Formulating Specialty Agrochemicals For Growth
Dhanuka Agritech (Dhanuka), is an agrochemical formulator with 5% market share, and a wide range of product offering of its own as well as alliance partner's products.
Increasing share of herbicides:
With enhanced marketing efforts and new product launches, Dhanuka has been able to increase the share of its Herbicide business from a mere 10% of revenue in FY07 to 28% in FY10. With more specialty products slated for a launch in next two years, we expect the share of herbicides to improve to 40% by FY12 thereby de-risking the company's revenue model.
Domestic business to outperform the market:
Agrochemical business is expected to grow at a CAGR of 22.2% to Rs. 6.65 bn during FY10-12E vis-a-vis market growth of 8-10% on account of a mature product basket, specialty product launches and enhanced marketing efforts. A diversified geographical presence along with multiple crop applications could impact of erratic monsoon.
Shift to advance production units to improve efficiencies:
The commissioning of new automated production line at Sanand and Udhampur will de-freeze production constraints for Dhanuka leading to an improvement in efficiencies. However we expect EBIDTA margin to remain stable between 13.1-13.7% during FY10-12E on account of increasing marketing and advertisement expenditure.
Margin of Safety - Land bank:
With phasing out of the Gurgaon and Sohna facilities (7 acres each), the company will consider deploying the land parcels for alternative use. Valuation & Recommendation: At the CMP of Rs. 74 the stock is trading at 7.8x FY11E EPS of Rs. 9.8 and 6.1x FY12E EPS of Rs. 12.6. We are intiating coverage with a "BUY" rating on the stock with a target price of Rs. 101 based on 8x FY12E EPS of Rs. 12.6, offering a 37% upside.
Dhanuka's well-established front-end capabilities position it well as a partner of choice for large agrochemical companies for marketing agreements. The company has built farmer connect via Dhanuka Doctor(s)' and is also investing in its own line of retail outlets. Sales from specialty products-MNC alliances contribute ~50% of sales. This is expected to further increase over new product introductions. Higher operational efficiencies (new facilities replacing old units), better product mix (favoring herbicides) ensures revenue visibility. Low R&D and backward integration reflects Dhanuka's asset light model and high return ratios.
Growth Formulation
Dhanuka Agritech (DAGRI) is a formulator and distributor of branded pesticides with a pan-India presence with more than 6,000 distributors/dealers and 85 products. The company follows an asset-light model with focus on brand building, which enables it to generate strong operating cash flows and return ratios. We believe that value migration in the agriculture industry towards crop protection to increase yields will open up immense opportunities for the pesticides industry and DAGRI, in particular. We initiate coverage on DAGRI with a Buy recommendation and a target price of Rs 99.
Dhanuka Agritech is a 25 years old, agro chemical company catering to only formulations segment of the industry. It is fifth largest player in domestic market with market share of approximately 6%. The Company has three manufacturing facilities in Gurgaon, Sanand and Udhampur... We believe the outlook for the company looks promising with factors like the low per-capita consumption of pesticides, which provides opportunities for growth, increased demand for food grains and the rising awareness about pesticide usage among the farming community. Based on our EPS of Rs. 12.8 for FY12E and a target multiple of 11x we arrive at target price of Rs. 141. We recommend "BUY" on Dhanuka Agritech Limited with a target price of Rs. 141 indicating a potential upside of 37%.
Innoventive Industries Ltd. (IIL) is a multi-product engineering company that makes precision-welded steel tubes for application in transportation, general engineering, power and other industries. IIL has developed an innovative manufacturing process (patent filed) for tubes that significantly lowers manufacturing cost by reducing multiple handling, wastage and energy requirement. IIL's strength lies in its focus on R&D to develop products of varied mechanical properties, material and customization through process engineering. The focus on R&D and innovation has enabled IIL to make its manufacturing process more efficient and broaden its product range. It has 122 products under various stages of development and commercialization. IIL has been able to scale up rapidly due to its cost-competitive products and constant introduction of new ones, enabling it to widen the customer base. The company is increasing its capacity to expand the portfolio of its value-added products, including CEW tubes, membrane strips, etc. Accordingly, we believe both revenues and earnings are likely to grow at a robust pace over the next few years due to continued focus on non-commoditized products and the benefits of subsidy (IPS scheme). We expect IIL to generate superior return ratios over the next few years (28% RoCE in FY11) on the back of strong earnings growth.
Diversified product portfolio and customer segments
Innoventive Industries Ltd (IIL) has diversified product portfolio which includes Drawn over Mandrel (DOM) tubes, CEW precision tubes, machined tubular components, press fabricated automotive products, oil country tubular products (OCTG) and other products for general engineering applications. IIL caters to automotive sector and especially to two-wheeler OEMs. The company has good presence in oil & gas and energy sector. IIL's products also find application in farm equipments, and other general engineering segments.
Forging a bright future
Innoventive Industries (IIL), promoted by first generation entrepreneurs, is positioning itself as an emerging player in value added engineering products. IIL's product profile includes precision steel tubes, membrane panel strips, auto components, CR coils and OCTG. The company's focus on innovation and R&D has produced value-added products, with new applications and expanding customer base and geographies. With the three-fold expansion of its CEW capacity, where it enjoys competitive advantage, we believe IIL is well placed to ride on sustained growth in the precision tube industry. We estimate IIL to deliver an earnings growth of 37% CAGR over FY11-14E on the back of capacity expansion. We recommend a Buy rating for IIL, with a price target of Rs 140, implying 7x FY13 EPS.
