Dhanuka Agritech's Q4FY19 results (Outperformer) - Weak performance, Recovery likely in FY20E

Q4FY19 result

• Dhanuka reported weak revenue growth of 4.1% yoy  to Rs1.92bn ( in line with est;Rs1.89bn) on poor rabi season and lower realisation,
• Gross margins declined sharply by 310ps to 42% (est ;39.6%) on Dhanuka’s inability to pass on the increase in raw material prices (China slowdown)
• Tight control over employee costs and operating expense led restricted further decline in EBITDA margins which remained flat at 17% (est : 13.5%). EBITDA increased by 5% yoy to Rs330m ( above est : Rs256m)
• Higher tax rate of 26% vs 17% in Q4FY18 led 6.6% yoy decline in PAT. Reported PAT stood at Rs268m (above our est: Rs170m)

Key positives: Healthy pipeline of product launches, improvement in working capital

Key negatives: Decline in Gross margins

Impact on financials:  Increase EPS by 5% in both FY20E and FY21E factoring in recovery in FY20E

Valuations & view

Dhanuka reported its worst-ever performance in FY19 as the company found itself on the wrong side of the raw material/inventory cycle and was unable to pass on the price increase. Besides, an uneven rainfall distribution, drop in acreage, low pest infestation and high-channel inventories were other key reasons that had a bearing on its overall performance. 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 Rs449 (15x FY21E PER). A weak monsoon remains a key risk to our estimates.