dahanu initiation

8/11/2019 Dahanu Initiation

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Edelweiss Securities Limited

I n d i a M i d c a p s

Dhanuka Agritech (DAL), an established agrochemical player in India, boastsof a unique asset-light business model underpinned by core focus onmarketing and distribution network, giving it an edge over competitors.The unique business model renders DAL the preferred partner of globalinnovators to venture into the rapidly surging Indian agrochemicalsmarket. Moreover, a promising launch pipeline of six exclusive productsover the next three years is bound to propel the companys growth intohigher gear. Thus, a vibrant distribution network, tie ups with innovatorsand launch of new products place DAL in a sweet spot to captureemerging opportunities in domestic agrochemicals market. We perceivere-rating potential in light of its exclusive product launches, superiorfinancials and steep discount to peers. Initiate coverage with BUY.

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

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

Outlook and valuations: Poised for growth; initiating with BUYWe estimate DAL to post sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of19.9% and 32.9%), respectively, over FY14-16E bolstered by new product launchesfurther 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 initiatecoverage 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 Q2FY14Promoters * 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 StockStock over

Index1 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 [email protected]

Manoj Bahety+91 22 6623 [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
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2 Edelweiss Securities Limited

Investment Rationale

Unique asset light business model renders superior RoE, RoCEDAL has a unique asset light business model with focus on marketing and distributionnetwork. The company is present only in manufacturing of formulations and has nopresence in manufacturing of technical (active ingredients (AI)), which is a capital intensivebusiness.

We believe the formulations only focus helps the company enhance sales with leastinvestments in assets. Further, the model helps DAL clock higher asset turnover ratio versuscompetitors, which assures superior RoE/RoCE in the business. The company has threeformulations (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 researchNote: We have considered average asset turnover of past five years

Marketing and distribution: Key focus, strengthDAL, with ~6% domestic market share, has over 8,000 direct dealers servicing over 75,000retailers, covering more than 85% of Indias districts. The company claims to have thesecond-largest rural distribution network in India and its products are used by over 10mnfarmers. It is planning to expand the distribution network by 50% over the next four-fiveyears. We believe a strong distribution network is one of the essential ingredients tosucceed in the domestic agrochemicals business. DALs prowess therein helps it enhanceproduct penetration efficiently.

The company has inked a contract with Amitabh Bachchan as brand ambassador for itsagrochemicals offerings.

The formulations only focusenhances sales with least

investments in assets; the modelhelps clock higher asset turnoverratio versus competitors, ensuringsuperior RoE/RoCE

DAL, with ~6% domestic marketshare, has over 8,000 directdealers servicing over 75,000retailers, covering more than85% districts


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Chart 2: Expanding distributor network

0

2,800

5,600

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11,200

14,000

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( N o s )

Source: Company, Edelweiss research

Chart 3: Districts covered through distributors

0

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420

560

700

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( N o s )


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

DAL has established strongconnect with farmers throughDhanuka Doctors

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


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Table 1: Technical tie ups with global innovatorsName 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 shareDAL has six products in the pipeline, of which two will be launched annually over the nextthree years, subject to regulatory approvals. Of these, it will launch five products in-licensingwith Japanese players; one product has been developed by DAL in-house. According to thecompany, these products will be launched for the first time in India. DAL is expected tolaunch 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 productin 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 enjoyhigher margin, good brand recall and lesser credit period. Hence, we believe that a strongpipeline of products under this section will rejuvenate DALs prospects and financialsdramatically provided they are accepted by farmers. We expect innovative product launchescoupled with a wide distribution reach and strong brand recall to facilitate market sharegains, going forward.

Apart from the above six launches, DAL will continue to register and launch products underSection 9(4).

DAL has tie ups with three USand four Japanese players andhas tied up for 20 productscurrently, which contributed~47% to FY14 revenue

Six products in pipeline, of whichtwo will be launched annuallyover the next three years

A strong pipeline of exclusiveproducts will rejuvenate DALsprospects and financialsdramatically


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Table 2: Strong pipeline of innovative/exclusive productsProduct Category CropsHerbic ide Soyabean, cotton, groundnut, onionHerbicide SugarcaneHerbic ide Not dis clos edFungicide Multiple cropsFungicide Multiple cropsInsecticide Paddy, vegetables, cotton, chillies


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

History of launching innovative productsBased on technical tie ups with global innovators, DAL is registering and launchinginnovative agrochemical products on a continuous basis. Historically, the company haslaunched three-four products annually with a combination of specialty and branded genericproducts. These launches helped DAL gain market share. Of 13-14 products launched overFY12-14, the company has launched four products ( Brigade, Vitavax Ultra, Bombard andLustre ) in-licensed with global innovators. Product launches in the past three yearscontributed ~15% to the companys revenue.

Table 3: Product launches in past three yearsYear 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, chillyFuzi Super Herbicide PaddyOnestar Fungicide

FY14 Danufron Insecticide Horticulture cropsDefend Insecticide Cotton, chilly, grapes, horticultureMedia Super Insecticide Cotton, rice, vegetablesProtocol Fungicide Potato, chilly, black gram, vegetables cropsMaxyld Plant growth regulator Paddy, sugarcane, cotton, groundnuts, fruits & vegetables


DALs 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 DhanzymeGold .

DAL is registering and launchinginnovative agrochemicalproducts on a continuous basis,which will help it gain marketshare


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Table 4: Top 5 productsProducts 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 Ins ecti ci de Cotton, ri ce, wheat, barl ey, gram, mai ze, groundnut, s ugarcane, chi ll i, tomato,

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


Fig. 1: Key Products



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Targa Super is the largest product in DALs portfolio with sales of over INR1bn, which waslaunched in 2001 in an exclusive tie up with Nissan Chemicals Industries, Japan. According toindustry sources, very few products (10-15) clock sales above INR1bn in the domesticagrochemicals industry. Currently, DAL is has a co-marketing arrangement with ChambalFertilisers, Godrej Agrovet and Insecticide India to sell Targa Super in India.

Despite stiff competition from domestic and multinational (MNC) players, DAL hasestablished its brand well and emerged as a key player in individual product categories. InTarga Super , the company faces tough competition from MNCs like BASF and MakhteshimAgan (MAI). However, DALs product has emerged as one of the key brands in this segment.

Table 5: Growing well despite stiff competitionProducts 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 researchNote: 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 streamDAL has a well diversified revenue stream in terms of products as well as geography. Thecompany has a strong portfolio of over 80 products and geographically, North, West, Eastand 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 individualsegment 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 largestproduct in DALs portfolio withsales of over INR1bn. Accordingto industry sources, very fewproducts (10-15) clock salesabove INR1bn in domestic

agrochemical industry

A well diversified revenue streamin terms of products as well asgeography mitigates risk ofadverse impact in any individualsegment or geography

Insecticide43%

Herbicide32%

Fungicide14%

Others11%

% of FY14 revenue


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

Insecticide64%

Herbicide20%

Fungicide16%


Expanding capacity to bolster growthCurrently, DAL has three manufacturing facliities located in NCR, J&K and Gujarat. Thecompany is setting up a formulations plant in Rajasthan, expected to go on-stream byQ4FY15, at a capex of INR0.50bn. The capex will be funded through internal accruals. It hasexpended INR0.18bn in this project till FY14. Existing capacities will more than double postthe expansion.

Table 6: More than doubling capacityLocation Liquid (KL) Granule (MT) Powder (MT)Gurgaon, NCR 4,500 Ni l 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 futureand may monetise the 6 acres Gurgaon land parcel. Management has guided for sales ofINR5bn/p.a. from the Rajasthan plant at full capacity.

We believe the Rajasthan plant is expected to support DALs growth, which is primairlydriven by launch of innovative products. On a conservative basis, we have consideredRajasthan projects w.e.f. Q1FY16 in our estimates.

DAL is setting up a formulationsplant in Rajasthan; expected togo on-stream by Q4FY15. Existingcapacities will more than doublepost expansion

Production of Gurgaon facility isexpected to shift to Rajasthan inthe future and DAL maymonetise 6 acres Gurgaon landparcel. Management has guidedfor sales of INR5bn/p.a. fromRajasthan plant at full capacity


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Valuation

DAL is likely to clock sales and PAT CAGR of 24.0% and 26.9% (FY08-14 CAGR of 19.9% and32.9%), respectively, over FY14-16E riding new product launches anchored by tie ups withglobal innovators, further bolstered by a wide distribution network and capacity expansionin 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 beingre-rated in the past couple of months. We strongly believe that the stock can further re-ratefrom current level considering exclusive product launches, superior financials and steepdiscount 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 comparisonCompanies 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 Rallis 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 thestock can re-rate from thecurrent level considering

exclusive product launches,superior financials and steepdiscount (15-20%) to domesticpeers


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Chart 9: One year forward EV/EBITDA

5x

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Chart 10: One year forward P/BV

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Key Risks

Weather: The crop protection industry faces risk of seasonal weather. Weather can triggerpest infestations as well as affect demand for crop-protection products. In the domesticmarket, sales are highly seasonal, primarily during the monsoon. Any adverse weatherchanges will negatively affect DALs sales. Further, delayed or adverse monsoon could affect

collection of receivables negatively. However, we believe that launch of innovative/exclusiveproducts over the next couple of years will provide DAL the arsenal to counter adverseweather conditions.

Chart 11: Correlation of monsoon departure with DALs sales growth

(28.0)

(14.0)

0.0

14.0

28.0

42.0

FY08 FY09 FY10 FY11 FY12 FY13 FY14

( % )

Source: IMD, Company, Edelweiss research

Genetically modified (GM) crops: The use of crop protection products is significantly less forGM crops. Hence, growth and acceptance of GM crops by consumers may adversely affectDALs business.

Dependency on global innovators for technical sourcing: DAL is dependent on globalinnovators for the supply of technical/active ingredients in its key products. Technicalssupply disruption could adversely impact the companys earnings.

Adverse currency movement: 30% of raw material costs are imported for DAL. Hence, anysharp INR movement could impact the companys earnings adversely. However, we believeit can pass on the impact to customers with a lag.

Regulatory risks: DAL has to register products in India before launching. Hence, any negativeregulatory changes could adversely impact the industry as well as DAL.


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Company Description

DAL manufactures a wide range of agrochemicals covering herbicides/weedicides,insecticides, fungicides, plant growth regulators in various formsliquid, dust, powder andgranulesand reaches out to more than 10mn farmers. The company has a pan-Indiapresence 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 withthree US and four Japanese companies.

It has three manufacturing units located at Gurgaon (Haryana), Sanand (Gujarat) andUdhampur (J&K).

Table 8: Existing plantsLocation 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 FY14revenue. 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


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Table 9: DALHistoryYear Particulars1980 Took over a closed sick unit Northern Minerals, Gurgaon; shi fted to new office at Daryaganj , Delhi.1981 With vis ion and determina tion, achi eved turnover of INR1.7mn in the firs t year itself.1984 Expanded to al l North Indian states, Mahara shtra & Gujara t; modernized the plant, added new generics ; Inaugura ted

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

Triumphcard and Superkil ler (Fenvalra te and Cypermethrin)

1992 Dhanuka goes global and si gns its firs t coll abora tion with E.I. Dupont and star ts production and sa le of Dunet 40 SP(Methomyl).

1997 Started production and marketing of Calda n 4G and Caldan 50 SP in colla boration with Sumitomo Chemica lCompany, Japan.Growth demands more space, Dhanukas regis tered office shi fted to Karol Bagh, Delhi from Darya Ganj , DelhiDhanuka s tarted production a nd marketing Sheathmar 3L in col laboration wi th Sumitomo Chemical Company Ltd.,Japan.Gurgaon factory got special is ed equipment for various formula tions; on-si te NABL (Indian GLP) Lab for formula tiondevelopment, soil & water testing etc; factory also got ISO 9001:2008 certification for quality assurance.

2000 Another addi tion in the portfolio, Dhanuka started manufacturing & marketing Kasu-B 3 SL in coll abora tion withHokko Chemical Ind., Japan.Set up unit at Sanand, 2nd largest granule facil ity for Car tap, Phorate, Dhanzyme and one of the la rgest dustingpowder 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 associ ates as they repetitively coll abora te for manufacturing qual ityproduct with Dhanuka. In the same year, company tied up with E.I. Du Pont, US for Hook

2004 Dhanuka started manufacturing Aaatank (Carbosulfan) in coll abora tion 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-Diceset up modern manufacturing unit at Udhampur, 12 lines for liquids and 2 lines for powder with online monitoring ofquality 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 incoll abora tion with E.I.Du Pont, US.100% seed treatment campaign l aunched 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 i n Asias 200 best under a bi ll ion companies for FY10. Rated as one of the fastest growingcompany by Business World and Economic Times Investors Guide (June 2011).Introduced Brigade in collaboration with FMC Corporation, US.Introduction of semi-dwarf fertil izer responsi ve cultivator- Lustre in col laboration with E.I.Dupont, US. The first

product registered in Dhanukas name u/s 9(3) of Insecticides Act, 1968.Asias 200 best under a billion companies recognition by Forbes for the second consecutive year.Recognition by India Inc. 500 for Indias fastest growing mid sized companies for the year 2011.

2013 Recognition from Indi a Inc. 500 for second consecutive year for Indias fastest growing mid si zed companies for theyear 2012.

2007

2008

2009

2011

2012

1998

2001



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DALs management team has rich experience in agriculture and agrochemical industry.

Table 10: Management profileKey personnel ProfileR.S. Agarwal, Chairman Started agrochemical business more than 40 years ago and provides strategic leadership

presently. He als o served for two terms as Chairman of Crop Care Federation of India

M.K. Dhanuka, ManagingDirector

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

Rahul Dhanuka, Director(Marketing)

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

Mridul Dhanuka, Director(Technical)

Oversees the manufacturing and supply chain functions across the companys threeproduction facil ities; spearheads expansi on projects; brought technological and managerialexcellence in the companys 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 nutr ients and Others 11% Dhanuvi t, Wetc it, Dhanzyme Gold, Dhanzyme Granules



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Industry Overview

Global marketThe 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 genericplayers. Generic players key strength is low-cost manufacturing and wide distributionnetwork.

Chart 13: Global agrochemicals industry

20.0

26.8

33.6

40.4

47.2

54.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

( U S D

b n

)

Source: Industry, Edelweiss research

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% tothe 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 bean attractive opportunity for generic players in the future.


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

Patented25%

OffPatented

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 marketAccording 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 inthe near term riding increasing food consumption, rising MSP, sharpened government focusand mounting cost of labour. In India, consumption of agrochemicals is well below globalstandard.

GenericPlayers

55%

Innovators45%


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Chart 19: Crop-wise pesticide consumption in India

Paddy35%

Cotton25%

Others

40%

Source: Industry, Edelweiss research

Global as well as domestic food demand has been driven by rising population, decliningarable land and shift from food to fuels. In India, arable land has been declining since thepast four decades. However, food production posted 2.1% CAGR (during 1960-2010)primarily due to yield improvement.

Chart 20: Indias arable landStagnant

102

109

115

122

128

134

1 9 6 0

1 9 6 2

1 9 6 4

1 9 6 6

1 9 6 8

1 9 7 0

1 9 7 2

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0

( m h

e c a t r e s )

Source: Department of Agriculture, Edelweiss research


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Agriculture


Chart 21: Indias food productionRising at slow pace

57

102

147

192

237

282

1 9 6 0

1 9 6 3

1 9 6 6

1 9 6 9

1 9 7 2

1 9 7 5

1 9 7 8

1 9 8 1

1 9 8 4

1 9 8 7

1 9 9 0

1 9 9 3

1 9 9 6

1 9 9 9

2 0 0 2

2 0 0 5

2 0 0 8

2 0 1 1

( m m

t )

Source: Department of Agriculture, Edelweiss research

Indias agricultural yield is rising in tandem with the global CAGR despite having an absoluteyield much lower than the latter. Demand for food is growing consistently on account ofrising 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 agriculturalyield that ensures strong trajectory for agricultural inputs like fertilisers, crop protectionproducts, seeds and irrigation facilities.

Chart 22: Agricultural yieldOn the rise

0.0

0.7

1.4

2.1

2.8

3.5

1 9 6 0

1 9 6 3

1 9 6 6

1 9 6 9

1 9 7 2

1 9 7 5

1 9 7 8

1 9 8 1

1 9 8 4

1 9 8 7

1 9 9 0

1 9 9 3

1 9 9 6

1 9 9 9

2 0 0 2

2 0 0 5

2 0 0 8

( m t /

h e c t a r e )

World's Yield India's Yield

Source: USDA, Department of Agriculture (India), Edelweiss research


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Dhanuka Agritech


Agrochemical product registrations in IndiaTo introduce any new product in the Indian market, it has to seek registration under TheCentral 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 ofinternational toxicity standard and number of crops on which the data is beinggenerated.

Once the product is registered under Section 9(3), competition cannot seek registration forsame product for atleast three-four years. Hence, we believe that products can enjoy firstmover advantage as well as market leadership over three-four years.

If the product is already registered under Section 9(3), anyone can directly apply forregistration under Section 9(4). Every company has to register individualtechnical/formulation for each crop in India.

We believe product registration plays a strong entry barrier in the domestic agrochemicalsindustry.


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Agriculture


Financial Outlook

Healthy growth momentum coupled with robust balance sheetDAL has posted robust sales CAGR of 19.9% over FY08-14 primarily led by productintroduction supported by tie ups with global innovators. This is further bolstered byinherent fundamentals of the domestic agrochemicals industry coupled with the companyswide distribution network.

We estimate DAL to post sales CAGR of 24.0% over FY14-16 on account of exclusive productlaunches further supported by strong distribution network and capacity expansion inRajasthan. 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 ledby probability of El Nino. Further, we have assumed revenue growth of 26% YoY in FY16 aswe believe that exclusive product launches during FY14 and FY15 will drive growth.

Chart 23: Strong revenue growth to continue

0.0

8.0

16.0

24.0

32.0

40.0

0

2,400

4,800

7,200

9,600

12,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

( % )

( I N R m n

)

Sales (INR m) Sales growth (%) Source: Company, Edelweiss research

High yielding exclusive products, better operating leverage to spur marginDALs EBITDA margin improved from 13.3% to 16.4% over FY08-14, which we believe wasled by innovative/exclusive product introduction. We expect it to scale up to 18-20% overthe next three-four years on account of launch of high margin, exclusive products and betteroperating leverage. However, we have estimated 170bps improvement in EBITDA margin to18.1% over FY14-16 on a conservative basis. We believe the surge is likely to be primarilydriven by better operating leverage. We have assumed flat gross margin over FY14-16.

Expected to post sales CAGR of24.0% over FY14-16E ridingexclusive product launches,further supported by strongdistribution network andcapacity expansion in Rajasthan

We expect EBITDA margin toscale up to 18-20% over the nextthree-four years on account oflaunch of high margin, exclusiveproducts and better operatingleverage


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Dhanuka Agritech


Chart 24: EBITDA set to improve

0.0

4.0

8.0

12.0

16.0

20.0

0

500

1,000

1,500

2,000

2,500


( % ) ( I N R m n

)

EBITDA (INR m) EBITDA margin (%)


Robust sales, margin expansion to boost PATWe estimate DAL to post PAT CAGR of 26.9% over FY14-16 primarily on account of strongsales growth coupled with EBITDA margin expansion. The company enjoys income tax aswell as excise exemptions in its Udhampur (J&K) facility. We have considered 26% tax rate inFY16E 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

0.0

4.0

8.0

12.0

16.0

20.0

0

320

640

960

1,280

1,600


( % )

( I N R m n

)

PAT (INR m) PAT growth (%)


Strong balance sheet coupled with healthy return ratiosDAL has a strong balance sheet with minimal debt. The company has only short-termborrowings 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 cashgeneration.

To post PAT CAGR of 26.9% overFY14-16E primarily on account ofrobust sales growth coupled withEBITDA margin expansion

Resilient balance sheet withminimal debt


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Agriculture


Chart 26: Strong balance sheet with minimal debt

0.0

0.2

0.5

0.7

1.0

1.2

0

140

280

420

560

700


( x )

( I N R m

n )

Long term borrowing Short term borrowing Debt equity ratio


We believe there is no major capex (except INR0.50bn in Rajasthan; already spentINR0.18bn in FY14) likely in the near term. The company has healthy RoE/RoCE (>30%) andstrong dividend payout ratio of >20%.

Chart 27: Cash flow to catapult dramatically over FY14-16

(280)

0

280

560

840

1,120


( I N R m n

)

Operating cashflow Free cashflow


No major capex likely in nearterm. The company has healthyRoE/RoCE (>30%) and strongdividend payout of >20%


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Dhanuka Agritech


Chart 28: Healthy return ratios

0.0

10.0

20.0

30.0

40.0

50.0


( %

)

RoE (%) RoCE - pre tax (%)



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Agriculture


Financial Statements

Key A ssumptionsYear 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 sal 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 Extra ordi na ry/ Pri or pe ri od i te ms - - - - Profit after tax 644 931 1,175 1,500 Profit after minority interest 644 931 1,175 1,500 Equi ty s ha res outs ta ndi ng (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 FY16E

Gross 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


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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 2,98 6 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 ass ets (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 lia bilities & prov. 1,219 1,413 1,710 2,088

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

Applic ation of funds 2,986 3,755 4,538 5,364

Book value per share (INR) 53 66 84 107

Free c ash 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 valuationCompanies 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 metri cs


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 as set 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


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Agriculture


Holding Top -10Perc. 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 availabl e data

Insider Trades Reporting Data Acquired / Seller B/S Qty Traded

No Data Available*as per last available data

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

No Data Available*as per last available data

Additional Data Directors Data Ram Gopal Agarwal Chairman Subhash Lakhotia Non-Executive DirectorMahendra Kumar Dhanuka Managing Director Indresh Narain Non-Executive DirectorArun Kumar Dhanuka Executive Director Shrikrishna Khetan Non-Executive Director

Rahul Dhanuka Executive Director Subash Chander Gupta Non-Executive DirectorMridul Dhanuka Executive Director Priya Brat Non-Executive DirectorSachin Bhartiya Non-Executive Director Vinod Jain Non-Executive Director

Auditors - Dinesh Mehta & Co.*as per last available data


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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): MiscellaneousBayer 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 JainIrrigation

Subdued quarter, upbeatoutlook;Result Update

123 Buy

22-May-14 PIIndustries

Margin disappoints, optimisticoutlook; Result Update

282 Buy

22-May-14 VIPIndustries

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


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Agriculture


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