>DHANUKA AGRITECH: Aims to launch 7 products over next 4 years

Q3FY12 results miss estimates; disappointing operational performance dents earnings growth
■ Topline for Q3FY12 de-grew by 3.7% YoY to ` 1.1bn, mainly on account of 6% decline in volume off-take due to poor northeast monsoons.
■ Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline, impacting the revenue contribution from these markets.
■ For 9MFY12, herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during the quarter.
■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Lower employee cost (down 40bps YoY) and other expenses (down 190bps YoY) restricted margin contraction to some extent.
■ Lower acreages, increasing fertilizer prices and falling produce prices have reduced average farmer’s propensity to spend on specialty products. The resulting shift in focus towards generic products has dented EBITDA margin.
■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as of December 2011 stood at ` 400mn. Depreciation too declined by 36.5% YoY to ` 12mn.
■ Tax rate stood lower at 19.5% (Q3FY11: 20.7%). PAT declined by 37% YoY to ` 78mn.




Financial highlights
■ Revenue for the quarter declined by 3.7% YoY led by a 6% decline in volume offtake. This was primarily on account of poor northeastern monsoons. The management indicated of a slowdown in herbicide and fungicide product segment during the quarter.


■ For 9MFY12, insecticides, herbicides, fungicides and PGRs/others contributed 48%, 30%, 12% and 10% to the topline respectively. This implies that herbicides and fungicides portfolio has shown a muted growth of 5% YoY while the insecticides and PGR portfolio grew by 14% YoY.


■ EBITDA margins have declined by 530bps YoY to 11.5% led by higher raw material cost at 52.6% of sales (up 750bps YoY). Employee cost and other expenses declined by 40bps YoY and 190bps YoY and stood at 9.3% and 26.6% of sales respectively. Lower revenue contribution from specialty products
impacted profitability.


■ Interest expense fell by 3.4% YoY to ` 19mn. Gross debt as December 2011 stood at  400mn.


■ Depreciation too declined by 36.5% YoY to ` 12mn. The company incurred ` 400mn of capex during 9MFY12.


■ Tax rate stood at 19.5% (Q3FY11 – 20.7%). PAT de-grew 37% YoY to ` 78mn.


Key takeaways from the conference call
■ All India rainfall data showed 48% drop during the quarter. Rainfall in key regions of Andhra Pradesh, Karnataka and Maharashtra recorded 40% decline.
■ Unfavourable weather conditions have led to lower crop acreage and pest incidence, impacting demand for pesticides. Further, increase in fertilizer cost and decline in produce prices has reduced the farmers’ propensity to invest in specialty products. The resulting shift towards to generic products has dented Dhanuka’s operating margins.
■ Sales in Andhra Pradesh contribute 22% to the topline. With increasing revenue contribution from eastern zone, this figure is expected to decline in future.
■ Top five products for 9MFY12 contributed 31% to the topline. The company's flagship brand Targa Super contributed 14.6% (YTD) to the topline and witnessed a decline of 61% during this quarter.
■ Slowdown in operations has led to inventory pile-up which the management expects to ease out by Q1FY13E. The management does not foresee any decline in industry prices for pesticide due to excess inventory in the system.
■ No new products were introduced for the quarter. However, the management has indicated of seven new product launches over CY12E-15E (one insecticide in CY12 and two each in CY13E-15E).
■ Gross debt on books as of December 2011 stands at ` 400mn, of which `298mn is secured and the balance is unsecured in nature.
■ The management has guided for a topline growth of 6-7% for FY12E.
■ Capex guidance for FY13E is ` 50-60mn.
■ Tax rate is guided to be 22%-23% for FY12E and FY13E. The Udhampur facility enjoys 100% tax benefit which will reduce to 30% FY14E onwards.
■ The management has guided for an improvement in operations after the Kharif season.




Valuation
Long term growth drivers include strengthening its seeds portfolio (scouting for acquisition) and manufacturing selective technicals, leading to backward integration. DAL enjoys high return ratios owing to its asset-light model.


However, given the eminent slowdown in the agrochem industry and slower off-take of high-margin specialty products, we have revised our FY12E/FY13E earnings estimate downwards by 20.5%/19.1%. At CMP, the stock trades at 9x FY12E and 6.9x FY13E earnings. We recommend Accumulate with a revised target price of `100 (8x FY13E earnings).


RISH TRADER