Ruchi Agrawal Moneycontrol Research
After a sharp correction in the stock in the last few months, Insecticides India Ltd (IIL) seems like an interesting pick from the agrochemical space. The company reported a decent performance in Q1 FY19. While revenue growth remained muted (up 2.3 percent year-on-year) given the low share of generic products in its portfolio, earnings before interest, tax, depreciation and amortisation (EBITDA) saw a decent 10 percent uptick. The management was able to substantially reduce interest cost, which contributed to the 11.4 percent uptick in net profit, despite higher taxes and lower other income.
About the company The company manufactures technical grade agrochemicals and formulation-based pesticides, herbicides, etc. Major crops for the company are paddy, cotton, wheat, sugarcane, mustard and groundnut. IIL also offers urban pest products such as lethal wood care and mosquito coils. Formulation-based products, which have relatively higher margin, constitute around 77 percent of the business, whereas technical grade agrochemicals account for the balance.
What drove performance?
Despite no uptick in product prices, the quarter gone by saw healthy growth. This was majorly driven by a strong uptick in volumes. The quarter gone by also saw the benefit from a low base due to the implementation of Goods & Service Tax in Q1 FY18. The management said it has exited some low margin products during Q1, which led to lower topline growth. However, introduction of high margin products aided margin improvement.
Improving product mix
The company has strategically started exiting low margin products and is now focussing on launching new products and capturing higher market share in the higher margin product portfolio. This improved product mix is expected to further strengthen future margins.
Product line-up
IIL has a strong line-up in technical grade agrochemicals and formulation products. These are expected to drive volumes in coming quarters. The company has a strong R&D focus and intends to launch 6-7 new products every year. It is focussing on its branded B2B business and has plans to spend on a branding exercise.
Tapping export opportunity
The management has started focusing on the export segment and is planning to export branded formulation and technical grade agrochemicals to high growth emerging markets like Middle East, African and South East Asian regions. With rigorous registration rules, exports to the US and European nations ae relatively more difficult and emerging markets seems like a thoughtful approach.
Planned capital expenditure
It has already invested Rs 200 crore for setting up a plant in Dahej. The management is planning brownfield expansion of its technical grade agrochemicals facility at Dahej. It is planning to fund the capital expenditure from internal accruals. With substantial capacity expansion on cards, we see improved volumes and benefits of operating leverage in the future.
Raw material situation
IIL imports around 50 percent of its raw material requirement, half of which are imported from China. Owing to closure of factories in China, depreciating rupee versus the dollar and uptick in crude oil prices, input prices might see some uptick in coming quarters. But the company sees scope for an uptick in product prices, which would help in protecting its current margin.
Moreover, the new plant, which is scheduled to be completed in FY19, would help it capture demand created due to the supply scarcity from China. It also augurs well for IIL’s own raw material sourcing. With the government imposing restrictions on Chinese imports, this move is expected to usher in benefits for the company.
Key risks
In August, the government banned 18 pesticides. The list includes 4 products currently manufactured by IIL that are to be phased out by December 2020. Sales from the 4 products account for 15 percent of revenue. Given the substantial share, this move could have an impact on the companies FY20 earnings. However, the company has a strong line-up of new products in the pipeline, which are scheduled to be launched in FY19 and FY20. We expect the sales from these new products to offset the revenue impact.
Outlook The management expects around 15 percent revenue growth for FY19, which seems achievable. We expect margin to see a slight improvement due to product launches in coming quarters.
The stock has corrected 38 percent in the last 1 month and is currently trading close to its 52-week low. Post correction, the stock is now trading at FY19 estimated price-to-earnings of 12 times. With the growth story remaining intact, the stock appears attractive. We expect consistency in earnings as the company is moving to a healthier product mix, focusing on high margin products, low penetration of herbicides and fungicides in India, expectation of a near normal monsoon and favourable macro and policy environment for agriculture companies.
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