Dhanuka Agritech's Q2FY18 results (Outperformer) - Performance improves

Q2FY18 result

• Dhanuka’s Q2FY18 performance was impacted by erratic distribution of rainfall and delayed rainfall in South India. Revenues stood at Rs3.48bn (est. Rs3.3bn), up 11.4% yoy led by 9% yoy growth in volumes.
• Gross margins declined by 139bp to 41% due to reduced refund of excise duty and GST implementation. Despite stable employee costs and other expenses, EBITDA margins declined by 79bp to 21.5%. EBITDA increased by 7.4% to Rs749m (est. Rs724m)
• Despite lower tax rate (28.3% versus 29.8% in Q2FY17) and stable interest costs, lower other income (down 53.03% yoy) and increase in depreciation charges (up 5.2%) restricted PAT growth to 5.4%. Net profit for Q2FY18 stood at Rs528m (est. Rs523.6m).

Key positives: New product launches

Key negatives: Decline in gross margins

Impact on financials: Earnings estimates maintained

Valuations & view

Dhanuka’s performance in Q2FY18 was impacted by erratic distribution of rainfall and delayed rainfall in South India. In the near term (FY18E), improving reservoir levels, increase in area under cotton cultivation and improved cash flow among sugarcane farmers is expected to drive growth.  On the profitability front, stable realisation and favourable exchange rate in imported speciality products is set to augur well. Fall in area under oil seeds and poor rainfall in South India are the key challenges faced by the company. We expect revenue, EBITDA and net profit CAGR of 15%, 15.9% and 14.6% over FY17-19E. Dhanuka is a pure play on Indian agrochemicals, with innovator alliances enabling 2-3 9(3) registered product launches per annum and debt free balance sheet. Moreover, given strong free cash flow (Rs1bn/year) and attractive return ratios (RoIC ~23%), Dhanuka will continue to command rich valuations. We maintain Outperformer.