CRISIL maintains fundamental grade of 3/5 to Insecticides

Insecticides (India) Ltd (Insecticides) has commissioned new manufacturing facilities in Udhampur (Jammu & Kashmir) and Dahej (Gujarat) in Q1FY12. While the Udhampur plant will be used entirely for formulations, the Dahej plant will be used to manufacture technicals and formulations. The management expects capacity utilisation in both plants to ramp up and full benefits of the expanded capacity will be available from FY13. Going forward, the company has also indicated that it will pursue technical as well as contract manufacturing tie-ups with multinational chemical companies. Therefore, coupled with a strong dealer/distributor network, comprising over 5,500 distributors and over 50,000 dealers spread across the country, we expect growth momentum to continue over the longer term. Consequently, we have raised our top line and earnings growth estimates beyond FY13. We maintain the fundamental grade of 3/5.

Insecticides has grown faster than the industry
While the domestic pesticides industry has grown at a 15.4% CAGR over FY07- 10, Insecticides posted revenue CAGR of 31% in the same period. The company has launched new products on a sustained basis, acquired off-shelf brands and turned them around through aggressive marketing strategies. These strategies have aided the growth of the company in the past.

Pressure to increase farm output is positive for pesticides players
Rising population, coupled with declining growth in crop production, is expected to provide a continued thrust on arresting crop losses and, therefore, on increasing use of pesticides. Increase in prices of farm produce has kept agri inputs affordable for farmers. We believe that the domestic pesticide industry will grow by at least 12-15% per annum until 2015.

Revising long-term earnings estimates upwards
We have revised our long-term revenues and earnings estimates upwards. We have now assumed 13% revenue CAGR over FY14-21 compared to 5% earlier. We have lowered our EPS estimates for FY12 and FY13 to Rs 34.0 and Rs 47.7, respectively, primarily due to assumption of slightly higher effective tax rate in FY12 and FY13 and higher interest and depreciation costs in FY13.

Valuations: Current market price is aligned
We continue to use the discounted cash flow method to value Insecticides. Based on our revised financial projections, the revised fair value is Rs 385 per share (Rs 338 earlier). Consequently, the valuation grade is 3/5.

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