FREE

Management Speak: Dhanuka Agritech (Outperformer) - Recovery likely in FY20E

Presented are key takeaways from our meeting with Mr M. K. Dhanuka (MD, Dhanuka Agritech Ltd), in which we attempt to understand the challenges and growth prospects of the company.

• Higher costs impact 9MFY19 performance: Dhanuka reported its worst-ever performance during 9MFY19, with muted 4.6% yoy revenue growth and 16% yoy fall in EBITDA. The company found itself on the wrong side of the raw material/inventory cycle and was unable to pass on the cost increases. Besides uneven rainfall distribution, lower acreage, low pest infestation and high-channel inventories were other key reasons that impacted its overall performance.
• Decent product pipeline: In FY20E, Dhanuka plans to launch three insecticides (Q1FY20E) and two 9(3) fungicides (H2FY20E). Apart from these, Dhanuka has 6-7 products in its pipeline for the next 3-4 years (registration in process; typically takes 3-4 years). The company expects to launch atleast 2 new products per annum.
• Growth recovery expected in FY20E: Management expects weakness to continue in Q4 but expects 10-15% revenue growth in FY20E, hoping margins to revert to FY18 levels (17-18%), backed by introduction of new products. As per its sales return policy, Dhanuka has recalled unsold stock from the market, eliminating the risk of stock returns in the coming quarters.
• Lack of capex to help generate healthy FCF: Dhanuka does not have any major capex plans and has managed to control its working capital outlays. We thus expect healthy FCF in the coming years.

Earnings to bounce back; Maintain Outperformer: 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 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 Rs456 (16x FY21E PER). A weak monsoon remains a key risk to our estimates.