IGI Logo

Resilient margins despite RM cost inflation

* Dhanuka Agritech (DAGRI) beat our Revenue/EBITDA/PAT estimates by 6%/21%/11%. DAGRI was able to maintain gross margins (+3bps yoy) despite raw material cost pressures. EBITDA margins expanded by 334bps yoy to 23.5% on cost-control initiatives and Covid-19-related savings.

* Management has guided for low-double digit volume growth in FY22, driven by higher acreage of soybean, oil seeds and pulses on government push and remunerative crop prices for farmers. We factor in 13.5% revenue growth for FY22E (vol: 12%, price: 1.5%).

* We have modelled a 78bps decline in EBITDA margin in FY22E as benefits from Covid19-related savings (online marketing, lower travel spends) moderate. However, management has guided for 40-50bps headwind from these initiatives and aims to maintain EBITDA margins through product mix improvement.

* We raise FY22/23 EBITDA estimates by 9%/10% and PAT estimates by 7% as we increase our margin and revenue growth assumptions. We roll forward to June-23E EPS and maintain Buy with a revised TP of Rs990 (Rs910 earlier), based on an unchanged PE multiple of 19x.

Higher soybean and oilseed acreage to aid product mix

According to management, favorable commodity prices and government push should improve acreage in soybean, oilseeds and pulses, while cotton acreage should come down due to less favorable crop prices. DAGRI has a strong portfolio of generic and specialty molecules in these segments; hence, it should tweak product mix in favor of specialty and better-margin molecules. Management expects innovation turnover index to improve to 12% in FY22 from 10.5% in FY21.

Dahej capex to support backward integration in FY24E DAGRI will execute Dahej capex in three phases:

1) formulation unit by FY22-end (Rs600- 900mn); 2) MPP to manufacture synthetic Pyrethroids AI without backward integration by FY23-end (Rs1bn); and 3) MPP to manufacture products tied up with one of the Japanese customers (Rs1.2bn). From synthetic Pyrethroids plant, DAGRI expects to consume 35-50% of AI produced for captive consumption and rest to be sold to external customers. DAGRI has not received the environment clearance as of now, and any delay in it could push the timelines. Hence, while we have modelled some capex, we have not modelled any impact on revenue or margins in FY24E.

Price hikes and better product mix to help maintain gross margins

DAGRI remained confident of maintaining gross margins in FY22E as it has already raised prices and believes that the market is absorbing it. This leads us to increase our FY22/23 EBITDA margin assumptions by 98bps/103bps to 18.6%/18.4%. We maintain Buy rating with a revised TP of Rs990, based on 19x Jun-23E EPS. We suggest accumulating DAGRI on any price decline. Key risks: 1) lower rainfall affecting demand for agrochemicals; 2) fewer pest attack and 3) sharp increase in raw material prices.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer