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Our Take:

Dhanuka Agritech has a strong diversified product portfolio across insecticides, herbicides and fungicide segments. It has a pan-India presence with over 7,200 distributors and approximately 75,000 retailers. Its unique “Rural FMCG” distribution-led business model makes it a preferred partner of global innovators targeting fast growing Indian markets.

The company has a strong exclusive product portfolio from strategic partnerships with leading Japanese and US players like Nissan, Sumitomo, Mitsui, Arysta, Hokko, FMC & Oro Agro Chemicals, which makes it an asset-light company that is leveraging strong capabilities of global innovators. Segment-wise insecticides, herbicides, fungicides and others contribute 37%, 31%, 19% and 13% respectively. Key growth drivers are the new 9(3) product launches, backward integration (capex outlay of Rs 200cr) of technical pesticides in Dahej, intensive marketing network penetrating even to the interiors of India, increased farm income, and enhanced awareness of the cost-benefit ratio of agrochemicals.

Dhanuka keeps adding new products every year through collaborations and continuously endeavors to bring the latest technology to Indian farmers. Dhanuka launched two new 9(3) products by the name of Kirari and Nissodium, which are both fungicides for the grapes segment. Kirari has been launched in technical collaboration with Nissan Chemicals Japan; it will control the Downey Mildew pests in grape crops.

The Nissodium has been launched in technical collaboration with a new Japanese company Nippon Soda and it will control the Powdery Mildew in the grape crop. Earlier, the company had launched Dozo Maxx and Dabooch (Herbicide). The company expects about Rs 50-60cr of revenue from these four products, in line with overall gross margin. It has launched six new products in FY21 and guided for 10 launches over the next two years. Products worth US$ 4.2bn are expected to go off patent over CY20-23, which will provide more opportunity for players like Dhanuka. In the past three years, Dhanuka Agritech has bought back shares twice and rewarded its shareholders.

It bought back 15 lakh equity shares at Rs 550 per share in early 2019 and spent Rs 82.5cr on the same. In Nov-2020, it bought back 10 lakh equity shares at Rs 1,000 each and used Rs 100cr. The relationship with the domestic manufacturers and distributors has helped sustain inventories in the pipeline even during the lockdown period in March-May 2020. The company's product portfolio falls under essential commodities; hence, no major impact is witnessed on the business performance in 9MFY21.

Despite a high base in FY21, management has guided revenue growth of 10-12% (if monsoon is good) and sustainable EBITDA margin of 16-17%. A better monsoon forecast by Skymet and IMD this year should boost growth of agri inputs. Dhanuka has a strong pipeline of products, which should drive revenue and net profit growth in the coming years.

View & Valuation:

Dhanuka Agritech has a strong product portfolio and a distribution-led business model; it has robust return ratios (> 20%), backed by a debt-free cash-rich balance sheet. It has registered 7% CAGR in revenue and 6% CAGR in PAT over FY15-20. This has been due to continuous decline in margin from 17% in FY15 to 15% in FY20. Historical operating performance between FY10-20 shows that every 3-4 years one year growth is super strong (20+% EBITDA growth during FY11/14/17/20) followed by negligible growth in the latter period (FY13,FY16,FY19).

This may be due to the inherent cyclicality in the business (largely rain dependent). This makes us put a lid on valuations. In 9MFY21, Dhanuka has recorded strong revenue growth at 24.7%, led by traction across segments. Operating margin expanded 410bps yoy due to better gross margin and cost control measures. The company reported robust 57% yoy growth in net profit at Rs 162cr. We estimate 15% CAGR in revenue along with margin at around 17-18% over FY20-23E. Company is likely to register 17% CAGR in net profit over the same period.

We are positive on the stock, given (1) strong balance sheet, (2) high revenue contribution from the specialty portfolio, and (3) strong distribution network. We recommend BUY on the stock at LTP and add more on declines to Rs 640 for the base case fair value of Rs 789 (16x FY23E EPS) and bull case fair value of Rs 863 (17.5x FY23E EPS) over the next two quarters.

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