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Dhanuka Agritech - Management Meet Update - 1Q likely to be subdued; all hopes pinned on the monsoons - BUY

Posted On: 2022-06-21 23:27:58 (Time Zone: IST)

Mr. Himanshu Binani - Research Analyst at Prabhudas Lilladher Pvt. Ltd.

Quick Pointers:

- 1QFY23 revenue growth likely to be subdued (low double digit growth).

- Monsoons on the lower side; impacting ground activities till date.

We interacted with senior management of Dhanuka Agritech (Dhanuka) to take an update on the business and outlook, going forward. Key highlights are (a) Delayed start of monsoons have kept ground sentiments lower; (b) weak rainfall in first 20 days (down 8% YoY on a PAN India basis); however major deficiency witnessed in key agricultural belts of central, western and Southern India; (c) 1QFY23 revenue growth for industry likely to be subdued (low double digit growth on a lower base of last year); (d) have taken price hikes of 3-4% across portfolio to pass on inflated cost; (e) RM prices remained stable, led by lower demand in domestic market; (f) Green-field project in Dahej remains well on track. Dhanuka sounded cautious on its 1Q performance, led by erratic monsoons. We believe that next few weeks would be crucial for the industry in terms of 1HFY23 performance (contributing ~60% of the annual revenues). However, pick-up in rainfall and sowing activities coupled with remunerative crop prices and lower base impact should bode well for the kharif season. We largely keep our estimates unchanged and would be watchful on how monsoons pan out over the next few weeks. Maintain 'BUY' with TP of INR870 based on 15xFY24E EPS. (5-year high/low 41x/7x, average 21x).

Delayed rainfall is playing spoilsport: Delayed start to monsoons this year (down 8% as on 19th June'22) has resulted in a decline of overall crop acreage during the ongoing kharif season (down 9% YoY as on 17th June'22). Acreages of all major crops remained subdued with Paddy/ Pulses/ Coarse Cereals /Oilseeds/ Cotton down 30%/7%/30%/18%/6% YoY respectively till 17th June'22. Further, lower acreages coupled with erratic rainfall led to a miss in sprays particularly in the herbicide category (Pre-emergent herbicides). However, the insecticides and fungicides have been impacted less till date as the consumption of these categories is generally at the later part of the season. The management cited for higher channel inventory particularly in the insecticides grades for few molecules like Monocrotophos, Acephate, Cypermethrin etc. as large players have dumped inventory in the channel. Dhanuka expects that domestic agrochemical industry to witness subdued growth in 1QFY23 (despite a lower base of last year; witnessed ~12% YoY in 1QFY22; ~+5% YoY in 1HFY22).

Liquidation of inventories remains the key for further price hikes: Industry has taken price hike to the tune of 3-5% across portfolio during 1QFY23 to pass on the inflated cost. However, liquidation has been on the slower side due to delayed monsoons. Hence, existing inventories needs to get liquidated for further price hikes with new inventory in the system. We believe, if inventories don't get liquidated then it can potentially pose risk to margins in the ensuing quarters. However, softer demand in the domestic market has resulted stability of RM prices.

Dhanuka expects low double digit growth in 1QFY23: Earlier, Dhanuka was expecting higher double digit YoY revenue growth during 1QFY23. Considering ongoing challenges, it now expects low double digit YoY revenue growth (largely driven by price led growth). While price hikes in the recent past (3-4% across portfolio) will likely support margins. Management remains hopeful for growth revival in the subsequent quarters, led by pick-up in rainfall and sowing activities aided by remunerative crop prices.

Dahej: INR3bn capex over FY22-24 progressing well on schedule: Management has cited for INR3bn capex to be spend over FY22-24 (Rs500mn/Rs1.5bn/Rs1.1bn in FY22/FY23/FY24) and is largely towards setting up formulation unit, 2 MPP's of pesticides in Dahej. The formulation unit is expected to be operational by FY23 and technical unit by FY24. DAGRI targets to achieve Rs2bn of revenues in FY24 and Rs3bn/PA in FY25/26 with EBITDA margins in the range of 12-15%.

Shares of Dhanuka Agritech Limited was last trading in BSE at Rs. 684.35 as compared to the previous close of Rs. 671.15. The total number of shares traded during the day was 393 in over 110 trades.

The stock hit an intraday high of Rs. 688.00 and intraday low of 673.10. The net turnover during the day was Rs. 268015.00.

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