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Dhanuka Agritech (DAL), an established agrochemical player in India, boasts of a unique asset-light business model underpinned by core focus on marketing and distribution network, giving it an edge over competitors. The unique business model renders DAL the preferred partner of global innovators to venture into the rapidly surging Indian agrochemicals market. Moreover, a promising launch pipeline of six exclusive products over the next three years is bound to propel the company’s growth into higher gear. Thus, a vibrant distribution network, tie ups with innovators and launch of new products place DAL in a sweet spot to capture emerging opportunities in domestic agrochemicals market. We perceive re-rating potential in light of its exclusive product launches, superior financials and steep discount to peers. Initiate coverage with ‘BUY’.

Unique asset light model; preferred partner of global innovators DAL is present only in formulations manufacturing and this exclusive focus helps it enhance sales with least investments in assets. Further, it aids clock higher asset turnover ratio versus competitors, which assures superior RoE/RoCE. Moreover, core focus on distribution network renders it the preferred choice of global innovators to partner with to venture into the fast-growing Indian market.

Innovative product launches to catapult growth Anchored by tie ups with global innovators, DAL is set to launch six exclusive products over the next three years, which we believe will catapult its growth trajectory. Of these, three products will be in herbicides, the fastest growing category in domestic agrochemicals industry. Thus, innovative product launches in conjunction with a wide distribution reach and strong brand recall are bound to facilitate market share gains.

Outlook and valuations: Poised for growth; initiating with ‘BUY’ We estimate DAL to post sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of 19.9% and 32.9%), respectively, over FY14-16E bolstered by new product launches further supported by strong distribution network and capacity expansion in Rajasthan. The company has robust operating cash flow, minimal debt and healthy RoE/RoCE (>30%) with good dividend payout (>20%). We value it at P/E of 15x FY16E and initiate coverage with ‘BUY’ recommendation.

INITIATING COVERAGE

DHANUKA AGRITECH Cultivating growth

EDELWEISS RATINGS

Absolute Rating BUY

Investment Characteristics Growth

MARKET DATA (R: DHNP.BO, B: DAGRI IN)

CMP : INR 384

Target Price : INR 450

52-week range (INR) : 404 / 125

Share in issue (mn) : 50.0

M cap (INR bn/USD mn) : 19 / 324

Avg. Daily Vol. BSE/NSE (‘000) : 95.6

SHARE HOLDING PATTERN (%)

Current Q3FY14 Q2FY14

Promoters *

75.0 75.0 75.0

MF's, FI's & BKs 0.2 0.0 0.8

FII's 8.4 8.4 8.2

Others 16.4 16.6 16.0 * Promoters pledged shares (% of share in issue)

: Nil

PRICE PERFORMANCE (%)

Sensex Stock

Stock over Index

1 month 11.2 43.2 32.0

3 months 16.6 53.4 36.8

12 months 31.6 183.8 152.2

Manish Mahawar +91 22 6623 3481 [email protected] Manoj Bahety +91 22 6623 3362 [email protected]

India Equity Research| Agriculture

June 9, 2014

FinancialsYear to March FY13 FY14 FY15E FY16ENet revenues (INR mn) 5,823 7,395 9,022 11,368 Revenue growth (%) 10.0 27.0 22.0 26.0EBITDA (INR mn) 819 1,216 1,543 2,058 Core profit (INR mn) 644 931 1,175 1,500 EPS (INR) 12.9 18.6 23.5 30.0 EPS growth (%) 12.8 44.5 26.2 27.7P/E (x) 29.7 20.6 16.3 12.8 ROAE (%) 27.0 31.3 31.2 31.5

http://www.edelresearch.com/webcast/webcast_new.aspx?Id=26206&Type=ynaj9XvqmJoptbYzJzovtA==

Agriculture

2 Edelweiss Securities Limited

Investment Rationale

Unique asset light business model renders superior RoE, RoCE DAL has a unique asset light business model with focus on marketing and distribution network. The company is present only in manufacturing of formulations and has no presence in manufacturing of technical (active ingredients (AI)), which is a capital intensive business. We believe the formulations only focus helps the company enhance sales with least investments in assets. Further, the model helps DAL clock higher asset turnover ratio versus competitors, which assures superior RoE/RoCE in the business. The company has three formulations (NCR, Jammu & Kashmir and Gujarat) facilities in India. Chart 1: Superior asset turnover ratio

0.0 3.2 6.4 9.6 12.8 16.0

Bayer Cropscience

Rallis India

UPL

PI Industries

Dhanuka Agritech

(x) Source: Companies, Edelweiss research

Note: We have considered average asset turnover of past five years

Marketing and distribution: Key focus, strength DAL, with ~6% domestic market share, has over 8,000 direct dealers servicing over 75,000 retailers, covering more than 85% of India’s districts. The company claims to have the second-largest rural distribution network in India and its products are used by over 10mn farmers. It is planning to expand the distribution network by 50% over the next four-five years. We believe a strong distribution network is one of the essential ingredients to succeed in the domestic agrochemicals business. DAL’s prowess therein helps it enhance product penetration efficiently. The company has inked a contract with Amitabh Bachchan as brand ambassador for its agrochemicals offerings.

The formulations only focus enhances sales with least investments in assets; the model helps clock higher asset turnover ratio versus competitors, ensuring superior RoE/RoCE

DAL, with ~6% domestic market share, has over 8,000 direct dealers servicing over 75,000 retailers, covering more than 85% districts

Dhanuka Agritech


Chart 2: Expanding distributor network

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Chart 3: Districts covered through distributors

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DAL has established a strong rapport with farmers through Dhanuka Doctors, wherein the company personnel educate farmers about safe and judicious use of agrochemicals through DAL’s initiative called ‘Dhanuka Kheti Ki Nayi Takneek’. The doctors are well trained to deliver the message of modern farming to the farmers at their door-steps.

DAL has established strong connect with farmers through Dhanuka Doctors

Planning to expand distribution network by 50% over next four-five years

Agriculture


Chart 4: Dhanuka Doctors—The right connect

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Tie ups with global players impart superior margin profile A major part of DAL’s success can be attributed to its technical tie ups with major international players. Exclusive presence in the formulations business and strong distribution network render DAL the preferred choice for global innovators for technical tie ups. Most global innovators/players have strong R&D-led product portfolios. However, they (except a few like Bayer, Syngenta) lack marketing and distribution network in India. Hence, they scout for Indian players with strong distribution networks to sell their products. DAL has inked pacts with three US and four Japanese players and has tied up for 20 products currently, which contributed ~47% to FY14 revenue. The company enjoys long lasting relationships with global partners—most have been active for more than a decade. We believe technical tie ups with global innovators give DAL access to specialty products which generally enjoy higher EBITDA margin as well as brand recall.

Technical tie ups with global innovators give DAL access to specialty products, which enjoy higher EBITDA margin as well as brand recall

Dhanuka Agritech


Table 1: Technical tie ups with global innovators Name of the Company Category ProductsChemtura, US Insecticide Omite

Fungicide Vitavax,Vitavax UltraInsecticide Dimlin

Dupont , US Insecticide DunetHerbicide QurinFungicide LustreInsecticide Dhawa GoldFungicide CursorFungicide Hi DiceHerbicide Hook

FMC, US Insecticide BrigadeInsecticide AatankInsecticide MarkarHerbicide Nabood

Sumitomo Chemicals, Japan Insecticide CaldanFungicide Sheathmar

Mitsui Chemicals, Japan Insecticide BombardInsecticide Nukil

Nissan Chemical Industries, Japan Herbicide Targa SuperHokko Chemical, Japan Fungicide Kasu-B


Innovative, exclusive product launches to spur market share DAL has six products in the pipeline, of which two will be launched annually over the next three years, subject to regulatory approvals. Of these, it will launch five products in-licensing with Japanese players; one product has been developed by DAL in-house. According to the company, these products will be launched for the first time in India. DAL is expected to launch the above six products registered under Section 9(3) of The Insecticide Act, 1968. Currently, DAL has only one product, i.e., Lustre under Section 9(3). It launched the product in FY13 and our channel checks indicate that initial response has been encouraging. Management indicated that Lustre is expected to be among the top 10 products from FY15. According to our channel checks products registered under Section 9(3) generally enjoy higher margin, good brand recall and lesser credit period. Hence, we believe that a strong pipeline of products under this section will rejuvenate DAL’s prospects and financials dramatically provided they are accepted by farmers. We expect innovative product launches coupled with a wide distribution reach and strong brand recall to facilitate market share gains, going forward. Apart from the above six launches, DAL will continue to register and launch products under Section 9(4).

DAL has tie ups with three US and four Japanese players and has tied up for 20 products currently, which contributed ~47% to FY14 revenue

Six products in pipeline, of which two will be launched annually over the next three years

A strong pipeline of exclusive products will rejuvenate DAL’s prospects and financials dramatically

Agriculture


Table 2: Strong pipeline of innovative/exclusive products Product Category CropsHerbicide Soyabean, cotton, groundnut, onionHerbicide SugarcaneHerbicide Not disclosedFungicide Multiple cropsFungicide Multiple cropsInsecticide Paddy, vegetables, cotton, chil l ies


DAL has recently completed registration of one product, i.e., insecticide (Cartap Hydrochloride 75%) under Section 9(3), which it expects to launch in FY15.

History of launching innovative products Based on technical tie ups with global innovators, DAL is registering and launching innovative agrochemical products on a continuous basis. Historically, the company has launched three-four products annually with a combination of specialty and branded generic products. These launches helped DAL gain market share. Of 13-14 products launched over FY12-14, the company has launched four products (Brigade, Vitavax Ultra, Bombard and Lustre) in-licensed with global innovators. Product launches in the past three years contributed ~15% to the company’s revenue.

Table 3: Product launches in past three years Year Product Name Product Category CropsFY12 Brigade Insecticide Apple, tea

Vitavax Ultra Fungicide Wheat, barley, gram, soyabeanWetcit Plant growth regulator Tea, grapes and other horticulture cropsBombard Insecticide Paddy

FY13 Dhanzyme Gold Organic manure Paddy, wheat, sugarcane, vegetable cropsFluid Insecticide Cotton, vegetable, fruits, cashew and tea, paddy, pulses &

vegetablesLustre Fungicide Groundnut, onion, chil lyFuzi Super Herbicide PaddyOnestar Fungicide

FY14 Danufron Insecticide Horticulture crops Defend Insecticide Cotton, chil ly, grapes, horticulture Media Super Insecticide Cotton, rice, vegetablesProtocol Fungicide Potato, chil ly, black gram, vegetables cropsMaxyld Plant growth regulator Paddy, sugarcane, cotton, groundnuts, fruits & vegetables


DAL’s top 5 and 10 products contributed 30% and 41%, respectively, to its overall FY14 sales. Its top 5 products are Targa Super, Caldan, Dhanzyme Granules, Markar and Dhanzyme Gold.

DAL is registering and launching innovative agrochemical products on a continuous basis, which will help it gain market share

Dhanuka Agritech


Table 4: Top 5 products Products Product Category CropsTarga Super Herbicide Soybean, cotton, groundnut, green gram, black gram,

sesamum, jute and all other broad leaf crops and vegetablesCaldan Insecticide Rice, sugarcane, onion, garlicDhanzyme Granule Seed Treatment Paddy, wheat, sugarcane, vegetable crops, soybean, potatoMarkar Insecticide Cotton, rice, wheat, barley, gram, maize, groundnut, sugarcane, chil l i , tomato,

brinjal, okra, teaDhanzyme Gold Seed Treatment Paddy, wheat, sugarcane, vegetable crops, soybean, potato


Fig. 1: Key Products


Agriculture


Targa Super is the largest product in DAL’s portfolio with sales of over INR1bn, which was launched in 2001 in an exclusive tie up with Nissan Chemicals Industries, Japan. According to industry sources, very few products (10-15) clock sales above INR1bn in the domestic agrochemicals industry. Currently, DAL is has a co-marketing arrangement with Chambal Fertilisers, Godrej Agrovet and Insecticide India to sell Targa Super in India. Despite stiff competition from domestic and multinational (MNC) players, DAL has established its brand well and emerged as a key player in individual product categories. In Targa Super, the company faces tough competition from MNCs like BASF and Makhteshim Agan (MAI). However, DAL’s product has emerged as one of the key brands in this segment.

Table 5: Growing well despite stiff competition Products MRP/Litre Dose/Acre Cost/AcreBASF - Pursuit 1,600 300ml 480 Makhteshim Agan - Weedlock 1,400 300ml 420 Dhanuka - Targa Super* 1,200 300ml 360

Source: Industry, Edelweiss research

Note: Above analysis on soyabean crop based on our channel checks

*Technical of Dhanuka's Targa Supar is different from BASF's Pursuit/MAI's Weedlock

Well diversified revenue stream DAL has a well diversified revenue stream in terms of products as well as geography. The company has a strong portfolio of over 80 products and geographically, North, West, East and South regions contributed 27%, 35%, 13% and 25% to FY14 revenue, respectively. Further, insecticides, herbicides, fungicides and others contributed 49%, 28%, 13% and 10% to FY14 revenue, respectively. Insecticides, herbicides and fungicides constitute 64%, 20% and 16%, respectively, of Indian agrochemicals industry. A well diversified revenue stream reduces the risk of adverse impact in any individual segment or geography.

Chart 5: Well diversified revenue in terms of geographies Chart 6: Well diversified revenue in terms of products

North27%

West35%

East13%

South25%

% of FY14 revenue

Source: Industry, Company, Edelweiss research

Targa Super is the largest product in DAL’s portfolio with sales of over INR1bn. According to industry sources, very few products (10-15) clock sales above INR1bn in domestic agrochemical industry

A well diversified revenue stream in terms of products as well as geography mitigates risk of adverse impact in any individual segment or geography

Insecticide43%

Herbicide32%

Fungicide14%

Others11%

% of FY14 revenue

Dhanuka Agritech


Chart 7: Revenue stream is in line with Indian agrochemical industry

Insecticide64%

Herbicide20%

Fungicide16%


Expanding capacity to bolster growth Currently, DAL has three manufacturing facliities located in NCR, J&K and Gujarat. The company is setting up a formulations plant in Rajasthan, expected to go on-stream by Q4FY15, at a capex of INR0.50bn. The capex will be funded through internal accruals. It has expended INR0.18bn in this project till FY14. Existing capacities will more than double post the expansion. Table 6: More than doubling capacity Location Liquid (KL) Granule (MT) Powder (MT)Gurgaon, NCR 4,500 Nil 3,000 Sanand, Gujarat Nil 24,000 1,000 Udhampur, J&K 4,000 Nil 900 Existing capacities 8,500 24,000 4,900 Rajasthan 10,000 Nil 6,000


The company is expected to shift production of Gurgaon facility to Rajasthan in the future and may monetise the 6 acres Gurgaon land parcel. Management has guided for sales of INR5bn/p.a. from the Rajasthan plant at full capacity. We believe the Rajasthan plant is expected to support DAL’s growth, which is primairly driven by launch of innovative products. On a conservative basis, we have considered Rajasthan projects w.e.f. Q1FY16 in our estimates.

DAL is setting up a formulations plant in Rajasthan; expected to go on-stream by Q4FY15. Existing capacities will more than double post expansion

Production of Gurgaon facility is expected to shift to Rajasthan in the future and DAL may monetise 6 acres Gurgaon land parcel. Management has guided for sales of INR5bn/p.a. from Rajasthan plant at full capacity

Agriculture


Valuation DAL is likely to clock sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of 19.9% and 32.9%), respectively, over FY14-16E riding new product launches anchored by tie ups with global innovators, further bolstered by a wide distribution network and capacity expansion in Rajasthan. The company has strong operating cash flow, minimal debt, healthy RoE/RoCE (>30%) with good dividend payout (>20%).

Currently, the stock is trading at a steep discount (15-20%) to domestic peers despite being re-rated in the past couple of months. We strongly believe that the stock can further re-rate from current level considering exclusive product launches, superior financials and steep discount to domestic peers. We value it at P/E of 15x FY16E and initiate coverage with ‘BUY’ recommendation with a target price of INR450.

Table 7: Peer comparison Companies Mcap D-Yield

(INR bn) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E %Dhanuka Agritech 19 44.5 26.2 27.7 20.6 16.3 12.8 31.3 31.2 31.5 1.0 Bayer Cropscinece 72 21.6 11.0 23.8 22.4 20.2 16.3 16.3 17.5 18.4 0.3 Rall is India 37 29.7 27.7 19.8 22.8 17.9 14.9 24.0 25.9 25.8 1.3 PI Industries 44 92.8 22.3 28.8 23.2 19.0 14.7 30.7 29.0 29.0 0.6 United Phosphorus 135 34.0 18.8 18.9 12.9 10.8 9.1 21.2 21.7 21.7 1.3

EPS Growth (%) P/E (x) ROE (%)

Source: Bloomberg, Edelweiss research

Chart 8: One year forward P/E

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We strongly believe that the stock can re-rate from the current level considering exclusive product launches, superior financials and steep discount (15-20%) to domestic peers

Dhanuka Agritech


Chart 9: One year forward EV/EBITDA

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Agriculture


Key Risks Weather: The crop protection industry faces risk of seasonal weather. Weather can trigger pest infestations as well as affect demand for crop-protection products. In the domestic market, sales are highly seasonal, primarily during the monsoon. Any adverse weather changes will negatively affect DAL’s sales. Further, delayed or adverse monsoon could affect collection of receivables negatively. However, we believe that launch of innovative/exclusive products over the next couple of years will provide DAL the arsenal to counter adverse weather conditions. Chart 11: Correlation of monsoon departure with DAL’s sales growth

(28.0)

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(%)

Source: IMD, Company, Edelweiss research

Genetically modified (GM) crops: The use of crop protection products is significantly less for GM crops. Hence, growth and acceptance of GM crops by consumers may adversely affect DAL’s business. Dependency on global innovators for technical sourcing: DAL is dependent on global innovators for the supply of technical/active ingredients in its key products. Technicals’ supply disruption could adversely impact the company’s earnings. Adverse currency movement: 30% of raw material costs are imported for DAL. Hence, any sharp INR movement could impact the company’s earnings adversely. However, we believe it can pass on the impact to customers with a lag. Regulatory risks: DAL has to register products in India before launching. Hence, any negative regulatory changes could adversely impact the industry as well as DAL.

Dhanuka Agritech


Company Description DAL manufactures a wide range of agrochemicals covering herbicides/weedicides, insecticides, fungicides, plant growth regulators in various forms—liquid, dust, powder and granules—and reaches out to more than 10mn farmers. The company has a pan-India presence via marketing offices in all major states in the country, with a network of more than 8,000 distributors/ dealers selling to over 75,000 retailers. It has technical tie ups with three US and four Japanese companies. It has three manufacturing units located at Gurgaon (Haryana), Sanand (Gujarat) and Udhampur (J&K). Table 8: Existing plants Location Liquid (KL) Granule (MT) Powder (MT)Gurgaon, NCR 4,500 Nil 3,000 Sanand, Gujarat Nil 24,000 1,000 Udhampur, J&K 4,000 Nil 900 Existing capacities 8,500 24,000 4,900


DAL has a well-diversified revenue stream in terms of products as well as geography. North, West, East and South regions contributed 27%, 35%, 13% and 25%, respectively, to FY14 revenue. Further, insecticides, herbicides, fungicides and others contributed 49%, 28%, 13% and 10% to FY14 revenue, respectively.

Chart 12: Well diversified revenue in terms of geographies and products

North27%

West35%

East13%

South25%

% of FY14 revenue


Insecticide43%

Herbicide32%

Fungicide14%

Others11%

% of FY14 revenue

Agriculture


Table 9: DAL—History Year Particulars1980 Took over a closed sick unit Northern Minerals, Gurgaon; shifted to new office at Daryaganj, Delhi.1981 With vision and determination, achieved turnover of INR1.7mn in the first year itself.1984 Expanded to all North Indian states, Maharashtra & Gujarat; modernized the plant, added new generics; Inaugurated

Dhanuka Agriculture Research Center1985 Incorporated Dhanuka Pesticides and set up plant at Sohna, Haryana for manufacturing Synthetic Pyrothrides, mainly

Triumphcard and Superkil ler (Fenvalrate and Cypermethrin)

1992 Dhanuka goes global and signs its first collaboration with E.I. Dupont and starts production and sale of Dunet 40 SP (Methomyl).

1997 Started production and marketing of Caldan 4G and Caldan 50 SP in collaboration with Sumitomo Chemical Company, Japan.Growth demands more space, Dhanuka’s registered office shifted to Karol Bagh, Delhi from Darya Ganj, DelhiDhanuka started production and marketing Sheathmar 3L in collaboration with Sumitomo Chemical Company Ltd., Japan.Gurgaon factory got specialised equipment for various formulations; on-site NABL (Indian GLP) Lab for formulation development, soil & water testing etc; factory also got ISO 9001:2008 certification for quality assurance.

2000 Another addition in the portfolio, Dhanuka started manufacturing & marketing Kasu-B 3 SL in collaboration with Hokko Chemical Ind., Japan.Set up unit at Sanand, 2nd largest granule facil ity for Cartap, Phorate, Dhanzyme and one of the largest dusting powder facil ities in India.Started production and marketing of Targa Super in collaboration with Nissan Chemical Industries, Japan.

2003 Dhanuka become the preferred choice among its associates as they repetitively collaborate for manufacturing quality product with Dhanuka. In the same year, company tied up with E.I. Du Pont, US for Hook

2004 Dhanuka started manufacturing Aaatank (Carbosulfan) in collaboration with FMC Corporation, US; Qurin (Chlorimuron Ethyl) and Dhawa (Indoxacarb) in collaboration with E.I.DuPont, USA.

2005 Dhanuka entered into tie-up with FMC Corporation, US for their product Markar and E.I.Du Pont, US for Hi-Dice set up modern manufacturing unit at Udhampur, 12 l ines for l iquids and 2 l ines for powder with online monitoring of quality and zero water discharge; an ISO 9001, ISO 14001 certified unit.Tied-up with E.I.DuPont, US for Cursor 40 EC.

Production with Japanese Technology, in collaboration with Otsuka Chemicals.Dhanuka started manufacturing One-up in collaboration with DOW Agrosciences, US.Dhanuka started manufacturing Nabood in collaboration with FMC Corporation, US; also introduced Qurate Gold in collaboration with E.I.Du Pont, US.100% seed treatment campaign launched by Government of India & Dhanuka.Dhanuka introduced Wetcit in collaboration with Oro Agri, South Africa.Shifted the corporate office to the hub of Fortune 500 companies at Cyber City, Gurgaon.Recognition by Forbes in Asia’s 200 best under a bil l ion companies for FY10. Rated as one of the fastest growing company by Business World and Economic Times –Investors Guide (June 2011).Introduced Brigade in collaboration with FMC Corporation, US.Introduction of semi-dwarf ferti l izer responsive cultivator- Lustre in collaboration with E.I.Dupont, US. The first product registered in Dhanuka’s name u/s 9(3) of Insecticides Act, 1968.Asia’s 200 best under a bil l ion companies recognition by Forbes for the second consecutive year.Recognition by India Inc. 500 for India’s fastest growing mid sized companies for the year 2011.

2013 Recognition from India Inc. 500 for second consecutive year for India’s fastest growing mid sized companies for the year 2012.

2007

2008

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Dhanuka Agritech


DAL’s management team has rich experience in agriculture and agrochemical industry. Table 10: Management profile Key personnel ProfileR.S. Agarwal, Chairman Started agrochemical business more than 40 years ago and provides strategic leadership

presently. He also served for two terms as Chairman of “Crop Care Federation of India”

M.K. Dhanuka, Managing Director

Co-founded the company; has 40 years of experience; re-elected as President of HPMA (Haryana Pesticide Manufacturers Association) consecutively for the 4th year. He oversees the overall operations of the company

Rahul Dhanuka, Director (Marketing)

Oversees the entire marketing function of the company; leads the large+ marketing team from the fore-front & maintains cordial relations with international collaborators

Mridul Dhanuka, Director (Technical)

Oversees the manufacturing and supply chain functions across the company’s three production facil ities; spearheads expansion projects; brought technological and managerial excellence in the company’s operations


DAL has a vibrant portfolio of 80 products, well diversified in terms of insecticides, herbicides, fungicides and others, which contributed 43%, 32%, 14% and 11%, respectively, to FY14 revenue.

Table 11: Key product portfolio

Agrochemicals categoryAs % of FY14

revenue Key ProductsInsecticide 43% Media, Dunet, Caldan, Omite, Aatank, Adfyre, Brigade, Bombard,

Dhanpreet, MarkerHerbicide 32% Targa Super, Barrier, Craze, Qurin, Noweed, Weedmar Super, Nabood

Fungicide 14% Lustre, Sixer, Vitavax Power, Kasu B, Cursor, Dhanteam, SheathmarPlant growth nutrients and Others 11% Dhanuvit, Wetcit, Dhanzyme Gold, Dhanzyme Granules


Agriculture


Industry Overview

Global market The global agrochemicals industry posted CY01-12 CAGR of ~5% and is worth ~USD47bn. Crop protection industry players are categorised into innovators and generics. Innovators are research & development patented product-based players like Bayer, Syngenta, BASF, Monsanto, Dow and Dupont. Off-patented products-based players are termed generic players. Generic players’ key strength is low-cost manufacturing and wide distribution network. Chart 13: Global agrochemicals industry

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Agrochemicals are necessary to avoid losses due to weeds, fungal disease and insect infestations to crops. According to Cheminova (global generic crop protection player), 30-50% of crops are saved by use of agrochemicals globally. As per a Philips McDougall Report (2007), while patented products contribute only ~25% to the global crop protection market, balance market is off-patented (generics). However, 45% of the generic market is still marketed by innovator companies. Hence, we believe it will be an attractive opportunity for generic players in the future.

Dhanuka Agritech


Chart 14: Global patented and off-patented market Chart 15: Share of innovators in off-patented market

Patented25%

Off Patented

75% Source: Philips McDougall, Edelweiss research

Chart 16: Geography-wise global agrochemicals market

Europe27%

Latin America22%North America

21%

Asia26%

Rest of World4%

Source: United Phosphorus, Edelweiss research

Domestic market According to the industry, the domestic agrochemicals sector has posted 10-year CAGR (FY01-13) of 7-8% and is worth INR125bn currently. It is expected to post 10-12% CAGR in the near term riding increasing food consumption, rising MSP, sharpened government focus and mounting cost of labour. In India, consumption of agrochemicals is well below global standard.

Generic Players

55%

Innovators45%

Agriculture


Chart 17: Consumption pattern of agrochemicals

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Further, 18-20% of crops are saved due to use of agrochemical products in India. Major agrochemicals consuming states are from southern and western belts. Further, paddy (rice) followed by cotton are major agrochemicals consuming crops.

Chart 18: State-wise pesticide consumption in India

AndhraPradesh23%

Punjab12%

Maharashtra12%

Karnataka7%

Gujarat7%

West Bengal6%

Haryana7%

Tamilnadu and Kerala

6%

Others20%

Source: Ministry of Agriculture, PI Industries, Edelweiss research

Dhanuka Agritech


Chart 19: Crop-wise pesticide consumption in India

Paddy35%

Cotton25%

Others40%


Global as well as domestic food demand has been driven by rising population, declining arable land and shift from food to fuels. In India, arable land has been declining since the past four decades. However, food production posted 2.1% CAGR (during 1960-2010) primarily due to yield improvement. Chart 20: India’s arable land—Stagnant

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Agriculture


Chart 21: India’s food production—Rising at slow pace

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India’s agricultural yield is rising in tandem with the global CAGR despite having an absolute yield much lower than the latter. Demand for food is growing consistently on account of rising population, diversion from food to fuels, rising incomes in developing countries etc. Further, declining arable land and climatic problems are imposing supply-side pressures. Hence, we believe the only solution to increase food availability is to enhance agricultural yield that ensures strong trajectory for agricultural inputs like fertilisers, crop protection products, seeds and irrigation facilities. Chart 22: Agricultural yield—On the rise

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Dhanuka Agritech


Agrochemical product registrations in India To introduce any new product in the Indian market, it has to seek registration under The Central Insecticide Act, 1968. If the product is new or to be first time launched in India, registration has to be under Section 9(3) of the act. • On new product, data is generated and submitted to the Central Insecticide Board on

various parameters like bio-efficacy, toxicology, chemistry, packaging etc.

• After the registration committee approves the product, a registration certificate is issued and only then can the product can be marketed in India.

• The entire registration process takes 48-60 months depending upon availability of international toxicity standard and number of crops on which the data is being generated.

Once the product is registered under Section 9(3), competition cannot seek registration for same product for atleast three-four years. Hence, we believe that products can enjoy first mover advantage as well as market leadership over three-four years. If the product is already registered under Section 9(3), anyone can directly apply for registration under Section 9(4). Every company has to register individual technical/formulation for each crop in India. We believe product registration plays a strong entry barrier in the domestic agrochemicals industry.

Agriculture


Financial Outlook

Healthy growth momentum coupled with robust balance sheet DAL has posted robust sales CAGR of 19.9% over FY08-14 primarily led by product introduction supported by tie ups with global innovators. This is further bolstered by inherent fundamentals of the domestic agrochemicals industry coupled with the company’s wide distribution network. We estimate DAL to post sales CAGR of 24.0% over FY14-16 on account of exclusive product launches further supported by strong distribution network and capacity expansion in Rajasthan. Management has guided for revenue growth of 25% YoY during FY15. However, we have considered revenue growth of 22% YoY factoring in adverse weather conditions led by probability of El Nino. Further, we have assumed revenue growth of 26% YoY in FY16 as we believe that exclusive product launches during FY14 and FY15 will drive growth. Chart 23: Strong revenue growth to continue

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High yielding exclusive products, better operating leverage to spur margin DAL’s EBITDA margin improved from 13.3% to 16.4% over FY08-14, which we believe was led by innovative/exclusive product introduction. We expect it to scale up to 18-20% over the next three-four years on account of launch of high margin, exclusive products and better operating leverage. However, we have estimated 170bps improvement in EBITDA margin to 18.1% over FY14-16 on a conservative basis. We believe the surge is likely to be primarily driven by better operating leverage. We have assumed flat gross margin over FY14-16.

Expected to post sales CAGR of 24.0% over FY14-16E riding exclusive product launches, further supported by strong distribution network and capacity expansion in Rajasthan

We expect EBITDA margin to scale up to 18-20% over the next three-four years on account of launch of high margin, exclusive products and better operating leverage

Dhanuka Agritech


Chart 24: EBITDA set to improve

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Robust sales, margin expansion to boost PAT We estimate DAL to post PAT CAGR of 26.9% over FY14-16 primarily on account of strong sales growth coupled with EBITDA margin expansion. The company enjoys income tax as well as excise exemptions in its Udhampur (J&K) facility. We have considered 26% tax rate in FY16E versus 20% in FY14. This will lead to PAT CAGR of 26.9% versus EBITDA CAGR of 30.1% over FY14-16E. Chart 25: Robust PAT growth trajectory

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Strong balance sheet coupled with healthy return ratios DAL has a strong balance sheet with minimal debt. The company has only short-term borrowings of INR0.4bn as on March 31, 2014, which are primarily working capital loans. Over FY08-14, its debt/equity ratio has dipped from 1.0x to 0.1x led by consistent cash generation.

To post PAT CAGR of 26.9% over FY14-16E primarily on account of robust sales growth coupled with EBITDA margin expansion

Resilient balance sheet with minimal debt

Agriculture


Chart 26: Strong balance sheet with minimal debt

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Source: Company, Edelweiss research We believe there is no major capex (except INR0.50bn in Rajasthan; already spent INR0.18bn in FY14) likely in the near term. The company has healthy RoE/RoCE (>30%) and strong dividend payout ratio of >20%. Chart 27: Cash flow to catapult dramatically over FY14-16

(280)

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No major capex likely in near term. The company has healthy RoE/RoCE (>30%) and strong dividend payout of >20%

Dhanuka Agritech


Chart 28: Healthy return ratios

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Agriculture


Financial Statements Key Assumptions Year to March FY13 FY14 FY15E FY16EMacro GDP(Y-o-Y %) 5.0 4.8 5.4 6.3Inflation (Avg) 7.4 6.2 5.5 6.0Repo rate (exit rate) 7.5 8.0 7.8 7.3USD/INR (Avg) 54.5 62.0 58.0 56.0

CompanyNet sales growth 12.2 28.3 22.0 26.0Excise duty as % of gross sales 9.9 10.8 10.8 10.8Raw material cost as % of net sales 65.4 63.2 63.2 63.2Employee cost as % of net sales 8.2 7.9 7.7 7.2Administrative cost as % of net sale 12.3 12.5 12.0 11.5Depreciation as % of gross block 4.9 4.6 5.0 5.0Interest cost 35.3 42.0 35.0 17.0Other income 69.5 37.0 37.0 74.0Tax rate as % of PBT 20.2 19.9 21.0 26.0Dividend per share 2.8 4.0 5.0 6.5DDT as % of dividend 16.2 17.0 17.0 17.0

Capex 265.1 302.5 100.0 600.0Receivable 94 84 85 83Inventory 153 168 155 150Payable 43 38 38 38

Income statement (INR mn)Year to March FY13 FY14 FY15E FY16ENet revenues 5,823 7,395 9,022 11,368 Raw material costs 3,811 4,670 5,702 7,184 Gross profit 2,012 2,725 3,320 4,183 Employee expenses 476 582 695 818 Other expenses 717 927 1,083 1,307 Operating expenses 1,193 1,509 1,777 2,126 Total expenditure 5,004 6,179 7,479 9,310 EBITDA 819 1,216 1,543 2,058 Depreciation & amortisation 45 48 57 87 EBIT 774 1,168 1,486 1,970 Interest expense 35 42 35 17 Other income 69 37 37 74 Profit before tax 808 1,163 1,488 2,027 Provision for tax 163 232 312 527 Core profit 644 931 1,175 1,500 Extraordinary/ Prior period items - - - - Profit after tax 644 931 1,175 1,500 Profit after minority interest 644 931 1,175 1,500 Equity shares outstanding (mn) 50.0 50.0 50.0 50.0 EPS (INR) basic 12.9 18.6 23.5 30.0 Diluted shares (mn) 50.0 50.0 50.0 50.0 EPS (INR) diluted 12.9 18.6 23.5 30.0 CEPS 13.8 19.6 24.6 31.7 DPS 2.8 4.0 5.0 6.5 Dividend payout (%) 21.7 21.5 21.3 21.7

Common size metrics (% net revenues)Year to March FY13 FY14 FY15E FY16EGross margin 34.6 36.8 36.8 36.8 Operating expenses 20.5 20.4 19.7 18.7 EBITDA margins 14.1 16.4 17.1 18.1 EBIT margin 13.3 15.8 16.5 17.3 Interest 0.6 0.6 0.4 0.1 Net profit margin 11.1 12.6 13.0 13.2

Growth metrics (%)Year to March FY13 FY14 FY15E FY16ERevenues 10.0 27.0 22.0 26.0 EBITDA 3.1 48.5 26.9 33.4 PBT 15.3 44.0 27.9 36.3 Net profit 12.8 44.5 26.2 27.7 EPS 12.8 44.5 26.2 27.7

Dhanuka Agritech


Balance sheet (INR mn)As on 31st March FY13 FY14 FY15E FY16EShare capital 100 100 100 100 Reserves & surplus 2,528 3,225 4,108 5,227 Shareholder equity 2,628 3,325 4,208 5,328 Long term borrowings - - - - Short term borrowings 330 394 294 - Loan funds 330 394 294 - Deferred tax liability/asset 28 36 36 36 Sources of funds 2,986 3,755 4,538 5,364 Gross fixed assets 919 1,041 1,141 1,741 Accumulated depreciation 300 348 405 492 Tangible assets 619 694 737 1,250 Intangible assets 6 6 6 6 CWIP (incl. intangible) 13 193 500 10 Total net fixed assets 639 893 1,243 1,266 Investments 82 10 10 10 Cash and cash equivalents 54 23 88 254 Inventories 1,599 2,148 2,421 2,952 Sundry debtors 1,507 1,709 2,101 2,585 Loans and advances 321 382 382 382 Other assets 3 3 3 3

Total current assets (ex cash) 3,430 4,242 4,907 5,922

Trade payable 450 482 594 748

Other current liabilities & prov. 769 931 1,117 1,340

Total current liabilities & prov. 1,219 1,413 1,710 2,088

Net current assets (ex cash) 2,211 2,829 3,197 3,834

Application of funds 2,986 3,755 4,538 5,364

Book value per share (INR) 53 66 84 107

Free cash flow

Year to March FY13 FY14 FY15E FY16E

Net profit 644 931 1,175 1,500

Add: Depreciation 45 48 57 87

Add: Int & other non-cash items 3 - - -

Gross cash flow 693 979 1,232 1,587

Less: Changes in working cap. 227 618 368 637

Operating cash flow 466 361 865 950

Less: Capex 279 302 407 110

Free cash flow 187 58 458 840 Peer comparison valuation Companies Mcap

(INR bn) FY14 FY15E FY16E FY14 FY15E FY16EDhanuka Agritech 19 20.6 16.3 12.8 27.6 28.3 30.3 Bayer Cropscinece 72 22.4 20.2 16.3 16.3 17.5 18.4 Rallis India 37 22.8 17.9 14.9 24.0 25.9 25.8 PI Industries 44 23.2 19.0 14.7 30.7 29.0 29.0 United Phosphorus 135 12.9 10.8 9.1 21.2 21.7 21.7

P/E (x) ROE (%)

Source: Edelweiss research

Cash flow metrics


Operating cash flow 466 361 865 950

Financing cash flow (314) (162) (393) (675)

Investing cash flow (185) (230) (407) (110)

Net cash flow (34) (31) 65 165

Capex (279) (302) (407) (110)

Dividends paid (215) (234) (293) (380)

Profitability ratios


EBITDA margin 14.1 16.4 17.1 18.1 ROACE (%) 29.1 35.1 35.9 39.9 ROAE (%) 27.0 31.3 31.2 31.5 ROA (%) 23.2 27.6 28.3 30.3 Current ratio 2.9 3.0 2.9 3.0 Quick ratio 1.5 1.5 1.5 1.4 Receivables (days) 94 84 85 83 Inventory (days) 153 168 155 150 Payables (days) 117 110 109 106 Cash conversion cycle (days) 131 142 131 127

Operating ratios (x)Year to March FY13 FY14 FY15E FY16ETotal asset turnover 2.1 2.2 2.2 2.3 Fixed asset turnover 11.6 11.3 12.6 11.4 Equity turnover 2.4 2.5 2.4 2.4

Valuation parametersYear to March FY13 FY14 FY15E FY16EDiluted EPS (INR) 12.9 18.6 23.5 30.0 Y-o-Y growth (%) 12.8 44.5 26.2 27.7 CEPS (INR) 13.8 19.6 24.6 31.7 Diluted P/E (x) 29.7 20.6 16.3 12.8 P/BV (x) 7.3 5.8 4.5 3.6 EV/Sales (x) 3.3 2.6 2.1 1.6 EV/EBITDA (x) 23.2 15.7 12.3 9.0 Dividend yield(%) 0.7 1.0 1.3 1.7

Agriculture


Holding Top -10

Perc. Holding Perc. Holding

Zoom Leasing & Finance Co 18.90 Duke Impex Pvt Ltd 7.01

Golden Overseas 16.47 2020 Equity Investors 6.29

Exclusive Leasing and Finance 13.47 HDFC Asset Management Co Ltd 2.26

Hindon Mercantile 11.79 L&T Investment Management 0.14

Muse Capital Advisors 8.25

*as per last available data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available


Bulk Deals Data Acquired / Seller B/S Qty Traded Price

No Data Available


Additional Data

Directors Data Ram Gopal Agarwal Chairman Subhash Lakhotia Non-Executive Director Mahendra Kumar Dhanuka Managing Director Indresh Narain Non-Executive Director Arun Kumar Dhanuka Executive Director Shrikrishna Khetan Non-Executive Director Rahul Dhanuka Executive Director Subash Chander Gupta Non-Executive Director Mridul Dhanuka Executive Director Priya Brat Non-Executive Director Sachin Bhartiya Non-Executive Director Vinod Jain Non-Executive Director

Auditors - Dinesh Mehta & Co.


Dhanuka Agritech


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s): Miscellaneous Bayer Cropscience, Jain Irrigation, PI Industries, Rallis India, Supreme Industries, Solar Industries, UPL

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 133 40 16 190 * 1 stocks under review

Market Cap (INR) 126 55 9

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

Recent Research

23-May-14 Jain Irrigation

Subdued quarter, upbeat outlook; Result Update

123 Buy

22-May-14 PI Industries

Margin disappoints, optimistic outlook; Result Update

282 Buy

22-May-14 VIP Industries

Strong sales growth; Result Update

111 Buy

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to

Agriculture


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The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Analyst holding in the stock: No. Edelweiss shall not be liable for any delay or any other interruption which may occur in presenting the data due to any reason including network (Internet) reasons or snags in the system, break down of the system or any other equipment, server breakdown, maintenance shutdown, breakdown of communication services or inability of the Edelweiss to present the data. In no event shall the Edelweiss be liable for any damages, including without limitation direct or indirect, special, incidental, or consequential damages, losses or expenses arising in connection with the data presented by the Edelweiss through this presentation.

Dhanuka Agritech


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