Wed, Dec 05, 2012 at 13:48

Dhanuka Agritech: Modest kharif season; upbeat for H2FY13

CRISIL Research has come out with its report on Dhanuka Agritech. According to the research firm, EBITDA margin is expected to remain stable at around 15% in the subsequent quarters, as the company imports one-third of its raw materials, adverse currency movements may lead to margin contraction



CRISIL Research has come out with its report on Dhanuka Agritech . According to the research firm, EBITDA margin is expected to remain stable at around 15% in the subsequent quarters, as the company imports one-third of its raw materials, adverse currency movements may lead to margin contraction.

Dhanuka’s Q2FY13 revenues were marginally below CRISIL Research’s expectations as deficient monsoon in key pesticide consuming regions of Punjab, Haryana, Gujarat, Karnataka and parts of Maharashtra led to lower-than-expected sales growth. However, the company registered better-than-expected EPS, led primarily by expansion in EBITDA margin, in spite of tough market conditions. We maintain our fundamental grade of 4/5 on Dhanuka, indicating that Dhanuka’s fundamentals are superior relative to other listed securities in India.

Sluggish volume growth in Q2FY13; expect better demand in rabi season
Revenues grew by a modest 6.4% y-o-y to Rs 2 bn, with 2.5% growth in volumes. Deficient monsoon in some of the key agricultural regions led to a y-o-y decline in sowing of key crops such as rice, cotton and pulses. This impacted offtake of pesticides, adversely affecting the

performance of the industry. However, excess rainfall in September raised the water levels at 84 of India’s most important reservoirs, critical for water supply during the rabi season. We are, therefore, positive on the demand prospects of the rabi season. However, rainfall in southern states, especially Andhra Pradesh, is a key monitorable in H2FY13.

EBITDA margin expanded 29 bps y-o-y; expect stable operating margin going forward EBITDA margin expanded 29 bps y-o-y to 14.8%, better than our expectations. We expected it to be lower than in Q2FY12 on account of intense competition among industry players in a slowing demand environment. We expect EBITDA margin to remain stable at around 15% in the subsequent quarters. However, as the company imports one-third of its raw materials, adverse currency movements may lead to margin contraction.

PAT margin expanded 62 bps y-o-y to 11.5%

Higher operating margin and lower interest cost y-o-y led to higher PAT margin. Dhanuka’s total debt has declined to Rs 360 mn compared to Rs 545 mn in Q2FY12. EPS increased 12.4% y-o-y to Rs 4.7.

Revising revenue estimates downwards; EPS estimates unchanged We have revised our FY13 and FY14 revenue estimates downwards by 3% each, while our EPS estimates are unchanged. We have raised our PAT margin estimates based on H1FY13 performance and management guidance on effective tax rate going forward.

Valuations: Current market price is aligned

Our discounted cash flow-based fair value for Dhanuka is Rs 117 per share. At the current market price of Rs 126, our valuation grade is 3/5.

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