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Dhanuka Agritech Ltd

Reco. Price: 650-680 Target Price: 840 (26%) ACCUMULATE

Company Background

Dhanuka Agritech Limited (“Dhanuka”) is a leading Agrochemical Company in India with Pan-India presence through its marketing offices in all major states across India. The 3 manufacturing facilities in Rajasthan, Gujarat and J&K with 40 warehouses and network of over 14 branch offices across the Indian geography. This caters to 7000+ distributors & around 80,000 retailers, which reach out to approx 10 million Indian farmers. Dhanuka has International collaboration with the world’s seven leading agrochemical Companies from US, Japan and Europe which helps it to introduce the latest technology in Indian farmlands.

Investment Rationale

Well diversified product portfolio

Dhanuka has a significant market presence in the domestic agrochemical business, with more than 350 active SKUs and 300+ product registrations throughout the categories of herbicides, insecticides, fungicides, and plant growth regulators/bio-stimulants. The Company provides solutions for all major crops grown which includes cotton, paddy, wheat, sugarcane, pulses, fruits & vegetables, plantation crops and others. As a result, Dhanuka’s performance is largely protected against poor performance of particular crop or region.

International Collaboration and Pan India distribution network

The Company has international collaboration with 10 leading global agrochemical companies from the US, Japan and Europe, which helps it to introduce the latest technology in India. The company has built several strong brands over the years. Further, The company also has a well-entrenched distribution network spanning across the country. DAGRI has established an extensive, pan-India distribution network comprising of over 7000+ distributors and over approx 80,000 retailers with a network of more than 1,000 field agents that connect with over 10mn farmers and retailers across the country. This is a key competitive advantage the company enjoys and can be leveraged with MNCs to drive further growth.

Dahej Capex plans well on track

Dhanuka is embarking on setting up of a technicals manufacturing plant in Dahej, Gujarat with a total capital outlay of Rs. 300 crore over the next three years. The plant will provide raw material security and benefits of backward integration in the form of lower raw material costs. Thus, Dhanuka to start deriving benefit from backward integration in FY2023 when the first phase of the plant is expected to be commissioned. The Dahej plant will commence operations in Mar 2023. At its full capacity, it will contribute approx 350 Cr to the revenue

Strong financial track record & healthy balance sheet

In last three years i.e. FY19-FY22, company’s revenue has grown at a CAGR of 14%. However, profitability growth during the same period was up 23% CAGR. Further, company has improved its operating margin by 300bps from 15% in FY19 to 18% in FY22. The company delivered a strong return ratio with ROE improved from 18% in FY19 to 24% in FY22. Company is almost debt free

Outlook and Valuation

Dhanuka is a pure play on the Indian agrochemical sector. We believe Dhanuka is well-placed in the domestic Agrochem industry given its strong product portfolio. It is aided by new product launches every year in collaboration with global MNCs and a solid distribution network helps Dhanuka in penetrating the newer markets. At the recommended price of Rs.660/-, the company’s stock trades at 11.6x FY24E EPS of Rs.56.66 Based on 14.8x its FY24E EPS, we arrive a target price of Rs.840/-, Hence, we recommend to ACCUMULATE stock.

KNR Constructions Ltd

Reco. Price: 225-230 Target Price: 291 (28%) ACCUMULATE

Company Background

KNR Constructions Ltd (KNR), incorporated in 1995, is Hyderabad based construction company promoted by Mr. K. Narasimha Reddy. KNR is a multi domain infrastructure project development company providing (EPC) engineering, procurement and construction services across various fast growing sectors namely roads & highways, irrigation and urban water infrastructure management..

Investment Rationale

Strong order pipeline providing healthy revenue visibility

Order pipeline is strong at Rs.93,509 million as on June 30, 2022. Outstanding order to FY22 revenue ratio is around 2.6 times, providing healthy revenue visibility over the medium term. Around 76% of the order book comprises of Road projects, and the balance consists of Irrigation projects. The order pipeline is decent, with the management expecting Rs.3000- 4000Cr of project wins in FY23. It is looking at bidding in other regions within India.

Government’s push on Infrastructure development

KNR is likely to be one of the key beneficiaries, as most sectors wherein it is present, are witnessing higher investment, as the government continues to focus on railways, roads and urban infrastructure. With a mammoth Rs100 trillion investment for infrastructure creation over the next five years, We believe KNR is well-positioned to benefit substantially owing to its decades of experience in infrastructure execution and its association with Road Transport and Highways (MoRTH), and various state government departments.

Established market position and strong project execution capability

KNRCL has established relations with National Highways Authority of India, Ministry of Road Transport and Highways (MoRTH), and various state government departments by virtue of its track record of over two decades in the construction industry and executing projects on time.

Strong project execution capabilities of the company are reflected from successful completion of its projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The company also has a track record for executing projects before the scheduled timeline and receive early completion bonuses from the relevant authorities.

Strong financial track record & healthy balance sheet

In last five years i.e. FY17-FY22, company’s revenue has grown at a CAGR of 17%. However, profitability growth during the same period was up 27% CAGR owing to execution of high margin orders & maintaining low debt level. Further, company has improved its operating margin by 600bps from 16% in FY17 to 22% in FY22 as company executed Irrigation orders which fetches higher margin as compared to other orders. Moreover, company has efficiently managed working capital cycle by leveraging strong relationship with clients as well as vendors. This has resulted into superior Cashflow generation from operations & thus effectively utilized for Capex with company’s consolidated leverage ratio maintaining at 0.6x in last five years.

Outlook and Valuation

KNR is a well-known player in the construction segment and has a longstanding presence of over two decades. Improved contract and a stronger order backlog substantially raise KNR’s EPC revenue visibility over the next two years. We value KNR by sum of parts. For standalone at 15x of FY24E EPS of Rs.18.25 implying a value of Rs.274 per share and BOT and HAM assets at Rs.17 per share, totaling the target price to Rs.291/-, Hence, we recommend ACCUMULATE rating on the stock.

KPR Mills LTD

Reco. Price: Rs.550-560 Target Price: Rs.765 ( 38%) ACCUMULATE

Company Background

KPR Mill Ltd (“KPR”) is one of the largest vertically integrated textile manufacturing companies in India present across the value chain from ‘fibre-to-fashion’. KPR has recently forayed into the retail segment with FASO, a 100% organic innerwear, sportswear, and athleisure brand. The company also has sugar business with sugar production capacity of 5,000 TCD, ethanol capacity of 130 KLPD, and power-generation capacity of 40 MW. The company exports to over 60 countries, including Europe, Australia, and the US.

Investment Rationale

Integrated operations with a strong textile industry footprint

The company is India’s largest integrated textile player, with operations spanning the whole textile value chain from yarn to garments. The company’s integrated structure and large-scale operations have benefited in maintaining product quality uniformity and raw material pricing control. Given the volatile nature of the textile industry, the company’s ten-year average EBITDA margins are 19 percent, which is impressive. Because of its control over its value chain, the company has been able to cut lead times and provide on-time delivery to domestic and international clients, establishing itself as a preferred vendor.

China plus one strategy to boost exports

Due to the diversification of supply chain triggered by the Covid-19 induced disruptions and trade tensions between US and China, manufacturers are avoiding to rely on one geography and looking for replacements. India is growing as the most favoured alternative in the South-East Asia region, owing to its abundant raw materials, low labour costs, and manufacturing infrastructure. Global brands show higher preference for vertically integrated players for their higher control on quality and timely deliveries. KPR Mill, being one of India’s largest vertically-integrated player, is expected to reap benefits from this shift

Capacity Expansion to aid Revenue Growth and Profitability

The company’s garments segment has recently undergone capacity expansion. The company’s overall garment manufacturing capacity was boosted to 157 million pieces per year with the additional capacity of 42 million pieces per year. The 42 million project completed in October 2021. Over FY14-21, KPR’s garment segment registered a revenue CAGR of 22% to clock 12,456mn in FY21. Further, the company has set up a new plant with capacity to produce 10,000 TCD sugar, 220 KLPD ethanol, and 50 MW co-gen. With this, the overall sugar business capacity increased to 20,000 of TCD of sugar, 90 MW of power, and 340 KLPD of ethanol. The management expects Rs. 1,100 – Rs. 1,200 crores of revenue from new sugar plant at full capacity

Strong financial track record & healthy balance sheet

KPR has established a consistent track record of financial performance and growth. During FY12-21, The company’s revenue and profitability has grown at a CAGR of 12% and 36% respectively. Further, during the same period, the company’s operating profit has grown at a CAGR of 19%. Moreover, company’s operating margin improved by almost 900bps from 14% in FY12 to 23% in FY21 led improving product mix. The company’s management is also shareholder-friendly, as dividends are paid on a regular basis and buybacks are done at regular intervals.

Outlook and Valuation

KPR Mill is one of the largest vertically integrated textile companies, with presence across the value chain - from fibre to fashion. The company is set to gain from large growth opportunities in exports, capacity development, vertically integrated operations, strong balance sheet, ability to manage cost of power through green power investments, and a strong client base in the local and international market. Based on 24.5x times its FY24E EPS of Rs.31.23, we arrive at a target price of Rs.765/-, Hence, we recommend ACCUMULATE rating on the stock.

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