Ruchi Agrawal Moneycontrol Research
Dhanuka Agritech reported a decent Q2, indicating a recovery after a muted performance in Q1 FY19. The 10.4 percent year-on-year (YoY) uptick in revenue was driven by growth in volume and price uptick. However, an increased input cost ate into profitability and led to a margin contraction. While earnings before interest, tax, depreciation, and amortisation (EBITDA) remained largely flat, net profit inched up 4.2 percent.
Erratic and uneven monsoon rains, coupled with water shortages in key states, stunted overall revenue and profit growth for the company. Revenue was up 10.4 percent YoY, with decent volume growth and price upticks in Q2. However, higher raw material costs impacted gross profitability. Though higher costs were passed on to customers in the form of price hikes, with some existing inventory in channels, there was a time lag in passing on the price hikes, which impacted Q2 margin and led to a 190 basis points (100 bps = 1 percentage point) contraction in EBITDA margin. A lower tax rate helped provide cushion on net margin, with net profit up 4.2 percent.
In Q2, a fire incident at one of its manufacturing units in Keshwana led to an inventory loss of Rs 45 crore. The company has filed a claim for the same.
The board has approved a proposal to buy-back shares worth Rs 8,250 crore at a maximum price not exceeding Rs 550 per share.
China situation improving Imported raw material constitutes 25 percent of total inputs. Of this, around 33 percent consist of imports from China and supply from there played a part in the company’s profitability. As per the management, prices of key technical imports from China have stabilised now. However, they continue to remain at elevated levels. Moreover, the management expects a slight relief on the cost front from the rabi season owing to stabilisation in the supply situation.
New products gaining traction The company has launched 11 products in FY18 and the same have now started to pick up. The management now plans to capitalise on these by launching them countrywide and aggressively pushing them with marketing efforts and farmer trainings. From Q4, it plans to launch one grape fungicide product.
Outlook
The management expects 10-15 percent revenue growth for FY19, with 6-7 percent volume uptick. The annual tax rate is expected to be around 29-30 percent, impacting net margin. We expect margin to remain intact in coming quarters.
The stock has corrected 32 percent over the last one year. After the correction, the stock is now trading at an FY19 estimated price-to-earnings of 17 times. With the growth story remaining intact, the stock appears attractive. We expect consistency in earnings as the company has a healthy product mix, with more than half of its sales accruing from specialty molecules, strong pick up in recently launched products, low penetration of herbicides and fungicides in India and favourable macro and policy environment for agriculture companies.
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