DHANUKA AGRITECH LTD : A GOOD BUY !!!

Scrip Code: 507717 / DHANUKA

CMP:  Rs. 432.55; Buy at current levels.
Medium to Long term Target: Rs. 687; STOP LOSS – Rs. 398.00; Market Cap: Rs. 2,163.59 Cr; 52 Week High/Low: Rs. 468.95 / Rs. 127.30

Total Shares: 5,00,19,500 shares; Promoters : 3,75,09,175 shares –74.99 %; Total Public holding : 1,25,10,325 shares – 25.01 %; Book Value: Rs. 71.15; Face Value: Rs. 2.00; EPS: Rs. 19.24; Dividend: 140.00 % ; P/E: 22.40 times; Ind. P/E: 23.93; EV/EBITDA: 17.07.

Total Debt:  33.01 Cr; Enterprise Value: Rs. 2190.39 Cr.

DHANUKA AGRITECH LIMITED:  Dhanuka Agritech Ltd was incorporated in 1985 and is based in Gurgaon, India. The company was earlier known as Dhanuka Pesticides Ltd and changed to Dhanuka Agritech Ltd in 2007. The company, in April 2010, declared split in its face value from Rs. 10 to Rs. 2. Dhanuka Agritech Limited is engaged in manufacturing, marketing, and trading various types of pesticides. It offers herbicides/weedicides, insecticides, fungicides, miticides, and plant growth regulators/stimulants in various forms, such as liquid, dust, powder, and granules. The company also generates electricity through wind mills, as well as provides seeds. It serves farmers, planters, and pest control operators. Dhanuka Agritech manufactures a wide range of Agro-chemicals like herbicides, insecticides, fungicides, miticides, plant growth regulators in various forms- liquid, dust, powered and granules. The company has pan-India presence through its marketing offices in all major states in India. It has a network of more than 7,000 distributors/dealers selling to over 75,000 retailers across India and reaching out to more than 1 crore farmers. The company has technical tie-ups with 4 American, 5 Japanese & 2 European Companies. Dhanuka’s target customers are primarily farmers. Dhanuka Agritech Limited is locally compared with Monsanto India Ltd, Sabero Organics Gujarat Ltd, Insecticides (India) Ltd, Advanta Ltd, Camson Bio-Technologies ltd, Dhanuka Agritech Ltd, Kaveri Seeds Co Ltd, Sabero Organics Gujarat Ltd, Excel Industries Ltd, Punjab Chemicals and Crop Protection ltd, Rallis India Ltd, Insecticides India Ltd, Bayer CropScience India ltd, UPL Ltd, Bharat Rasayan Ltd, Meghmani Organics ltd and Globally compared with Monsanto Co of USA, Du Pont (E.I.) De Nemours (DD) of Delaware, FMC Corporation of Pennsylvania, Sumitomo Chemical Co Ltd of Japan, Syngenta AG of Switzerland, Vilmorin & Cie of Paris, Bayer Aktiengesellschaft of Germany, KWS SAAT AG of Germany, Sakata Seed Corporation of Japan, Yukiguni Maitake Co Ltd of Japan, Akikawa Foods & Farms Co Ltd of Japan, Hob Co Ltd of Japan, Hokuto Corporation of Japan, Kaneko Seeds Co ltd of Japan.

Investment Rationale:

Dhanuka Agritech Ltd (DAL) is a leading player in the agrochemical sector. Dhanuka Agritech Ltd is engaged in the businesses of Agro-Chemicals & Seeds producing under Dhanuka Agritech Ltd and its pharmaceutical ingredients are produced under its Dhanuka Laboratories Ltd. Dhanuka’s target customers are primarily farmers. In April 2014, company announced the receipt of approvals for its innovative product registered under the section 9(3) of the Insecticide Act of India, these approvals gives DAL the exclusive rights to sell the products in Indian markets. These products will be launched in this kharif season. The management has also filed for licenses for 6 new products and is confident of launching at least 2 products each year in the coming 3 years. Of these 6 products 3 will be of herbicide, which is a fast growing category in the agrochemical space. Specialty products contribute two‐third of the revenue while generic products contribute one‐third of its revenue. The company have received the approvals for two products under section 9 (3) – Mortar which is insecticides for paddy, vegetables and is produced in-house, & second product is Sakura herbicides for soybean produced by tie up with Nissan. Mortar would be launched in this month of Aug’14 and Sakura in Rabi season. There is one product more under section 9(3) of the Insecticide Act of India herbicides for sugarcane which produced in association with Nissan which is likely to be launched in second half of FY15. During the year, Company is in process of launching few products under section 9(4) of the Insecticide Act of India. Pager a insecticides for cotton and vegetables was launched in July’14 and Jackal insecticides for multiple crops will be launched in Sept’14. All above products are likely to drive the growth in second half of the year. According to the estimates from Crop Care Federation of India (CCFI), 85 % of annual crop losses are due to pest infestation, diseases and weeds. Pesticide penetration in India is very low, about 0.6 kg per hector as against its global peers of 5‐17 kg per hector. With the government’s focus on increasing the MSP (minimum support prices) for key crops like rice, wheat, maize, sugarcane etc. will lead to higher farm income and will provide an incentive for farmers to use more pesticides to improve their farm yields. Dhanuka Agritech’s has long standing tie ups with leading chemical companies of the world such as Nissan, Sumitomo, Chemtura, DuPont, FMC etc. Technical sources and expertise from these MNC’s along with their formulations will help the company to develop its own manufacturing plants. These products command higher margins and this is reflected from the company’s superior EBITDA margins which are about 16 % as compared to industry average of 14 %. For MNCs, DAL comes as a preferred choice due to its profound understanding of the Indian agrochemical market, its nationwide distribution network and strong farmer contact. So far DAL, its 25 products from its partners out of which 6 are among the top 10 revenue contributors. Majority of the new products in the pipeline will be coming from such tie‐ups. DAL’s asset light business model has enabled it to achieve superior asset turnover ratio as well as return ratio’s compared to its peers. The more capital intensive technical manufacturing process has been consciously avoided. Management’s priority still remains on leveraging its marketing and distribution network which is one of the largest in the country. It has also built a robust team of sales and marketing workforce which has fostered strong relationship with the farmers. Last year, it had roped in superstar Amitabh Bachchan as its brand ambassador. This marketing exercise has improved DAL’s brand visibility, increased brand recognition and had a positive influence on the target audience. Over the last few years management has taken measures to reduce the working capital which has resulted in strong operating cash flow making company nearly Debt free on balance sheet. Company’s higher profitability gives the flexibility to invest its cash back into the business for further expansion or development of new products. Company’s RoCE has consistently been maintained above 30 % which is higher than its peers in the industry. Tax rate for FY15 is expect to be under MAT however it would increase in FY16 as company is exhausting its MAT credits. Company’s management has more than 40 years of experience in this field. These all factors augers well for Dhanuka Agritech Ltd.

Outlook and Valuation:

Dhanuka Agritech Ltd bagged itself a place in the prestigious ‘Forbes Asia – 200 Best under a Billion lists’ for the third time in last four years in Asia – Pacific region. The Company is actively taking up the cause of Food security & Farmers interest in various forums & industry bodies like CII, ASSOCHAM and FICCI. Company's marketing team has taken many initiatives to strengthen the Brand image by signing Shri Amitabh Bachchan as Brand Ambassador. Globally, the Agro-chemical Industry is dominated by MNCs such as Syngenta, Bayer, Monsanto, BASF, Dow and Dupont which accounts for nearly 75 % by value of the overall $4,200 Cr Industry. These Companies are the principal innovators in this industry, and have invested heavily in R&D with an aim of reaping the rewards from it in form of patent protection. Dhanuka Agritech Ltd, currently has production facilities at Gurgaon, Sanand and Udhampur, with cumulative capacity of over 35,900 tonnes of solids & granules and over 11,000 kilo liters of liquids. Company is currently planning its capacity expansion at Gurgaon and Udhampur units, involving capex outlay of around Rs. 7 crores. Company has bought 10 acres (4,35,600 sq.ft)) of land at Keshwana in Rajasthan for setting up its new manufacturing unit, which will be of International standards with maximum automation. The expected capex will be around Rs. 45 to Rs. 50 crores. This unit is expected to be operational by the end of 2014 and this will triple its existing manufacturing capacity. Agro Chemicals sector is vital for the food and nutritional requirement of any nation, and so this sector remains the principal source of livelihood for more than 55 % of the population in India. In comparison to the other countries, India faces a greater challenge, since we have only 2.3 % share in world's total land area; India has to ensure food security for all of its population, which is about 17.5 % of world population (world population as on 2013 estimates was 718.4 cr and India was 126 Cr). India has the 2nd largest area under agriculture (179.9 million hectares) in the world with major crops such as paddy and wheat. India has achieved five-fold increase in food grains production from mere 50.8 million tonnes in 1950-51 to an all-time record production of 257.4 million tonnes in 2011-12. However, the food security and sustainability concerns have become much more severe today due to many challenges like fast rising population, diminishing arable land, rising cost of inputs, limited technology reach, increasing losses caused by insect pests and weeds and so on. Agro Chemicals play an vital role in this. Agro-chemical business is divided in two parts - 'Technical' manufacturing and 'Formulation' manufacturing. a) 'Technical' or 'Active Ingredients' manufacturers: These are essentially the manufacturers of raw materials for making Agro-chemicals, very similar to API manufacturers in Pharmaceutical Industry. This is quite asset intensive business and requires significant capital expenditure and serves mostly B2B segment. b) 'Formulation' manufacturers: These are manufacturers of final product from technical grade pesticides (the usable form of pesticides). This is quite an asset light model and serves mostly B2C segment. Domestic Agro-chemical Industry is expected to have a bright future due to favourable macro factors mainly due to increasing minimum support price (minimum price of agri-commodities set by Government of India); lower current penetration of Agro-chemicals in India, and MNREGA led labour shortage leading to increased herbicide usage. The Government of India is also launching several programmes, including 100 % seed treatment campaign, increasing food grains production, special focus on enhancing production of fruits and vegetables. The National Food Security Mission, National Horticulture Mission, Bringing Green Revolution in Eastern India and such other programmes are likely to increase the demand for Agrochemicals. The Rashtriya Krishi Vikas Yojna is having a provision for giving subsidy to farmers for appropriate plant protection measures. The Government policy for Minimum Support Price (MSP) and Fair & Remunerative Price (FRP) as in sugarcane is a good incentive for saving crop losses due to pests to have assured economic return. The MSP and FRP have been increased year after year. And Dhanuka Agritech Ltd gains out of it. The company's inherent strength lies in its asset light business model which has led to higher Return On Asset than the industry. The management’s focus on building strong distribution network along with collaboration with major global chemical players and introducing high‐margin specialty products, has paid rich dividends to the company and this will continue in the years to come. Company will keep on adding new products every year through its collaborations and is continuously on the look out to bring the latest technology to Indian farmers. With nearly Debt free balance sheet, sound financial backing and experienced management team, with healthy revenue visibility, sustainable margins and ability to monetize innovative products due to strong relationships with global giants given its huge distribution network makes Dhanuka Agritech an attractive buy. At the CMP of Rs. 432.55, the stock is trading at its all-time high P/E of 19.22 x FY15E, 16.38 x FY16E. The company can post EPS of Rs. 22.50 for FY15E and Rs. 26.40 for FY17E. One can buy DHANUKA AGRITECH LIMITED with a LONG TERM target price of Rs. 600.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 500.00 

KEY FINANCIALS	FY14	FY15E	FY16E	FY17E
SALES (₹ Crs)	739.50	887.40	1,082.60	1,487.70
NET PROFIT (₹ Cr)	93.10	112.40	132.10	180.60
EPS (₹)	18.60	22.50	26.40	36.10
PE (x)	22.60	18.80	16.00	11.10
P/BV (x)	6.30	5.10	4.10	3.00
EV/EBITDA (x)	17.70	14.50	11.50	8.10
ROE (%)	31.30	30.00	28.30	30.05
ROCE (%)	34.60	33.60	34.90	37.7

I would buy DHANUKA AGRITECH LTD for Medium to Long term for target of Rs. 600.00 and for the Shorter term the target would be Rs. 500.00. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of ₹ 398.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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