Buy Insecticides (India); target of Rs 590: Sharekhan

Sharekhan's research report on Insecticides (India)

Q3FY2021 results were weak as OPM missed by 306 bps at 5% (down 370 bps y-o-y); it led PAT to be 46% lower than expected at Rs. 6 crore (down 30.9% y-o-y). OPM shrunk due to a 492 bps y-o-y decline in gross margins to 21.1% (high raw material cost & rise in higher share of low margin generic products) and increase in logistic cost. Although revenues grew by 13.8% y-o-y to Rs. 299 crore, the mix deteriorated as share of branded products declined by 668 bps y-o-y to 68.8% while that of low margin institutional sales increased by 743 bps y-o-y to 26.4%. Management guided for 15% revenue growth for FY2022 led by new launches and expects gross margin to recover gradually to historical level of 29-30% supported by backward integration, product price hikes and rise in share of high-margin products.

Outlook

We maintain a Buy on Insecticides (India) with a revised PT of Rs. 590 as we expect strong earnings recovery (PAT to clock 38% CAGR over FY21E-FY23E) along with decent RoE of 15-16%. At CMP, stock is trading at an attractive valuation of 6.6x FY2023E EPS.