Dhanuka Agritech's Q2FY20 results (Outperformer) - Broadly-in-line; Positive rabi outlook

Q2FY20 result

• Dhanuka’s Q2FY20 results were broadly in-line with our estimates. Revenues were below our estimates, however PAT was slightly above of our est.
• Revenues grew by 5% to Rs4bn vs our est :Rs4.2bn led by new product launches
• Gross margins declined sharply by 512bps to 35% ( est : 38%) owing to inventory losses on fall in prices of  key raw materials.
• Tight control on operating expenses and employee costs restricted further margin erosion. EBITDA margins declined by 147bps tp 18.3% (in line with est:18%). EBITDA declined by 3% to Rs734m (est:Rs759m)
• Despite higher depreciation, lower tax rate( 16.5% vs 26.2% in Q2FY19, led to 9%yoy growth in PAT to Rs600m (est: Rs575m)   

Key positives: Healthy traction in new product launches

Key negatives:  Sharp decline in gross margins

Impact on financials:  Cut FY20E EPS by 3.8% to factor in decline in gross margins.

Valuations & view

Dhanuka performance in Q2FY20 was marred by erratic rainfall, subdued commodity prices and liquidity constraints at farmer’s end. Besides, the company found itself in the wrong side of the inventory/raw material cylcle as it suffered inventory losses on fall in raw material prices. In the near term, mgt remains upbeat on the rabi outlook, given favourable reservoir levels driving crop acreage. On the profitability front tight control over operating expenses should negate the impact of raw material price volatility. Dhanuka is a pure play on Indian agrochemicals with a differentiated, asset-light business model, based on its alliances with innovators to launch 9(3) registered products and generic sales. Dhanuka’s India-focused model has demonstrated fragility (versus geographically diversified peers), as its business has been adversely impacted due to erratic monsoons and liquidity constraints at the farmers’ end, along with volatility in raw material prices. We believe gradual normalization in raw material prices and impact of cost rationalization measures coupled with new product launches should aid a strong bounce back in Dhanuka’s earnings over FY19-21E. Return ratios should continue to stay healthy. We maintain our Outperformer rating on the stock with a target price of Rs435 (15x FY21E PER).