Dhanuka Agritech's Q3FY20 results (Outperformer) - Robust quarter

Q3FY20 result

• Dhanuka reported revenue, EBITDA and PAT above our estimates driven by favourable rabi season.
• Revenues grew by strong 25.2% yoy to Rs2.7bn (above est : Rs2.45b) led by 27% volume growth , while realisations declined by 2%
• Gross margins declined by 150bps to 35% (est 37.5%) as  the company passed on the decline in gross margins
• Tight control on employee and operating expense led to 270bps improvement in EBITDA margins to 12.6% ( est : 13.5%) .EBITDA stood at Rs343m, up 59.8% yoy  ( marginally above est: Rs331m)
• Despite higher depreciation costs ( up 41% yoy ) , higher other income ( up 107% yoy ) and lower tax rate 26.5% vs 34% in Q3FY19 led to strong 89.5% yoy growth in PAT to  Rs267m (above est : Rs198m)

Key positives: Healthy traction in new product launches, healthy volume growth

Key negatives:  Decline in gross margins

Impact on financials:  Increase FY20E/ FY20E EPS by 9%/8% respectively to factor in volume growth. Introduce FY22e EPS of Rs36.7/ sh

Valuations & view

During Q3FY20, Dhanuka witnessed strong growth recovery on increase in rabi acreage. On the profitability front tight control over operating expenses negated the impact of raw material price volatility. In the near term, mgt remains upbeat on the Q4 outlook, given favourable reservoir levels and traction in new product launches.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. However 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 Rs587 (16x FY22E PER).