Indian Investors, as well as Global Investors, are betting big on the development and advancement in Indian Agriculture and improved rural India’s farm incomes throughout the following five years can purchase the shares of Dhanuka Agritech, which is into the production of crop protection chemicals (herbicides, fungicides, and bug sprays) and plant development supplements.
The Budget 2020 has thought of a couple of long haul positives for the Indian Agriculture segment (counting formation of new distribution centers and a designation for setting farmer-producer organizations) that can improve the pay of ranchers and subsequently interest for crop protection chemicals.
Dhanuka Agrictech’s main goal is to target India’s Domestic market. Our venture postulation for Dhanuka lays on appealing valuations at current costs and desires for a brisk recuperation after the lockdown time frame. This standpoint is bolstered by solid rainstorm desires, low channel stock, and restricted issues in crude material obtainment. The incorporation of agrochemicals in the list of the fundamentals is empowering and this has begun smoothening out production and supply chain issues. A solid debt-free balance sheet with a decent return for capital utilized by 23 percent makes the stock appealing.
Dhanuka makes bug sprays, pesticides, fungicides, herbicides and the greater part of its deals include specialty chemicals. It has three production facilities situated at Keshwana (Rajasthan), Sanand (Gujarat), and Udhampur (J&K).
While the primary portion of 2019-20 was bad for Dhanuka Agritech (deals development of 4 percent to ₹621 crores and PAT development of 5 percent to ₹74.7 crores) on dull and tepid demand because of the postponed beginning of monsoon (ranchers favored short time horizon crops), the subsequent half holds guarantee. The organization is relied upon to report solid deals development in the December 2019 quarter following an uptick in deals in the rabi season. With the significant expense stock spent, there’ll be further investment funds in input cut, which should help in improving their profit margins.
Problems in Procuring Raw Materials
Dhanuka Agritech has a raw material stock of around 45 days and has low direct dependence on China. In any case, we accept that any significant increment would be given to the end customer.
Dhanuka imports around 30% of its raw material necessity from China, an extent which is lower than its rivals and competitors. As indicated by the administration, the fourth quarter is commonly a slow time of year term and the organization develops raw material stock during this opportunity to profit by low costs. In accordance with this technique, Dhanuka had developed considerable raw material stock before the lockdown. Besides, the provisions from China have begun arriving at Indian ports and with the incorporation of agrochemicals in the essentials category, the coordinations from port to production lines have begun returning on target with consents.
The expense of key imported crude materials, for example, metribuzin, lamda, and bifenthrin utilized by producers of pesticides expanded altogether in November-December 2017. This was because of a huge shortage in supply in the market after numerous manufacturing plants were closed down in China following the adjustment in contamination control standards. Net revenues of numerous agri-input players in India in this manner saw a sharp disintegration. Indeed, even as the cost of these information sources began to address from May 2018, numerous players including Dhanuka Agritech, had supplies of high-cost inputs and henceforth couldn’t profit by the correction in the prices.
Notwithstanding, things are turning upward. Dhanuka has depleted a significant part of the high-cost inventory it had. Along these lines, the organization could see some relief on the margin side in the second 50% of 2019-20. All things considered, the costs of some different inputs are on the rise at present, which will restrain the upside in margins.
In the course of the last two quarters, the organization has controlled its various costs, including selling costs which will give a breather here on.
All the new items propelled by the organization have likewise been valued higher, which can help support margins in the coming quarters.
The operating profit margin for the half-year 2019-20 was 15 percent against 15.3 percent in a similar period a year ago.
Commencement of Operation at Production Facilities
Dhanuka has told that each of the three of its production and assembling units in Sanand (Gujarat), Udhampur (Jammu & Kashmir), and Keshwana (Rajasthan) are currently working post-mid-April. While the production capacity levels are as of now underneath 50 percent, this is required to climb continuously. Work accessibility is an issue the organization may face and it is chipping away at making proper courses of action. Dhanuka has the ability to work in 3 moves rather than the typical 2 moves so as to increase its manufacturing in the coming occasions.
Dhanuka Agritech has a differentiated portfolio in the crop protection segment. In the September quarter, 50 percent of income was from pesticides, 23 percent from herbicides, and the equalization from fungicides and different items.
Incomes have developed at an aggravated yearly pace of 6 percent between 2014-15 and 2018-19. Profit After Tax development, however, was at a lower 1.4 percent — because of an expansion in the expense of crude materials. The operating profit margin was about 17.5 percent in 2014-15 and it improved to 21.2 percent in 2016-17, however, it declined to 16.62 percent in 2018-19. An expansion in crude material expenses was because of a lack of contributions to the market on the shutdown of numerous units in China. The expansion in raw material prices couldn’t be burdened to end customers totally and the organization endured Margin erosion.
All things considered, entrance into new topographies and new items dispatches have guaranteed that income development doesn’t waver. In April a year ago, the organization propelled three new items — CHEMPA, a herbicide which controls expansive leaf weeds and green weeds in paddy; APPLY, a bug spray to control earthy colored planthopper, and LARGO that controls vermin of cotton crops.
All these three items have discovered great acknowledgment in the market. In November, another bug spray for use by paddy and vegetable ranchers was propelled. This item is being sold at a value that is premium to traditional bug sprays in the market and can help improve overall revenue.
Dhanuka’s income development will keep on being driven by new item dispatches in the following one year as traditional items — principally pesticides for paddy crop — are seeing a lower request. Further, the organization’s developing distribution network ought to likewise help. The firm right now has a system of in excess of 8,000 merchants and vendors offering to more than 75,000 retailers across India.
Good Monsoon and low channel stocking to uplift the demand
Forecasts of a typical Kharif monsoon after a conventional Rabi harvest ought to encourage interest for agrochemicals. There is a shortage of items in the business sectors because of the end of assembling units and the shutdown of merchant and retailers shops. This has prompted a drawdown of inventories in channels. Manufacturing units are currently returning with the incorporation of agri-inputs to the essential category and the dissemination chain is a step by step getting actuated. We accept this will encourage huge demand and strong volumes sales. With relaxations set up, farmers are presently permitted to work in fields and with the up and coming season approaching, a significant rise in agrochemical demand is predicted to accelerate in the coming days.
Besides Dhanuka’s product portfolio bargains in herbicides, insecticides, and pesticides which are as a rule sought after in the last piece of the trimming cycle. As interest for the organization’s items is higher in the later piece of Q1 and in Q2, we accept the effect of the present lockdown will be lower on a yearly premise.
Healthy Valuations & Zero Debt Company in Agricultural Space
Dhanuka has a solid debt-free balance sheet. This is a solid positive and safeguard’s profit margins in turbulent times when other companies would be down with tremendous challenges due to high fixed costs or unavailability of materials.
Work accessibility and scarcity of labor forces stay significant problems. Because of the present lockdown, a huge bit of migrant workers has moved back to its hometown. The administration is taking a shot at making proper arrangements so as to address this issue as of now, anyway, this would be something to keep an eye out for.
Another issue featured by the administration is the low liquidity with channel distributors, merchants and agents. While the administration is finding a way to address cash liquidity issues and there is a desire that the circumstance would improve steadily, there could be some augmentation in payments.
Dhanuka Agritech Future Outlook
Dhanuka Agrictech has seen a huge correction in the stock prices and has now settled after making a 52 week low recently. In spite of the uptick, the stock is 20 percent beneath its multi-week highs. It is as of now exchanging at an FY22e cost to income to 14.6 times and FY22e EV/EBITDA of around multiple times. At these products, the stock offers a decent risk-reward opportunity and appears to be alluring. While the current COVID emergency has influenced the organization’s manufacturing and supply chain, we anticipate that the circumstance should improve. The organization has sound financials and we trust it is preferable situated over companions which will empower a quicker recuperation.
Our strategic pick during the current week is agrochemical organization Dhanuka Agritech (Dhanuka) (CMP: Rs 450; Mcap: Rs 2150 crore) which offers a decent return on equity over the next five years.