dhanuka agritech - detailed report - crisil - july 2013

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Dhanuka Agritech Ltd

Detailed Report


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Fundamental Grade Assessment

CRISIL

Valuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (<-25% from CMP)

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Going strong despite industry headwinds

Fundamental Grade 4/5 (Superior fundamentals)

Valuation Grade 3/5 (CMP is aligned)

Industry Chemicals

1

July 05, 2013

Fair Value ₹132

CMP ₹133

For detailed initiating coverage report please visit: www.ier.co.in

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

Dhanuka Agritech Ltd (Dhanuka) manufactures branded pesticide formulations and holds

~5% share of the domestic crop protection market. Adverse weather-led subdued demand for

agrochemicals slowed down Dhanuka’s revenue growth in FY13. However, with a normal

monsoon expected through most of FY14, we believe Dhanuka is well positioned to take

advantage of the growth prospects in the industry. Based on its pan-India distribution

network, diversified product basket, product pipeline, management experience and higher

RoE than that of peers, we reiterate the fundamental grade of 4/5 for Dhanuka.

Expect industry to rebound in FY14; remain positive on long-term prospects

Monsoons are expected to be normal in FY14. Consequently, we expect the pesticide

industry to post higher growth in FY14. Over a longer horizon, burgeoning population coupled

with stagnant agricultural output will make it imperative to arrest crop loss and, therefore,

increase the usage of agrochemicals. We estimate the agrochemical industry to grow by 12-

15% per annum going forward.

Management continues to focus on product tie-ups and augmenting distribution

Tie-ups with innovator companies and expansion of the distribution network have led to an

impressive growth in the operations over FY08-11. The company currently has ~7,400

dealers/distributors (~7,200 in FY12) across India and a well-diversified product portfolio (80+

products). It has launched three specialty molecules (one each of insecticide, herbicide and

fungicide) during FY13 in small regional pockets and received an encouraging response. The

products are now slated for pan-India introduction. Dhanuka also plans to launch three

specialty molecules over 2014-15 in collaboration with global chemical companies.

Key risks: Weather conditions, pest occurrence and exchange rate volatility

Adverse weather conditions and inadequate pest occurrence have direct implications on

demand for pesticides. Since Dhanuka’s import exposure is more than 30% of its raw

material costs, volatility in ₹/$ exchange rate could impact margins. Other risks are lack of

presence in exports (a pure domestic play), difficulty to completely pass on hikes in raw

material costs to farmers and the government’s ban on toxic products.

Expect two-year revenue CAGR of 16% and EBITDA margin of 15%

We expect revenues to increase to ₹7.9 bn by FY15, at a two-year CAGR of 16%, driven by a

rebound in industry demand and Dhanuka’s continued thrust on launching new products as

well as marketing and distribution. We expect EBITDA margin and PAT margin to remain at

15% and ~10% levels respectively.

Valuations: Current market price is aligned

We have used the discounted cash flow (DCF) method to value Dhanuka and maintain our

fair value at ₹132. This value implies P/E multiples of 9.6x and 8.3x FY14E and FY15E EPS

respectively.

KEY FORECAST

(₹ mn) FY11 FY12 FY13# FY14E FY15E

Operating income 4,928 5,293 5,869 6,904 7,903

EBITDA 777 795 865 1,036 1,186

Adj Net income 509 566 644 693 800

Adj EPS (₹) 10.2 11.3 12.9 13.9 16.0

EPS growth (%) 28.6 11.3 13.8 7.6 15.4

Dividend Yield (%) 1.5 1.7 2.1 1.9 1.9

RoCE (%) 38.1 30.8 30.3 30.2 29.0

RoE (%) 38.1 29.5 27.0 23.9 22.8

PE (x) 13.1 11.7 10.3 9.6 8.3

P/BV (x) 3.9 3.1 2.5 2.1 1.7

EV/EBITDA (x) 9.3 8.6 8.0 6.6 5.7

NM: Not meaningful; CMP: Current market price; # Based on abridged financials

Source: Company, CRISIL Research estimates

CFV MATRIX

KEY STOCK STATISTICS

NIFTY/SENSEX 5837/19411

NSE/BSE ticker DHANUKA

Face value (₹ per share) 2

Shares outstanding (mn) 50.0

Market cap (₹ mn)/(US$ mn) 6,653/111

Enterprise value (₹ mn)/(US$ mn) 6,929/115

52-week range (₹)/(H/L) 141/81

Beta 0.7

Free float (%) 25.0

Avg daily volumes (30-days) 29,281

Avg daily value (30-days) (₹ mn) 3.9

SHAREHOLDING PATTERN

PERFORMANCE VIS-À-VIS MARKET

Returns

1-m 3-m 6-m 12-m

DHANUKA 1% 9% 2% 37%

NIFTY -1% 3% -3% 11%

ANALYTICAL CONTACT

Mohit Modi (Director) [email protected]

Prateek S Chauhan [email protected]

Bhaskar Bukrediwala [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fu

nd

am

en

tal G

rad

e

Poor

Fundamentals

Excellent

Fundamentals

Str

on

g

Do

wn

sid

e

Str

on

g

Up

sid

e

75.0% 75.0% 75.0% 75.0%

8.3% 8.3% 8.3% 8.3%1.35% 0.72% 0.72%

15.5% 15.5% 16.0% 16.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-12 Sep-12 Dec-12 Mar-13

Promoter FII DII Others

mailto:[email protected]





2

Table 1: Dhanuka Agritech - Business environment

Parameter Pesticides formulations

Revenue CAGR (FY09-13) 15%

Revenue CAGR (FY13-15) 16%

Product application

■ Pesticides include three major categories – insecticides, fungicides and herbicides

– Insecticides: Used for preventing, destroying, repelling or mitigating pests in order to protect crops

– Herbicides: Used largely to kill weeds

– Fungicides: Applied on crops to treat diseases, surface fungi on crops, etc.

■ Plant growth regulators influence formation of flowers, stems, leaves and the development and ripening of the

fruit/grain

Geographic presence

Absence of the technical segment restricts Dhanuka’s presence in the export market unlike large players such as

United Phosphorus and Rallis. Though Dhanuka is a 100% domestic play, it has a presence across major

agricultural regions with southern and western regions contributing ~60% to the top line.

Market position ■ ~5% share of the domestic market with focus on formulations. Collaborates actively with MNCs to introduce

high end specialty products

Key competitors Rallis India, Bayer CropScience, Insecticides India, PI Industries, United Phosphorus

Demand driver

■ Burgeoning population amid declining rate of crop production make it essential to arrest crop loss and,

therefore, lead to increase in the usage of pesticides

■ Despite a rise in pesticide prices due to increased raw material costs, consistent increase in MSP (minimum

support price) of major crops and the government’s support to the agriculture sector by way of subsidies have

kept the cost of pesticides affordable for farmers

■ While pesticides may form only ~15% of a farmer’s operating costs, not applying pesticides may cause crop

losses which are much higher in comparison to the cost of pesticides. Therefore, a farmer’s decision to spend

on crop protection is mainly determined by the cost of crop production and farm produce prices

Key risks

■ Unpredictable weather and occurrence of pests/diseases

■ Fluctuation in foreign exchange rates as one-third of Dhanuka’s raw materials are imported

■ Delay in increase of MSP / decline in farm profitability

Source: Company, CRISIL Research


3

Grading Rationale

Long-term growth story intact

Owing to deficient monsoon - and consequently lower demand for agrochemicals - during the

kharif season in FY13, the domestic agrochemical industry, including players such as

Dhanuka, registered a slower growth rate in FY13; the industry reported a growth rate of 12-

15% over the past few years except FY12. Though the industry remains susceptible to

adverse weather conditions, we believe that a well-entrenched player such as Dhanuka is

fairly positioned to take advantage of the long-term growth opportunities: increasing need to

improve agricultural productivity, thrust on usage of agrochemicals to minimise crop losses

and fiscal stimulus from the government.

Dhanuka has continuously expanded its dealer/distributor network; it has 7,400 direct

accounts across the country as of FY13 catering to over ~10 mn farmers in India. Dhanuka

has also launched three specialty molecules (one each of insecticide, herbicide and fungicide)

during FY13 in collaboration with MNCs. The products were launched in a few regional

pockets and the off-take has been encouraging; the management now intends to launch these

products on a pan-India basis. Dhanuka expects to launch three more products over FY14-15

in collaboration with MNC partners; these products will be introduced for the first time in India

with Dhanuka having the exclusive marketing and distribution rights. We believe that Dhanuka

is likely to introduce more products sourced from MNC partners going forward and we are

confident of its ability to leverage its distribution network to increase sales.

Table 2: Performance of pesticide players

Company

FY07-11

revenue CAGR

FY11-12

revenue growth

FY12-13

revenue growth

Dhanuka Agritech 25 9 11

Rallis India 14 7 13

Insecticides India 28 16 18

United Phosphorus (domestic) 23** 15 18

Bayer CropScience 27** 1 18

**CAGR over FY08-11

Source: Industry, CRISIL Research

While Dhanuka’s revenue growth has slowed, it has been able to maintain a healthy balance

sheet on account of the management’s focus on debt reduction and receivables collection.

D/E ratio has declined from 0.2x in FY12 to 0.1x in FY13. Debtor days, although historically

high compared to other players, have moderated during FY13.

Focus on improving

agricultural productivity, usage

of agrochemicals to minimise

crop losses and fiscal stimulus

from the government offer

long-term growth opportunities


4

Table 3: Kharif crop output declined due to erratic monsoons during 2012-13

2011-12 (mn tonnes) 2012-13 (mn tonnes) Relative change in output

compared to 2011-12 kharif

season (%) Crop name

2nd Advance

estimates Final estimates Target

2nd Advance

estimates

Rice 90.2 92.8 90.0 90.7 (2.3)

Jowar 3.0 3.3 3.5 2.6 (21.2)

Bajra 9.7 10.3 10.0 8.2 (20.4)

Maize 16.1 16.5 17.0 15.6 (5.5)

Ragi 2.3 1.9 2.3 1.8 (5.3)

Small millets 0.7 0.5 0.7 0.4 (20.0)

Coarse cereals 31.8 32.5 33.5 28.5 (12.3)

Cereals 122.0 125.2 123.5 119.2 (4.8)

Tur 2.7 2.7 3.1 2.8 1.9

Urad 1.3 1.2 1.4 1.3 6.7

Moong 1.5 1.2 1.1 0.8 (30.0)

Other kharif pulses 0.9 0.9 1.5 0.6 (31.1)

Total pulses 6.4 6.1 7.1 5.5 (9.8)

Total food grains 128.4 131.3 130.6 124.7 (5.0)

Source: Ministry of Agriculture, CRISIL Research

Normal monsoons in FY14 expected to revive agrochemical

industry

While the area under sowing for the FY13 rabi crop was higher by 1.6% compared to FY12,

the crop output based on the 2nd

Advance Estimate released by the Department of Agriculture

is expected to surpass the target for FY13. Also, MSPs for rabi crops have increased by 10-

20%. Consequently, higher farm incomes from rabi crops may support growth in

agrochemicals during the first quarter of FY14. The south-west monsoon remains a key

monitorable; if normal, it could propel a healthy kharif crop over a low base of FY13 and,

thereby, accelerate agrochemical sales.


5

Table 4: Rabi crop output expected to surpass 2012-13 targets

2011-12 (mn tonnes) 2012-13 (mn tonnes) Relative change in

output compared to

last rabi season (%) Crop name

2nd Advance

estimates Final estimates Targets

2nd Advance

estimates

Rice 12.57 12.6 14 11.1 (11.90)

Wheat 88.31 94.9 83 92.3 (2.74)

Jowar 3.06 2.7 3.5 2.7 -

Maize 5.5 5.3 5.5 5.5 3.77

Barley 1.68 1.6 1.5 1.8 12.50

Coarse cereals 10.24 9.6 10.5 10 4.17

Cereals 111.12 117 112.5 113.4 (3.08)

Gram 7.66 7.7 8 8.6 11.69

Urad 0.44 0.5 0.5 0.47 (6.00)

Moong 0.25 0.4 0.4 0.43 7.50

Other rabi pulses 2.54 2.4 2.3 2.6 8.33

Total pulses 10.69 11 11.1 12.1 10.00

Total food grains 122 128.1 123.6 125.5 (2.03)

Source: Ministry of Agriculture, CRISIL Research

However, we expect agrochemical sales in the southern region to lag the national average

over the next few months. While the water levels of the 84 major reservoirs across India are

above the long-term average, levels in reservoirs in southern (Karnataka) and western

(Maharashtra and Gujarat) regions have depleted significantly. Also, the likelihood of

continued power shortage/use of high cost power during first half of FY14 may impact the

southern region. These factors coupled with lower cash availability with farmers - owing to

three consecutive crop failures - are expected to result in lower agrochemical sales volume

during H1FY14 but the same is expected to revive by the second half of FY14. Though normal

south-west monsoons are likely to increase agrochemical consumption in the western region,

low reservoir levels and a significant correction in prices of cash crops such as cotton over

FY13 may play spoilsport.

Stable farm incomes owing to bumper wheat production due to better irrigation facilities are

expected to result in steady agrochemical consumption in the northern region.

In the eastern region, healthy rabi and kharif output, government support through subsidies

(₹10 bn was allocated to the eastern states in the Union budget 2013-14 to usher in green

revolution), agricultural thrust via green manuring and hybrid rice are expected to result in

higher farm incomes which in turn should boost the consumption of agrochemicals.

We expect normal monsoons

during FY14 to revive

agrochemical consumption


6

Update on the monsoons:

The cumulative rainfall for India during FY14 monsoons up to June 26, 2013 has been 37%

above long period average (LPA). Rainfall was above normal levels across regions except

East and North-east India, where it was 45% below LPA. The key pesticide consuming states

of Andhra Pradesh, Karnataka, Tamil Nadu, Haryana and Maharashtra have received excess

rainfall.

Also, as the rainfall was 37% above average in the week to June 26, water level in the main

reservoirs was at 25% of their capacity, up 8 percentage points from the year-ago period. The

reservoir levels are above the 10-year average of 17% for the week. This is a positive

development as these reservoirs provide water to irrigate the rabi crops later in the year.

Agrochemical industry to benefit from…

1. Increase in MSPs to enhance affordability

The government has consistently raised the MSPs of major crops such as wheat, rice,

sugarcane and cotton since FY07. MSPs have registered a CAGR of 11-15% over FY07-12

compared to 1-5% CAGR over FY02-07. The increase in MSPs has cushioned the volatility in

farm income over the past few years wherein deficient rainfall has resulted in fluctuations in

agricultural production.

During 2012, MSPs were raised by 10% (wheat) to 53% (jowar), which enabled the

sustenance of farm income despite a lower kharif output. In FY14, MSPs for the rabi crop

have been hiked by 5-20% which will result in better farm economics and support

agrochemical sales during the first half of FY14.

Figure 1: Historical hikes in MSP

Source: Ministry of Agriculture, Govt. of India

500

1,000

1,500

2,000

2,500

3,000

3,500

FY09 FY10 FY11 FY12 FY13

(₹/quintal)

Wheat Barley Gram Masur Mustard Safflower

Paddy and cotton are the major

pesticide consuming crops


7

Table 5: Increase in MSPs of rabi crops

Crops

Old Prices

(₹/quintal)

Revised

Prices

(₹/quintal) Increase Increase (%)

Wheat 1,285 1,350 65 5.1

Barley 980 980 - -

Gram 2,800 3,000 200 7.1

Masur (Lentil) 2,800 2,900 100 3.6

Rapeseed 2,500 3,000 500 20.0

Safflower 2,500 2,800 300 12.0

Source: Ministry of Agriculture

2. Growth in agricultural credit disbursements to help improve farm

economics

Agricultural credit backed by the government’s initiative to promote the sector registered a

16% CAGR over FY06-11. Higher government spending has resulted in improved farm

economics and has provided a thrust to farmers to undertake production of different crops

which, in turn has boosted the demand for pesticides. The Indian crop protection industry was

valued at ₹164 bn (domestic consumption) in FY12. While the industry registered an 11-year

CAGR of 9% over FY00-11, it registered 15% CAGR over FY06-11. Higher growth is due to

higher MSPs of key pesticide products, thus making it more remunerative for farmers to

undertake cultivation. Also, this has enabled the manufacturers to pass on the increase in raw

material prices. The government is expected to continue to provide support to agriculture and

allied sectors to increase food grain production to support the burgeoning population.

Consequently, the government has increased agri-credit target by ₹1,250 bn for FY14. We

believe this to be a positive for the agrochemical industry.

3. Shortage of economical labour to drive growth in herbicides

In India, traditionally, removal of weeds is done manually. However, the Mahatma Gandhi

National Rural Employment Guarantee Act (MNREGA), introduced in 2005, has been

providing better employment opportunities and higher wages to labourers in non-agricultural

sectors. So, deployment of manual labour for removal of weeds has become a costly affair.

Farmers, therefore, are increasingly shifting from manual weeding to usage of herbicides.

With labour shortage slated to continue in the longer run, Pesticides Manufacturers and

Formulators Association of India anticipates the sale of herbicides to grow at 25% per annum

over the next couple of years. Herbicides account for ~30% of Dhanuka’s revenues.


8

Dhanuka: Thrust on branded formulations

Formulations being a B2C play, wherein retail offtake is determined by brand strength and

reach of the distribution network, Dhanuka’s focus on branded formulations (in tie-ups with

MNCs) and its extensive pan India distribution network are its key growth drivers.

Dhanuka’s product basket, comprising over 80 products, has a judicious mix of insecticides

(38), herbicides (21) and fungicides (21). The company has 16 products in the plant growth

regulators/biofertilisers/wetting agents segment. This diversified product basket enables the

company to cater to a wide spectrum of crops, such as wheat, paddy, sugarcane, cotton,

pulses, soyabean, vegetables, etc.

Continues to focus on specialty molecules

Dhanuka continues to focus on specialty molecules (introduced in collaboration with MNCs),

which are eco-friendly having crop/disease specific usage and command a higher margin

(more than 20%) than generic products (10-15% margin). Typically, in case of specialty

molecules sourced through tie-ups with MNC chemical companies, the active ingredient

(overall chemistry) is supplied by MNCs to Dhanuka under purchase contracts. Dhanuka

receives the product know-how as well as the right to manufacture and market the products in

India. While this alliance provides Dhanuka a wider product basket to cater to different kinds

of crops/types of pests, MNCs benefit from increased off-take of their products owing to

Dhanuka’s pan-India presence.

Products sourced through these collaborations contribute more than 60% to Dhanuka’s

revenues. Dhanuka has announced plans to launch three specialty molecules (one insecticide

and two herbicides) during FY14-15 in collaboration with MNCs. As per the management,

these molecules will be introduced for the first time in India with Dhanuka having the exclusive

marketing and distribution rights for the same. Post introduction, these molecules are

expected to have a dominating life cycle of 8-10 years. We believe this development is

positive for the company as it not only allows Dhanuka to launch hitherto unavailable

molecules in the Indian market but also strengthens its relationship with the active ingredient

manufacturers.

Dhanuka continues to augment

its specialty products basket


9

Figure 2: Dhanuka’s product basket caters to various crops Figure 3: Herbicides account for ~30% of Dhanuka’s revenue

Source: Company, CRISIL Research Source: Company, CRISIL Research

Table 6: Dhanuka’s tie-ups with MNCs

Tie-up Products marketed by Dhanuka

E. I. du Pont, US Dunet, Hook, Qurin, Dhawa Gold, Hi-Dice, Cursor, Lustre, Fuzi Super

FMC Corporation, US Aatank, Markar, Brigade

Dow AgroSciences, US Wrap-up, Zargon, One-up

Sumitomo Chemical Co., Japan Caldan, Sheathmar

Mitsui Chemicals, Japan Nukil, Bombard

Hokko Chemical Ind. Co., Japan Kasu

Nissan Chemical Industries, Japan Targa Super

Yara International, Norway Samadhan

Chemtura, US Omite, Vitavax, Dimilin, Banmite

Bayer AG Fluid


Success of recently launched products - a key monitorable

During FY13, Dhanuka launched three products in tie-ups with Bayer Crop Science (Fluid - an

insecticide) and DuPont (Fuzi Super - a herbicide; Lustre - a fungicide). As per the

management, the products were launched in small regional pockets to assess their

acceptance among the farmer community. With good off-take of the launched products, the

management intends to introduce these across India. The management expects the new

products to contribute significantly to Dhanuka’s revenues in four to five years. However, long-

term success of the products is a key monitorable.

Paddy27%

Pulses20%

Vegetables18%

Cotton15%

Others20%

55% 53%45% 46% 49%

26% 27%33% 32% 28%

13% 13% 13% 12% 13%

6% 6% 10% 11% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 FY12 FY13

(% revenue share)

Insecticides Herbicides Fungicides Others


10

Table 7: Dhanuka’s new launches in FY13

Brand Foreign partner Product group Active ingredient Description

Fluid Bayer AG Insecticide Flubendiamide

active Insecticide for control of caterpillars in pulses,

vegetables and rice segments

Fuzi Super E. I. du Pont, US Herbicide Bispyribac Sodium

10% SC Herbicide for application in paddy cultivation

Lustre E. I. du Pont, US Fungicide Flusilazole 12.5% For application on paddy


Strong distribution network…

Dhanuka has been able to expand its distribution network from 4,529 direct accounts in FY08

to 7,400 in FY13. This extensive distribution network supports Dhanuka’s existing product

offerings and plays an important role in attracting global agrochemical majors to launch their

products in tie-up with Dhanuka.

Figure 4: Growth in distribution network


4,529 4,953 5,402 6,383 7,200 7,400

9% 9%

18%

13%

3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1000

2000

3000

4000

5000

6000

7000

8000

FY08 FY09 FY10 FY11 FY12 FY13

(No.)

No. of Dealers / Distributors Growth (RHS)


11

… along with farmer engagement initiatives to support growth

Owing to the competitive nature of the agrochemical industry, product differentiation and

brand recall assume significant importance. Product demonstrations, counselling, awareness

campaigns regarding quantity and periodicity of usage and after-sales services are important

channels to enhance farmer/company engagement. Dhanuka via its “Dhanuka Doctors” has

been able to increase the visibility of its products, thus resulting in strong brand recall for

products such as Targa Super, Caldan and Omite. Dhanuka employs ~1,500 “Dhanuka

Doctors” on a contract basis (2,000 in peak season) to work closely with farmers. Activities

include product demonstrations, educational campaigns and group meetings and

workshops/seminars. With the incentives for “Dhanuka Doctors” deployed in a region linked to

sales generated by Dhanuka in that region, it also helps in recovering costs associated with

these activities.

Expect working capital intensity to remain higher than

industry’s

Dhanuka’s 94 receivable days is higher than the industry average of 70-80 days. We believe

this is attributable to the company’s business model which does not include sales of

technicals where number of receivables days is shorter compared to the formulations

business. Hence, we believe that Dhanuka’s working capital intensity is likely to remain higher

than that of its competitors.

Figure 5: Dhanuka’s debtor days on the rise

Source: Industry, CRISIL Research

-

20

40

60

80

100

120

140

UPL Rallis Bayer PI Ind Insecticides Dhanuka

(Debtor Days)

FY10 FY11 FY12 FY13


12

Figure 6: Inventory of industry players Figure 7: Payable days of industry players

Source: Industry, CRISIL Research Source: Industry, CRISIL Research

-

50

100

150

200

250


(Inventory Days)

FY10 FY11 FY12 FY13

-

20

40

60

80

100

120

140


(Creditor Days)

FY10 FY11 FY12 FY13


13

Key Risks

Unpredictable weather and pest/disease occurrence

The performance of the agrochemical industry is highly dependent on weather conditions,

which determines the occurrence of disease and pest infestations in the short term and on a

regional basis. Normal monsoons are an important but not the only factor that drive demand

for pesticides. Pest occurrence is also critical in driving sales volumes of agrochemical

companies. Therefore, adverse weather conditions and inadequate pest occurrence can

negatively impact the performance of agrochemical companies.

Foreign exchange rate fluctuation

Approximately one-third of Dhanuka’s raw materials are imported. This exposes the company

to foreign exchange risks as it hedges only 10% of its exposure on an average. According to

the management, in case of an adverse currency movement leading to high raw material

costs, the company is able to take price hikes in some of its key products (specialty

molecules). Depreciation of the rupee for a longer duration may increase Dhanuka’s raw

material costs and adversely impact its operating margins.

Lack of export revenues

Larger players such as United Phosphorus and Rallis have a presence in the technicals

segment, which opens up the export avenue. Dhanuka does not enjoy this advantage as it is

a 100% domestic play. Complete dependency on the domestic market may impact revenues,

in case of a slowdown in demand. However, within India, Dhanuka has a presence in all major

agricultural regions.

Delay in increase of MSP / decline in farm profitability

Farmers’ purchasing power with regard to agricultural inputs depends on the realisation of

farm output. Therefore, consumption of fertilisers and pesticides is partly dependent on the

MSPs fixed by the government and on other subsidies. In an environment of increasing raw

material costs, inadequate/delayed increase in MSPs may restrict the pesticide

manufacturers’ ability to pass on higher raw material costs to farmers, consequently affecting

the manufacturers’ margins.

Regulatory risks

The pesticide industry is highly regulated. Every product launch, patented or off-patent, has to

go through field trials and comply with several requirements to keep the environment safe and

toxic levels under acceptable limits. These processes are expensive and time consuming, and

come with the uncertainty of facing a ban anytime. About 8% of Dhanuka’s revenues are

derived from highly toxic (red triangle category) products, which have a high probability of

facing a government ban. We do not view this as a significant risk as the company’s product

basket is highly diversified (over 80 products).


14

Financial Outlook

Revenues estimated to grow at 16% CAGR over FY13-15;

EBITDA margin likely to remain stable

We estimate revenues to grow at a two-year CAGR of 16% to ₹7.9 bn in FY15. We believe

sales volumes will increase in FY14 on expectations of a normal monsoon. We expect

Dhanuka to post 15% EBITDA margin on a sustainable basis on account of its focus on high-

margin specialty molecules. The company has already introduced three specialty molecules

during FY13 and three more product launches are on the anvil. We expect these will be high-

margin products and, if successful, will result in margin expansion.

Figure 8: Revenues to grow at a two-year CAGR of 16% Figure 9: EBITDA margin to sustain at 15%


Adjusted PAT to grow at 11.4% CAGR over FY13-15; RoE

expected to decline

Dhanuka’s adjusted PAT is expected to grow from ₹644 mn in FY13 to ₹800 mn in FY15 at a

CAGR of 11.4%. We expect PAT margin to decline from 11.0% in FY13 to 10.1% in FY15 on

account of diminishing income tax benefits at the company’s Udhampur plant. This plant is

entitled to 30% income tax holiday over FY14-18.

Return on equity is also expected to decline from 27% in FY13 to 22.8% in FY15 due to

contraction in PAT margin and reduction in debt.

3,369 4,085 4,928 5,293 5,869 6,904 7,903

36.1%

21.3%

20.6%

7.4%

10.9%

17.6%

14.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

(₹ mn)

Revenue Growth (RHS)

480 586 777 795 865 1,036 1,186

14.3%

14.4%

15.8%

15.0%

14.7%

15.0% 15.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

-

200

400

600

800

1,000

1,200

1,400


(₹ mn)

EBITDA EBITDA margin (RHS)


15

Figure 10: PAT to grow 11.4% over FY13-15 Figure 11: RoE will decline from 27% in FY13 to 23% in FY15


Debt likely to remain low

Dhanuka is likely to pay its existing debt entirely over the next two-three years. According to

the management, the company plans to undertake a capex (capacity expansion) of ₹450 mn

over FY14-15 to commission a formulations facility in Keshwana, Rajasthan. The required

capex will be funded through internal accruals. Although we expect the working capital as a

percentage of sales to remain at current levels, we believe this is a key monitorable going

forward as Dhanuka’s receivable days have increased continuously over FY09-12.

Figure 12: Debt to reduce further going forward Figure 13: Working capital expected to remain high


232 363 509 566 644 693 800

6.9%

8.9%

10.3%10.7% 11.0%

10.0% 10.1%

0%

2%

4%

6%

8%

10%

12%

-

100

200

300

400

500

600

700

800

900


(₹ mn)

PAT PAT margin (RHS)

41.3

40.2 38.1 30.8 30.3 30.2 29.0 38.8

43.9

38.1

29.5 27.0

23.9 22.8

0

10

20

30

40

50


(%)

ROCE ROE

523 597 602 460 330 443

313

0.8

0.6

0.4

0.2

0.1 0.1 0.1

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-

100

200

300

400

500

600

700


(X)(₹ mn)

Total Debt D/E (RHS)

100 103 140 128 137 137 137

27.3% 28.3%

38.3%

35.1%37.6% 37.6% 37.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

20

40

60

80

100

120

140

160


(%)(No. of Days)

WC Days WC as % of revenue (RHS)


16

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Experienced senior management

Extensive experience in the agrochemical industry and sound business knowledge of the

promoters, brothers - Mr R.G. Agarwal (chairman) and Mr M.K. Dhanuka (managing director) -

have been instrumental in taking the company forward. Mr Agarwal began his career as a

trader of pesticides and fertilisers. With a trading experience of 12 years, he got into

manufacturing pesticides by acquiring Northern Minerals Ltd in 1980. Mr Dhanuka, who has

over 30 years of experience in the pesticide industry, looks after the day-to-day

responsibilities of the company. The finance function is headed by Mr V.K. Bansal (CFO), who

has been with the company for over 20 years. Dr. O.P. Singh (president, research &

development) has over 25 years of experience and has been with Dhanuka for the past 10

years.

Second generation of promoters assuming bigger roles

Among the second generation of promoters, Mr Rahul Dhanuka (Mr Agarwal’s son) and Mr

Mridul Dhanuka (Mr M.K. Dhanuka’s son), hold senior management positions in the company.

Mr Rahul Dhanuka is director-marketing and has an experience of 13 years. He has been

associated with the company since 2002. Mr Mridul Dhanuka (director-operations) looks after

production, processes and quality control. We expect the second generation of promoters to

play a greater role in the company’s growth going forward. However, the company has not

announced any succession plans as yet.

Competent second line of management

Key personnel from the second line of management have considerable industry experience

and some have been with the company for a long time. On the operations side, Mr Vijay

Kumar, senior general manager (quality control), has been with the company for 14 years; he

holds an M-Tech degree from IIT Delhi and has an industry experience of 32 years. Mr Y.K.

Goel, senior general manager (production), has over 35 years of experience and has played a

key role in expansion and automation of production capacities. The company has also

augmented its marketing leadership by recruiting two professionals in the recent past at the

vice president level.

Highly experienced senior

management; expect second

generation of promoters to

play a bigger role going

forward


17

Corporate Governance

CRISIL’s fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a company’s corporate governance.

Corporate governance practices at Dhanuka meet the minimum levels, reflected in the

constitution of its board, and by the presence of audit and other committees, which support

the board’s processes. Based on the disclosure levels, attendance record of independent

directors and their level of engagement in the company’s affairs, CRISIL Research believes

that the company has good corporate governance standards.

Board comprises six independent directors

The company’s board comprises 12 directors, six of whom are independent. Mr R.G. Agarwal

is the chairman of the board. Other board members from the promoter group include Mr M.K.

Dhanuka, Mr A.K. Dhanuka, Mr Rahul Dhanuka and Mr Mridul Dhanuka. Mr Sachin Bhartiya

(non-independent director), who represents 2020 Equity Investors, is a qualified chartered

accountant and has previously worked in lending and advisory functions with IDBI, GE Capital

and IL&FS. Based on our previous interactions with the board members, we believe that the

independent directors have a good understanding of the company’s business. Mr Priya Brat,

chairman of the audit and remuneration committees, has previously served as a director on

the boards of several public sector banks and has been on Dhanuka’s board since 2002. Mr

Brat previously headed State Bank of India’s international operations. Mr Indresh Narain has

previously worked as Head of Compliance and Legal, HSBC Group and currently serves as

director on the boards of Cholamandalam DBS Finance, Intex Technologies and Mindteck

India. Other independent directors are Mr Vinod Jain, Mr S.C. Gupta Mr S.K. Khetan and Mr

Subhash Lakhotia.

Board’s processes have evolved gradually

The company’s quality of disclosure can be considered good judged by the interaction with

independent directors, level of information and details furnished in the annual report, websites

and other publicly available data. The company has the necessary committees – audit,

remuneration and investor grievance.

As per our recent discussions with independent directors, board practices at Dhanuka have

evolved over time. The board meetings have become more meaningful as the interaction

between independent directors and management has improved. The management has also

implemented various suggestions made by the independent directors.

Board processes have

improved over a period of time,

based on recommendations

made by independent directors


18

Valuation Grade 3/5

We have used the DCF method to value Dhanuka and arrived at a fair value of ₹132 per

share, implying P/E multiples of 9.6x and 8.3x FY14E and FY15E EPS respectively. The stock

is currently trading at ₹133 per share. Consequently, we assign a valuation grade of 3/5,

indicating that the market price is aligned.

Key DCF assumptions

We have considered the discounted value of the firm’s estimated free cash flow. We have

made explicit forecasts until FY22. We have assumed a terminal growth rate of 4% beyond

the explicit forecast period.

WACC computation

FY14-21 Terminal value

Cost of equity 16.0% 16.0%

Cost of debt (post tax) 8.1% 8.1%

WACC 14.4% 14.4%

Terminal growth rate 4.00%

Sensitivity analysis to terminal WACC and terminal growth rate

Terminal WACC

Te

rmin

al G

row

th R

ate

12.4% 13.4% 14.4% 15.4% 16.4%

2.0% 142 151 162 176 194

3.0% 130 137 145 155 169

4.0% 120 126 132 140 149

5.0% 113 117 122 128 135

6.0% 106 110 114 118 124

Source: CRISIL Research estimates

One-year forward P/E band One-year forward EV/EBITDA band

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

20

40

60

80

100

120

140

160

Ap

r-0

7

Jul-0

7

Oc

t-0

7

Jan-0

8

Ap

r-0

8

Ju

l-0

8

Oc

t-0

8

Jan-0

9

May-0

9

Au

g-0

9

Nov-0

9

Feb-1

0

Ma

y-1

0

Au

g-1

0

No

v-1

0

Feb-1

1

Jun-1

1

Se

p-1

1

Dec-1

1

Ma

r-12

Jun-1

2

Se

p-1

2

Dec-1

2

Mar-

13

Jul-1

3

(₹)

Dhanuka 4x 6x7x 8x 9x

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Ap

r-0

7

Jul-0

7

Oc

t-0

7

Jan-0

8

Ap

r-0

8

Jul-0

8

Oc

t-0

8

Jan-0

9

May-0

9

Au

g-0

9

Nov

-09

Feb-1

0

May-1

0

Au

g-1

0

Nov

-10

Feb-1

1

Jun-1

1

Se

p-1

1

Dec

-11

Mar-

12

Jun-1

2

Se

p-1

2

Dec

-12

Mar-

13

Jul-1

3

(₹ mn)

EV 4x 5x 6x 7x

Our fair value for Dhanuka is

₹132 per share and the

valuation grade is ‘3/5’


19

P/E – premium / discount to Nifty P/E movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

Peer comparison

Companies

M.cap P/E (x) P/B (x) EV/EBITDA (x) RoE (%)

(₹ mn) FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Dhanuka Agritech** 6,653 10.3 9.6 8.3 2.5 2.1 1.7 8.0 6.6 5.7 27.0 23.9 22.8

Insecticides India** 4,921 13.8 11.6 9.3 2.4 2.0 1.7 9.6 7.8 6.4 18.8 19.0 19.9

Rallis India 27,702 18.9 17.0 14.0 3.6 3.7 3.1 10.6 10.5 8.8 20.3 22.4 23.5

Bayer CropScience 58,422 22.0 19.4 14.8 4.6 3.8 2.5 14.0 12.8 10.1 42.7 15.5 15.6

United Phosphorus 60,415 6.7 7.7 6.6 1.1 1.3 1.1 4.5 5.0 4.4 17.6 17.0 17.3

PI Industries 17,880 16.8 12.1 9.6 3.6 2.9 2.2 10.9 8.3 6.8 25.0 25.7 25.9

**CRISIL Research estimates

Source: CRISIL Research, Consensus estimates

CRISIL IER reports released on Dhanuka Agritech Ltd

Date Nature of report

Fundamental

grade Fair value

Valuation

grade

CMP

(on the date of report)

06-Apr-10 Initiating coverage 3/5 ₹52 3/5 ₹50

04-Jun-10 Q4FY10 result update 3/5 ₹67 3/5 ₹71

11-Aug-10 Q1FY11 result update 3/5 ₹72 3/5 ₹82

12-Nov-10 Q2FY11 result update 3/5 ₹79 2/5 ₹93

04-Feb-11 Q3FY11 result update 3/5 ₹87 4/5 ₹72

03-Jun-11 Q4FY11 result update 3/5 ₹87 3/5 ₹84

11-Jul-11 Detailed report 4/5 ₹109 4/5 ₹91



16-Feb-12 Q3FY12 result update 4/5 ₹109 4/5 ₹88

25-Jun-12 Detailed Report 4/5 ₹117 4/5 ₹96



12-Mar-13 Q3FY13 result update 4/5 ₹132 3/5 ₹122

24-May-13 Q4FY13 result update 4/5 ₹132 3/5 ₹129

05-Jul-13 Detailed report 4/5 ₹132 3/5 ₹133

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Ap

r-0

7

Ju

l-0

7

Oc

t-0

7

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oc

t-0

8

Ja

n-0

9

Ma

y-0

9

Au

g-0

9

No

v-0

9

Fe

b-1

0

Ma

y-1

0

Au

g-1

0

No

v-1

0

Fe

b-1

1

Ju

n-1

1

Se

p-1

1

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

l-1

3

Premium/Discount to NIFTY

Median premium/discount to NIFTY

0

2

4

6

8

10

12

Ap

r-0

7

Ju

l-0

7

Oc

t-0

7

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oc

t-0

8

Ja

n-0

9

Ma

y-0

9

Au

g-0

9

No

v-0

9

Fe

b-1

0

Ma

y-1

0

Au

g-1

0

No

v-1

0

Fe

b-1

1

Ju

n-1

1

Se

p-1

1

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

l-1

3

(Times)

1yr Fwd PE (x) Median PE

+1 std dev

-1 std dev


20

Annexure: Financials

Note: #- based on abridged financials

FY13 financials are not strictly comparable with that of the previous years due to the new format of disclosure under Schedule VI of the Companies Act

Source: CRISIL Research

Income Statement Balance Sheet

(₹ mn) FY11 FY12 FY13E# FY14E FY15E (₹ mn) FY11 FY12 FY13E# FY14E FY15E

Operating Income 4,928 5,293 5,869 6,904 7,903 Liabilities

EBITDA 777 795 865 1,036 1,186 Equity Share Capital 100 100 100 100 100

EBITDA Margin 15.8% 15.0% 14.7% 15.0% 15.0% Reserves 1,598 2,046 2,528 3,076 3,730

Depreciation 49 45 45 57 69 Minorities - - - - -

EBIT 728 750 820 979 1,117 Net Worth 1,698 2,146 2,628 3,176 3,830

Interest 65 55 35 51 44 Convertible Debt - - - - -

Operating PBT 663 695 785 928 1,073 Other Debt 602 460 330 443 313

Other Income 8 5 23 14 8 Total Debt 602 460 330 443 313

Exceptional inc/(exp) 1 5 - - - Deferred tax liability (net) 28 26 28 26 26

PBT 672 705 808 942 1,081 Total liabilities 2,328 2,632 2,986 3,644 4,169

Tax provision 162 134 163 249 281 Assets

Minority interest - - - - - Net f ixed assets 381 388 639 782 912

PAT (Reported) 510 571 644 693 800 Capital WIP 8 145 - 48 48

Less: Exceptionals 1 5 - - - Total fixed assets 389 532 639 830 961

Adjusted PAT 509 566 644 693 800 Investments - 0 82 0 0

Current assets

Ratios Inventory 1,412 1,386 1,599 1,797 2,057

FY11 FY12 FY13E# FY14E FY15E Sundry debtors 1,377 1,512 1,507 2,081 2,382

Growth Loans and advances 362 283 321 380 435

Operating income (%) 20.6 7.4 10.9 17.6 14.5 Cash & bank balance 50 85 54 60 79

EBITDA (%) 32.6 2.3 8.8 19.8 14.5 Marketable securities - 156 - 156 156

Adj PAT (%) 40.2 11.3 13.8 7.6 15.4 Total current assets 3,201 3,421 3,481 4,473 5,108

Adj EPS (%) 28.6 11.3 13.8 7.6 15.4 Total current liabilities 1,265 1,325 1,219 1,662 1,903

Net current assets 1,937 2,096 2,262 2,811 3,205

Profitability Intangibles/Misc. expenditure 2 3 3 3 3

EBITDA margin (%) 15.8 15.0 14.7 15.0 15.0 Total assets 2,328 2,632 2,986 3,644 4,169

Adj PAT Margin (%) 10.3 10.7 11.0 10.0 10.1

RoE (%) 38.1 29.5 27.0 23.9 22.8 Cash flow

RoCE (%) 38.1 30.8 30.3 30.2 29.0 (₹ mn) FY11 FY12 FY13E# FY14E FY15E

RoIC (%) 30.8 26.3 26.3 23.8 22.3 Pre-tax profit 671 700 808 942 1,081

Total tax paid (151) (136) (161) (251) (281)

Valuations Depreciation 49 45 45 57 69

Price-earnings (x) 13.1 11.7 10.3 9.6 8.3 Working capital changes (731) 29 (352) (387) (376)

Price-book (x) 3.9 3.1 2.5 2.1 1.7 Net cash from operations (161) 639 340 361 493

EV/EBITDA (x) 9.3 8.6 8.0 6.6 5.7 Cash from investments

EV/Sales (x) 1.5 1.3 1.2 1.0 0.9 Capital expenditure (52) (189) (152) (248) (200)

Dividend payout ratio (%) 19.6 19.3 21.7 18.0 15.6 Investments and others 0 (156) 73 (73) -

Dividend yield (%) 1.5 1.7 2.1 1.9 1.9 Net cash from investments (52) (344) (78) (322) (200)

Cash from financing

B/S ratios Equity raised/(repaid) 339 (0) - - -

Inventory days 135 122 117 120 120 Debt raised/(repaid) 5 (142) (130) 113 (130)

Creditors days 101 95 81 93 93 Dividend (incl. tax) (117) (128) (163) (145) (145)

Debtor days 93 102 94 97 97 Others (incl extraordinaries) 1 5 - - -

Working Capital Days 140 128 137 137 137 Net cash from financing 229 (265) (293) (33) (275)

Gross asset turnover (x) 8.1 8.2 7.2 6.5 6.3 Change in cash position 16 30 (31) 6 18

Net asset turnover (x) 12.9 13.8 11.4 9.7 9.3 Closing cash 50 85 54 60 79

Sales/operating assets (x) 12.7 11.5 10.0 9.4 8.8

Current ratio (x) 2.5 2.6 2.9 2.7 2.7 Quarterly financials

Debt-equity (x) 0.4 0.2 0.1 0.1 0.1 (₹ mn) Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13

Net debt/equity (x) 0.3 0.1 0.1 0.1 0.0 Operating income 1,301 1,081 2,063 1,397 1,328

Interest coverage 11.2 13.7 23.2 19.2 25.5 Change (q-o-q) 18% -17% 91% -32% -5%

EBITDA 228 158 306 158 243

Per share Change (q-o-q) 80% -31% 94% -48% 54%

FY11 FY12 FY13E# FY14E FY15E EBITDA margin 17.5% 14.6% 14.8% 11.3% 18.3%

Adj EPS (₹) 10.2 11.3 12.9 13.9 16.0 PAT 182 112 237 117 179

CEPS 11.2 12.2 13.8 15.0 17.4 Adj PAT 182 112 237 117 179

Book value 33.9 42.9 52.5 63.5 76.6 Change (q-o-q) 132% -38% 112% -51% 53%

Dividend (₹) 2.0 2.2 2.8 2.5 2.5 Adj PAT margin 14.0% 10.4% 11.5% 8.4% 13.5%

Actual o/s shares (mn) 50.0 50.0 50.0 50.0 50.0 Adj EPS 3.6 2.2 4.7 2.3 3.6


21

Focus Charts

Revenue and growth trend EBITDA and EBITDA margin trend


PAT and PAT margin trend RoE and RoCE trend


Debt and D/E ratio Share price movement

Source: Company, CRISIL Research Source: NSE, BSE, CRISIL Research

3,369 4,085 4,928 5,293 5,869 6,904 7,903

36.1%

21.3%

20.6%

7.4%

10.9%

17.6%

14.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


(₹ mn)

Revenue Growth (RHS)

480 586 777 795 865 1,036 1,186

14.3%14.4%

15.8%

15.0%

14.7%

15.0% 15.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

-

200

400

600

800

1,000

1,200

1,400


(₹ mn)

EBITDA EBITDA margin (RHS)

232 363 509 566 644 693 800

6.9%

8.9%

10.3%10.7% 11.0%

10.0% 10.1%

0%

2%

4%

6%

8%

10%

12%

-

100

200

300

400

500

600

700

800

900


(₹ mn)

PAT PAT margin (RHS)

41.3

40.2 38.1 30.8 30.3 30.2 29.0 38.8

43.9

38.1

29.5 27.0

23.9 22.8

0

10

20

30

40

50


(%)

ROCE ROE

523 597 602 460 330 443

313

0.8

0.6

0.4

0.2

0.1 0.1 0.1

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

-

100

200

300

400

500

600

700


(X)(₹ mn)

Total Debt D/E (RHS)

0

50

100

150

200

250

300

350

400

450

Oct-

07

Fe

b-0

8

Ju

n-0

8

Oct-

08

Fe

b-0

9

Ju

n-0

9

Oct-

09

Fe

b-1

0

Ju

n-1

0

Oct-

10

Fe

b-1

1

Ju

n-1

1

Oct-

11

Fe

b-1

2

Ju

n-1

2

Oct-

12

Fe

b-1

3

Ju

n-1

3

Dhanuka NIFTY


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CRISIL Research Team

President

Mukesh Agarwal CRISIL Research +91 22 3342 3035 [email protected]

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