Dhanuka Agritech is an agri-chemicals (herbicides, pesticides and insecticides) formulation manufacturing and marketing company which has over 82 products, reaches over 1 Cr (10 mi) farmers, had revenues of more than Rs 650 Crs, EBIDTA of Rs 88 Crs and PAT of Rs 65 Crs in FY 2012-13, has bagged the Forbes Best under a billion award 3 times and has a 6% market share in the agro-chemicals sector.
MAJOR INTERNATIONAL TIE-UPS AND AN ASSET LIGHT MODEL
As per CRISIL`s July 2013 report on the company, the company is in a tie up with 4 American, 4 Japanese, 1 Norwegian and 1 German multi-national agri-chemicals companies. The company with its strong distribution network is a perfect partner to these multi-nationals which have a strong technical expertise but are weak when it comes to marketing their products to the farmer. The company buys the technicals (chemicals that when mixed in the right proportion give the final formulation) from these companies, prepares the formulations and sells the same to the farmer directly.
As per in-Focus July 13 edition titled Indian Pesticide Industry: An Analysis,
“The costs associated with research, development and registration (pesticides must be approved by the Central Insecticides board) of new molecules (formulations) have increased substantially. On an average, it takes more than 9 years between first research and final authorization of the products. Indian companies have not focused on developing newer molecules due to absence of patent protection”.
As per Emkay research dated October 2012, Dhanuka has achieved a FY 13 RoCE of 28.7% and a FY 14E RoCE of 29.9%. This matches up to its biggest competitor, Rallis India, which as per Emkay has a FY 13 RoCE of 29.6% and FY 14E RoCE of 30.5%.
Emkay goes onto add that
“Dhanuka` s profit margins are 2nd highest in the industry (after Rallis) while asset light business model results into RoE (26%) higher than industry average by 300-400 bps”
Due to all the above tie-ups, the company has consistently been able to launch a slew of products each year which has helped in a healthy CAGR year on year.
MNREGA AND THE COMING AGRI BOOM
With MNREGA having an effect on farm labour and Indian agriculture experiencing a mechanization and productivity boom, Dhanuka` s herbicide segment (19 products out of the company`s 82 products), has begun to take a bigger share of revenues (from 20% a few years back to 33% in FY-13 as per Emkay Oct 2010).
Below WSJ article talks about the coming boom in agricultural mechanization
http://online.wsj.com/news/articles/SB10001424052702304441404579121313326574626
Below 2 day old article on Mahindra`s 18% growth in tractor for Feb 2014 is another indication
PROMOTER PROFILE
Promoters hold a healthy 74.99% stake in the company, take home 1.5% of the PAT margins as salaries and have been in the agro-chemicals business for a long time.
HEALTHY DIVIDEND PAYOUT AND CASH FLOWS
The company has paid out Rs 18.5 Crs of dividend in FY 13, Rs 11 Crs in FY 12 and Rs 10 Crs in FY 11. Although dividend yield (stock price/dividend payout) is less than 5%, the payout has been very consistent. Also, since FY 2011, the company has been seeing better cash flows from operating activities.
FII STAKE
41.25 lakh shares of Rs 2 face value at a premium of Rs 80 constituting 8.25% of the post issue paid up capital were issued on a preferential basis to Lighthouse funds. Since then, Lighthouse funds has been allowed to have one of its representatives on the board of the company. As per the company`s FY 13 annual report, the FII holding in the company stands at 8.25% indicating that there are no FII funds other than Lighthouse that have entered into the script.
DEBT AND WORKING CAPITAL INTENSITY
Company has no long term debt. Short term debt of Rs 33 Crs is seen on its balance sheet. Company`s working capital as a percentage of sales has remained high at 38% for the past couple of years. This trend of high working capital (inventories and receivables are high) seems to be prevalent across all companies in this sector (as per CRISIL July 13 report on Dhanuka) and maybe due to the seasonal nature of demand (monsoon dependent business forces companies to hold a lot inventories).
LOTS OF IMPORTS, NO EXPORTS
Since, the company imports many technical grade chemicals, it has always had a big chunk of raw materials that have been imported. As per KREDENT Dec 2010 report on Dhanuka
“The company used to import over 70% of its key raw material in its initial year of operation”
For FY 13, the company imported only 30% of its raw materials. Nonetheless, the company is still vulnerable to foreign exchange fluctuations.
Also, since the company does not manufacture technical grade chemicals (unlike its peers Rallis India and United Phosphorous), the company does no exports.
BUY RECOMMENDATION RATIONALE
The script, over the past 2 years has been trading at a price band of 8-10 times earnings. For FY 14, the company has till date earned Rs 14/share. In March 13 quarter, the company had earned Rs 3.6/share. Assuming a similar earnings profile, the company will end up with Rs 17.5/share for FY 14, discounting the current market price of Rs 216 by a P/E (x) of 12.5 times.
Indian agriculture is slowly entering an era of high growth driven by rapid productivity increases and companies like Dhanuka (which will help farmers weed out herbs without employing additional farm hands) are going to be the biggest beneficiaries.
Rallis, which is a technicals manufacturer, a major exporter and which does substantially better on the working capital front is Dhanuka`s competitor and trades at a P/E(x) of 24 times.
Dhanuka Agritech is bound to touch new highs. The stock has been moving up substantially over the last 1.5 years and is bound to move up further.
Disclaimer : I have bought stock at Rs 220/share
thepokaranmoneymanager 