impact of uneven monsoon: While the average rainfall in CY21 appears to be good, less rainfall in July and Aug’21, followed by flood like situations caused by excessive rainfall in Sep’21, adversely affected the Kharif season. We see it as a key reason for the revenue decline in Q2FY22. However, we model Rabi season to be normal due to sufficient reservoir levels.

* Herbicide Patent: Insecticides India was granted a patent for an herbicidal formulation in Nov’21, for a period of 20 years. We believe company’s investment in R&D to launch new formulations will likely result in healthy growth in long term.

* Maintain ADD: We model Insecticides to report revenue and PAT CAGRs of 9.8% and 11.4%, respectively, over FY21-FY24E. 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 Rs710, the implied P/E works out to 10x FY24E EPS. Key risk: Weaker-than-expected performance of new product launches and higher competition.

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