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Dhanuka Agritech (DAL) is a branded formulations player focused on the fast-growing herbicides segment (33% of
sales). DAL’s well-established front-end initiatives — Dhanuka Suvidha Stores (franchisee model) /Dhanuka Doctors
— position it well as a partner of choice for marketing agreements for large agrochemical companies. Revenue
from specialty products launched through MNC tie-ups make up 55% of sales. We believe this could increase as
new products are introduced every year.
DAL operates on an asset-light model and has the potential to generate healthy free cash flow through FY14E.
Sustainable earnings growth (23% over FY11-14E) without the need to dilute equity and easing working capital
stress too shall enable DAL to become virtually net debt free by FY14E.
Long-term growth drivers include a strengthening seeds portfolio (scouting for acquisition) and manufacturing
selective technicals, resulting in backward integration. We expect DAL to trade at a premium considering its high
return ratios and a positive transformation in balance sheet
Investment Rationale
Set to ride fast-growing herbicides segment
The rising cost of labour due to NREGA and other factors have led to increased
usage of herbicides. Dhanuka derives 33% of its sales from herbicides (25%
in FY09) and is well placed to capitalize on this opportunity. We expect the
herbicide portfolio to grow 30% over FY11-14E, led by new product
introductions.
Leveraging front-end capabilities
DAL has built an association with the Indian farming community and stockists
over a period of three decades, positioning it as a preferred partner of choice
for MNCs. The company establishes direct linkage with farmers via the
‘Dhanuka Doctor’ (counseling and product demonstrations) program and
runs Dhanuka Suvidha stores (franchisee model) that promote awareness
of Dhanuka products. These initiatives have built strong goodwill for DAL.
MNC tie-ups — Central to growth
DAL has also built strong relationships and has entered into several alliances
with global majors such as DuPont, Chemtura and Nissan, among others.
These tie-ups enable it to offer a bouquet of specialty products (55% of
sales), addressing varied crop protection needs. In most cases, the product
is marketed under the Dhanuka brand. DAL has a high-potential product
pipeline with six specialty products to be launched in the next three years.
Balance sheet transformation underway
We expect 23% earnings growth over FY11-14E, driven by higher contribution
from specialty product launches. DAL has the potential of generating healthy
free cash flow through FY14E, aided by sustainable earnings growth. We
believe the company is in a position to meet its capex commitments through
internal accruals.
At CMP of Rs 100, the stock trades at 8.2x FY12E and 6.5x FY13E earnings. We
initiate coverage on the stock and recommend a Buy rating, with a target
price of Rs 155 (10x FY13E EPS). Healthy return ratios (over 30%) and no
overhang of dilution plans give us comfort. We have not factored in any cash
flow accretion from probable land sale in future.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dhanuka Agritech (DAL) is a branded formulations player focused on the fast-growing herbicides segment (33% of
sales). DAL’s well-established front-end initiatives — Dhanuka Suvidha Stores (franchisee model) /Dhanuka Doctors
— position it well as a partner of choice for marketing agreements for large agrochemical companies. Revenue
from specialty products launched through MNC tie-ups make up 55% of sales. We believe this could increase as
new products are introduced every year.
DAL operates on an asset-light model and has the potential to generate healthy free cash flow through FY14E.
Sustainable earnings growth (23% over FY11-14E) without the need to dilute equity and easing working capital
stress too shall enable DAL to become virtually net debt free by FY14E.
Long-term growth drivers include a strengthening seeds portfolio (scouting for acquisition) and manufacturing
selective technicals, resulting in backward integration. We expect DAL to trade at a premium considering its high
return ratios and a positive transformation in balance sheet
Investment Rationale
Set to ride fast-growing herbicides segment
The rising cost of labour due to NREGA and other factors have led to increased
usage of herbicides. Dhanuka derives 33% of its sales from herbicides (25%
in FY09) and is well placed to capitalize on this opportunity. We expect the
herbicide portfolio to grow 30% over FY11-14E, led by new product
introductions.
Leveraging front-end capabilities
DAL has built an association with the Indian farming community and stockists
over a period of three decades, positioning it as a preferred partner of choice
for MNCs. The company establishes direct linkage with farmers via the
‘Dhanuka Doctor’ (counseling and product demonstrations) program and
runs Dhanuka Suvidha stores (franchisee model) that promote awareness
of Dhanuka products. These initiatives have built strong goodwill for DAL.
MNC tie-ups — Central to growth
DAL has also built strong relationships and has entered into several alliances
with global majors such as DuPont, Chemtura and Nissan, among others.
These tie-ups enable it to offer a bouquet of specialty products (55% of
sales), addressing varied crop protection needs. In most cases, the product
is marketed under the Dhanuka brand. DAL has a high-potential product
pipeline with six specialty products to be launched in the next three years.
Balance sheet transformation underway
We expect 23% earnings growth over FY11-14E, driven by higher contribution
from specialty product launches. DAL has the potential of generating healthy
free cash flow through FY14E, aided by sustainable earnings growth. We
believe the company is in a position to meet its capex commitments through
internal accruals.
At CMP of Rs 100, the stock trades at 8.2x FY12E and 6.5x FY13E earnings. We
initiate coverage on the stock and recommend a Buy rating, with a target
price of Rs 155 (10x FY13E EPS). Healthy return ratios (over 30%) and no
overhang of dilution plans give us comfort. We have not factored in any cash
flow accretion from probable land sale in future.
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