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New business segments, R&D investments to be key growth drivers

Insecticides India has reported robust revenue growth of 31.1% YoY in Q2FY23, led by strong growth in branded products, rising acceptance of new products and market share gains. Higher input material prices and adverse forex fluctuations impacted EBITDA margin of the company in Q2FY23. The company continues to incur capex for expanding capacities at its Dahej (in Gujarat) and Chopanki (in Rajasthan) facilities. We believe good soil moisture and decent reservoir levels will drive domestic demand for agrochemicals in the upcoming rabi season (midNov to May). We remain positive on Insecticides India due to (i) its focus on distribution expansion; (ii) removal of generic products from portfolio and launch of differentiated products; and (iii) backward integration of technicals. We estimate an earnings CAGR of 16.5% over FY22-FY24E and RoE to move to 13.8% in FY24E. Maintain ADD on the stock with a revised DCF-based target price of Rs785 (implied P/E of 16x FY24E EPS; prior target price: Rs733).

* Q2FY23 result: Insecticides India’s revenue, EBITDA and adjusted PAT registered growth of 31.1%, 6.7% and 6.9%, YoY, respectively. While gross margin declined 111bps YoY, EBITDA margin contracted 270bps YoY on higher other expenses. PAT margin was also down 174bps YoY.

* Segment-wise performance: B2C business segment contributed 73% (up 200bps YoY) of the company’s revenue in Q2FY23. Share of exports and B2B segments was 2% and 25%, respectively. We believe continuous efforts to penetrate into newer geographies will result in higher share of exports in near term. IIL remains focused on reducing dependence on insecticides, as a result, share of herbicides increased to 29% in Q2FY23.

* Multiple levers to drive volume growth: (1) Insecticides India has incorporated IIL Biologicals to manufacture and market organic and biological fertilisers, biopesticides etc. (2) Company continues to aggressively launch new products (with internal R&D investments and via Nissan partnership). (3) Capacity expansion at Dahej and Chopanki sites will also fuel volume growth of the company.

* Maintain ADD: We model Insecticides to report revenue and PAT CAGRs of 13.3% and 16.5%, respectively, over FY22-FY24E. Return ratios are also expected to improve over FY22-24. At our revised DCF-based target price of Rs785, implied P/E works out to 16x FY24E EPS. Maintain ADD. Key risks: Weaker-than-expected performance of new product launches and higher competition.

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