Dhanuka agro - Asset Light Agro Chemical business

Dhanuka Agritech Ltd (DAL) - A Shareholder Friendly Business Model

Content Index

• Our Research Desk’s views on the Stock Idea :- Slide #3 • Dhanuka Agritech Limited – Investment Snapshot :- Slide #6 • Industry Opportunity & Potential – An Overview:- Slide #7 • Dhanuka Agritech Limited – Business Overview :- Slide #11 • Investment Arguments :- Slide #22 • Dhanuka Agritech Limited – Financials:- Slide #38 • Concerns & Reasoning :- Slide #41 • Conclusion :- Slide #43

“ Specialists in discovering Multibagger stocks “

Dear Members, Before we get into the details of this Month’s “Multibagger Stock” - Dhanuka, let us understand the broad reasons for the recommendation of this idea, Our on-ground research has been consistently showing that the Rural & Semi-Urban areas have not been affected by the current downtrend. Structural productivity improvements and several government policies are helping them grow strongly compared to their Urban peers. This understanding helped us get ahead of the game in finding interesting Ideas among that space such as M&M Finance and Kaveri Seeds at early stages of their growth. We have also recommended companies which have a large part of their distribution in Rural & Semi-Urban markets like Bajaj Electricals, Atul Auto and Kewal Kiran. These stocks form substantial part of our Portfolios. We might have seen a structural reduction in Agriculture’s share as a % of Rural economy, but it is still the dominant back bone of the Rural economy. We at HBJ Capital have been tracking the entire Agriculture ecosystem and found good businesses across the spectrum. Some or the other factors such as Valuations (or) Regulations (or) Management Quality have restrained us from not investing in these stocks. We have also made “Errors of Omission” by not buying stocks like Rallis India and PI Industries, which were in our close tracking list. The major reasons for the interest in the Agriculture sector is obvious from the fact that, India has no other way but to improve the productivity of its agriculture. We all know that India’s huge population can be fed only by improving productivity, as increasing Land under cultivation is not a viable alternative. The biggest productivity improvements can happen by investing in better “Agri Inputs” which includes Seeds, Fertilizers and Pesticides. Regulatory constrains in Fertilizers eliminates most of the stocks in that space. Our Multibagger pick – Dhanuka falls under the “Pesticides & Crop protection” space. We have turned away from this stock in the past, since it is a pure Marketing and Sales company and hence we felt that the business had very little sustainable competitive advantage. But our extensive field work on understanding the ecosystem has “ Specialists in discovering Multibagger stocks “

Our Research Desk’s views on the Stock Idea

Our Research Desk’s views on the Stock Idea helped us in appreciating the inherent strengths of Dhanuka. We also have realized that, “Sales & Marketing” is the most crucial component in the Agri Inputs industry. The importance of an established sales and distribution channel can be seen from, the stickiness in the dealer’s relationship with the farmer by extending him credit for the purchase and the brand consciousness in the minds of customer for an established product, to the effort required by marketing people to establish a new molecule through farmer education. All these clearly indicate the competitive advantage which an established company like Dhanuka brings to the table. We have also come to the belief that Dhanuka’s business model of having a mix of In-Licensing products (both 9(3)’s and 9(4)’s), Co-Marketing brands and Non-Exclusive products helps it to achieve a mix of bigger scale and higher margins. Also its track record in launching new molecules and establishing their products as successful brands should give confidence to more Innovator companies in tying up with Dhanuka. Considering the costs involved in R&D of a new molecule, In-Licensing partnerships are a Win-Win situation for both the companies. While Dhanuka is a pure Marketing and Sales company, we believe that the advantage which some of its peers with an in-house Research team has is not very significant. Considering that the development of a Novel molecule involves Investment of over 200 Million $’s, no Indian company would be able to do them in the foreseeable future. Hence, tying up with various Innovator companies allows Dhanuka to bring technologically best products to the Indian market without attachment to any particular company (or) technology. Also Dhanuka’s on-ground presence and farmer interactions, helps it to identify products which has good potential and then partners with those product innovators. This has allowed the company to build a strong Brand portfolio across segments and partners. The importance of Co-Marketing deals in the sector is an indicator of the value, a distribution network brings in the Agro-Input business. While its prevalent across the spectrum, we believe that Dhanuka has been able to partner with several of its peers indicating its extremely strong distribution network. This business model helps Dhanuka to scale up its operations with less capital and tap the huge opportunity. PI Industries has in fact said in an interview that, “Their Agro-Inputs business is a cash cow which is feeding the Investment requirements of its successful but capital intensive CSM business”. This points to attractive nature of the In-Licensing business.


Our Research Desk’s views on the Stock Idea Hence, the Capital Allocation of the Management becomes an important criterion for Investing in Dhanuka. Management has been allocating capital wisely with an increasing Dividend Payout record and a decent control over the large Working capital requirements. While longer Working Capital days are symbolic of this Industry, the higher Fixed Asset turnover and decent margins allows it to earn respectable returns on its capital employed. We are also impressed with the recent activities which the company has been taking such as roping in Mr. Amitabh Bachchan as its brand ambassador.

Long Term Positives about Dhanuka Agritech :-

* An extremely Asset Light business model with Fixed Asset Turnover of 10X and hence little CAPEX requirement. * Strong Focus on Sales and Marketing has enabled it to build and scale up brands better than competitors. * Management focus on Cash generation has enabled it to maintain a Debt free Balance sheet. * A successful history of Tie-Ups has enabled it to build a “Strong Web of Deserved Trust” among global majors. * Company’s healthy Pipeline of 9(3)’s and 9(4)’s gives strong visibility for higher growth in profitability. * Co-Marketing deals and higher share of Innovator products helps the company in maintaining high Margins. * Company’s strong product portfolio on Herbicides would help Dhanuka in growing above-Industry average. * Dhanuka’s consistent efforts in strengthening its distribution channel & deepening it will help outperform. * Good will generated through ads with Mr. Bachchan and investments in Dhanuka doctors will help in long-run. * Company’s core ROE’s can be sustained above the 30% mark and growth can be funded by Internal accruals. * We believe that the next generation in Rahul Dhanuka, MD – Marketing will help it to grow steadily. * Company expects to grow its revenue 3-fold over the next 5 years which helps it topline achieve 25% CAGR.

All these put together gives us confidence about Dhanuka’s Asset light business model and the returns it can generate for Shareholders. While it is still not a High Conviction bet, we certainly believe that Dhanuka is a stock to take a bet and scale up once we gain more confidence in its execution capabilities.


Regards,

[ Gokul Raj . P, Head – Investment Research ]

Dhanuka Agritech– Investment Snapshot (as on Oct 31, 2013)

Recommendation :- BUY

Maximum Portfolio Allocation :- 4%

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 70%

Current Accumulation Range :- 130-140 Rs

Dhanuka Agritech is our typical Multibagger stock where there are certain risks involved but the overall Risk-Return scenario is extremely favourable for the Investor. Also with more focus on the Agriculture sector going forward, Dhanuka Agritech would definitely be a stock to watch out for.

Core Investment Thesis :

Company’s business model of in-sourcing with a strong focus on building the required Marketing and Sales network in India gives us enormous confidence of the company’s ability to capture the upcoming growth in the Agri-Inputs market. More specifically we believe that this growth will be extremely share holder friendly with a lot of value creation for Investors.

Current Market Price – Rs. 137.90 Current Dividend Yield – 2.04 % Bloomberg / Reuters Code – DAGRI. IN/ DHNP.BO BSE / NSE Code – 507717/ DHANUKA Market Cap (INR BN / USD Mn) – 6.27 /110.85 [1 USD – Rs. 62] Total Equity Shares [Mn] – 50.00 Face Value – Rs. 2 52 Week High / Low – Rs. 112.35 / 162.5 Promoter’s Holding - 74.99 % FII - 8.25 % DII - 0.81 % Other Holdings - 15.95 %


Key Investment Highlights

1.) Strong Structural Growth Opportunity :- Consumption of Agro-Chemicals is a strong growing industry and we can expect the organized sector to clock a 15% CAGR growth over the next 5 years.

2) Entrenched Distribution Network :- Dhanuka has a strong relationship with over 8000 dealers/ distributors and caters to over 80000 retailers. It’s distribution network is amongst the best in the industry.

3.) Global Innovator Tie-Ups :- The company has a strong front end infrastructure to establish a new molecule in the market and scale up its revenues. Its strong relationship with various Innovator companies which has been developed over the years is a key competitive advantage.

4.) Molecule selection & Brand Building :- Company’s strong understanding of the Indian markets and its relationship with farmers helps it to select the right molecule and educate the farmers about its positives.

5) Strong Product Portfolio:- Dhanuka has been able to build a strong portfolio of over 80 brands over the years which helps it to cater to the needs of every farmer and grow its scale.

6.) Asset Light Business Model :- Company’s business model of a mix of Exclusive Innovators, 9(4)’s and Co-Marketing deals helps it to grow its business without significant capital requirement. This mix has helped it to get the right products and build scale to emerge as one of the Top Agri-Inputs company.

7.) Efficient Capital Allocation :- Management has been frugal in their Capital Expenditure and its ROE’s continue to be one of the highest in the Industry. It’s dividend payout has been increasing.

8) Healthy Product Pipeline :- Dhanuka currently has a strong future product pipeline and hopes to launch 2 new products every year for the next 4 years which gives strong visibility about its growth.

9.) Credible Management :- The company has a good management and adheres to strong corporate governance norms. The next generation Rahul Dhanuka gives us hope of a stable future for the company.

10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations. The company is quoting at 9.5X its trailing FY13 Earnings which is reasonable for a company which has a strong operating performance and provides strong growth visibility.


Industry Opportunity & Potential - An Overview


Categories of crop protection products There are broadly 5 categories of crop protection products:

Insecticides: Insecticides protect crops by killing insects or preventing their attack. Insecticides may attack a particular type of insect or could be broad spectrum insecticides. Insecticides are used to manage the pest population below the economic threshold level. E.g. Chlorpyrifos is used to control insect pests in crops such as cotton, corn almonds, etc.

Fungicides: They are used to prevent the deterioration of crops due to fungi infestation. Fungicides are classified as protectants or eradicants. Protectant fungicides prevent or inhibit fungal growth and may have to be applied at regular intervals. Eradicant fungicides kill the pests on application. E.g. Anilazine is used to control fungal attack on lawns and turfs, cereals, coffee and various vegetables and other crops.

Herbicides: Herbicides or weedicides are used to prevent the growth of unwanted plants in a crop field. Herbicides could be selective, which kill the unwanted plants without any harm to the crop, or non-selective which kill all the plants. E.g. Glufosinate ammonium, a broad-spectrum contact herbicide, is used to control weeds after the crop emerges or for total vegetation control on land not used for cultivation.

Bio pesticides: These are derived from natural substances like plants, animals, bacteria and certain minerals and control pests by nontoxic mechanisms. Bio-pesticides are considered ecofriendly and easy to use. They could be classified as microbial pesticides, plant incorporated protectants and biological pesticides. They are of low volume and high effect formulations and require lesser dosages as compared to chemical pesticides. A growth area for bio-pesticides is in the area of seed treatment and soil amendments. Example of bio-pesticides includes Bacillus subtilis which is used as soil inoculant in horticulture and agriculture.

Others (Nematocides, Rodenticides etc): Fumigants and rodenticides are used to prevent the attack of pests during storage of crops. Plant growth regulators control or modify the plant growth process and are most commonly used in cotton, rice and fruits.


Global Agrochemical Industry overview


• Globally, the Agro-chemical Industry is dominated by MNCs such as Syngenta, Bayer, Monsanto, BASF, Dow and Dupont accounting for nearly 75% (by value) of the over USD 42 billion Industry.

• These Companies are the principal innovators in the Industry, and they invest heavily in R&D with the aim of reaping the rewards in the form of patent protection.

• Globally, herbicides account for largest value within agrochemical industry followed by insecticides and fungicides.

• Indian market however has largest value from insecticides due to tropical warm weather which is conducive for higher insect attacks on crops. Share of herbicides is growing fast now due to sharp rise in labour costs.

Global R&D Expenditure by Function


Cost of bringing a new product to market


• The cost of bringing a new product to market has been increasing from USD 152 mn in 1995 to about USD 256 mn in 2008. The leading Indian companies in the agrochemical space like Rallis, United Phosphorous etc are far smaller in size and cannot carry out innovations on their own. • Dhanuka Agritech realizes that research is not its strength and has instead opted for alliances with Innovator companies, there by de-risking its business as well as enjoying the R&D efforts of these global players. This has enabled the company to introduce new products to gain market share in the domestic market by leveraging the strength of the innovator to its advantage due to its knowledge of the local agrochemical market.

Increasing share of Generics


• With huge increase in R&D costs and the growing population’s demand for agricultural products at a reasonable price, the governments globally had to strike a balance between rewarding companies that are doing R&D to improve productivity and an affordable price to the farmer. • The developing countries were in favour of generics as the cost of patented products were out of reach of most of their population. Further, most patented products had gone off patent resulting in increasing share of generics. • The proportion of patented share currently stands at around 23% while generics and Proprietary off-Patent account for 51.7% and 23% share respectively .

Lower Consumption of crop protection chemicals


• The size of the Indian agrochemicals market is pegged at USD 3.5bn and is growing by 10-12% — among the world’s fastest. India is the fourth largest producer of agrochemicals after USA, Japan and China. However, its consumption of crop-protection chemicals stands at 570 gm per hectare which is relatively lower when compared to other markets. • The low consumption of crop protection chemicals can be attributed to fragmented land holdings, poor irrigation, dependence on monsoon and low awareness about the benefits of pesticides. • Going forward the demand for crop protection chemicals will catch up with other countries due to high demand for food grains, growing income from agriculture to farmers and better awareness about use of crop protection chemicals .

Limited Farm Land Availability + Growing Population


• Indian population has increased from 68 Cr in 1981 to 121 Cr in 2010 & is expected to reach 141 Cr in 2025. • To feed the projected population of 1.4 bn by 2030, the country needs to produce 355 mn tonnes of grains. • The expanded food needs of the future must be met through intensive agriculture as more expansion in arable land is not a solution. • The per capita arable land decreased from 0.34 ha in 1950-51 to 0.15 ha in 2000-01 and is expected to shrink to 0.08 ha in 2025 and to 0.07 ha in 2030.

Rising Food grain production to drive demand


• The rising population has led to increased food production which has increased from 50.8 mn tonnes in 1950-51 to about 257.40 mn in 2012. • The net availability of food grains per day and per annum which were 394.9 g and 144.1 kg respectively in 1951 increased correspondingly to 510.1g and 186.2 kg in 1991. • In order to maintain food security and to meet the ever-increasing demand of growing population of the country, the production of food grains will have to keep pace with population growth. • There is likely to be strong demand for agrochemicals sector as the available land for cultivation is fast decreasing while the population growth and demand growth are increasing exponentially. decreasing.

High Crop loss a demand driver


• The pesticides have played a key-role in improving the productivity of India, a country where famines were frequent, has been able to quadrupled grain production since 1951. • The yield losses in production of various crops after Green Revolution are huge due to the increased complexities of pests resulting from the change in cropping patterns, intensive cultivation, higher use of fertilizers, and climatic changes etc. • As per the estimates of central pollution control board, the highest food grain losses are due to weeds which account for 28% while the losses due to insect pest and diseases account for 23% and 25% respectively. • The high crop loss can be vastly brought down by use of agrochemicals which benefits the farmer to improve his yield and get a better income.

Yield Improvement Potential


• There is considerable scope for reduction in crop losses by use of agrochemicals which will help to improve yield and productivity. • Yield improves from 30% to 58% with the usage of Agro-Chemicals and this is a low hanging fruit to improve Yields in India. • The Yield per hectare in India is the lowest in the world at 2.9 mn tonnes per hectare as compared to7.8 mn tonnes in the US, 6.2 mn tonnes in Japan, and world average of 4 mn tonnes per hectare. • The attainable yield without pesticides is 100% as against 130% with the usage of pesticides. • The government is making sustained efforts to improve per hectare yield which in turn necessitates increased usage of agrochemicals, thereby creating a strong market for these Agro chemical companies.

Favorable cost benefit ratio


• The use of pesticides has been the most common method to mitigate crop losses by pest. • A study by the division of agrochemicals in India reported avoidable losses ranging from 8% to 90% in different crops. • The highest loss was in Cotton 49-90% followed by 40-88% in Pulses. • In terms of cost: benefit ratio, it was highest in groundnut (1:28) followed by sugarcane (1:13) and lowest in maize (1:3). • It has been estimated that every rupee spent on plant protection saves on an average, a produce worth five rupees.

Crop wise pesticide consumption


• Pesticide consumption among different crops has seen a significant shift over the years as indicated above.

• The share of Cotton which was around 33% in 2005 dropped sharply to 20% in 2009 due to the advent of BT cotton. Bt cotton carries a very high degree of resistance to the bollworm complex. In the recent past, there are reports of increased incidence of sucking pests in Bt cotton. Further, the new molecules are highly effective at much lower dosages, particularly against these sucking insect pests.

• The share of Paddy which was at 24% in 2005 has risen to about 27% in FY12 and has the highest consumption in the domestic market. This trend is expected to continue in the medium term.

• The share of other crops has more or more less been stable with no major changes to be expected in the medium term. Threat of genetically modified product is not big as sounded by a few analysts.

Increasing MSP to drive demand


• Government has increased the Minimum Support Prices (MSP) for almost all the crops. This has provided more cash in the hands of the farmers. More money enables the farmers to spend on discretionary items like crop protection thereby increasing productivity. • Also with higher MSP’s, the value of the same crop has increased which the farmer can’t afford to lose. afford to lose • Dhanuka Agritech derives half of its revenues from crops like Paddy and Pulses, which have benefitted most from the increased MSP. • This sharp increase will ultimately lead to increased spending on crop protection which will increase demand for agrochemicals.

Dhanuka Agritech – Business Overview


Dhanuka Agritech – A Snapshot • Dhanuka Agritech is a leading domestic agrochemical company which is engaged in the business of manufacturing agrochemicals and plant growth regulators.

• Dhanuka Agritech boasts of a Pan India distribution network of about 80,000 retailers and 8000 distributors. • Dhanuka Agritech operates three manufacturing facilities at Gurgaon, Sanand and Uthampur.


• Dhanuka Agritech has a strong management team with good corporate governance practices and has been a consistent performer in the industry. • Dhanuka Agritech has the wide product range across crops which has helped the company to de-risk its business without being dependent on a single crop. • Dhanuka Agritech plays to its strength and has grown its business through partnerships with global majors.

Registration Process


In India agrochemical industry is highly regulated by multiple government agencies. Manufacture, sale, import, export and use of pesticides require multiple clearances from various agencies. This is an expensive and time consuming process and can often delay the launch of new products

• In India agrochemical industry is highly regulated by multiple government agencies. Manufacture, sale, import, export and use of pesticides require multiple clearances from various agencies. This is an expensive and time consuming process and can often delay the launch of new products.

• 9(3) registrations - First time registration of a new molecule is required to be registered under section 9(3) of the Insecticide Act. It is a tedious and time consuming process and requires extensive field trials, soil testing, water testing, etc. to be conducted. These tests evaluate whether the pesticide has the potential to cause adverse effects on humans, wildlife, plants, etc, and possible contamination of surface water or ground water. The registration process can take upwards of 4 to 6 years, and the total cost incurred could be anywhere between Rs 7-10 crs. Benefit of registering under section 9(3) is that company gets exclusive rights to sell the product.

• 9(4) registrations - Molecules which are already registered can be registered by some other company under section 9(4). This is a much simpler process and requires less time. Registration can be done within 6-8 months. Once 9(4) registration is obtained, the company can sell the molecule under a different brand name. This is extremely popular among the Indian In-Licensing companies.

• Currently Dhanuka has 80 products out of which 24 are generic, 54 are 9(4) and only two are under section 9(3) viz. Targa Super and Luster. Company is working on 5-6 new molecules and plans to launch 2 molecules each year under 9(3) and 9(4) registrations. Two of them will be registered under section 9(3) which will give Dhanuka Agritech an exclusive right to sell them in India.

• Co-Marketing Deals - Dhanuka Agritech enters into co-marketing deals with other companies where it simply buys a formulation of an other company and rebrands it and sells it through its distribution network. This will help Dhanuka Agritech to sell bulk quantity which will improve inventory turnover as well as save on distribution and selling costs. Company has tie-ups with Bayer, PI Industries, Syngenta under such deals.

International Tie Ups


• Since its first international collaboration with Du Pont in 1992, for manufacturing formulations, Dhanuka Agritech has entered into collaborations with various MNCs in the US and Japan. It is one of the pioneers in such collaborative deals with global majors.

• The foreign collaborator typically supplies active ingredients as well as the exact combination in which the chemicals are to be mixed. Dhanuka formulates, packs, brands and sells them in India.

• Currently, Dhanuka Agritech’s sales through international tie-ups constitute around 60% of total revenue. In most cases, the product is marketed under the brand name of Dhanuka.

• The international tie-ups enables Dhanuka Agritech , to offer a large number of products addressing crop protection needs across different kinds of crops, type of pests, various soil types and weather conditions.

Company Products E.I.Dupont, US Dunet,Hook,Qurin,Dhawa Gold,Hi-Dice,Cursor FMC Corporation,US Aatank,Markar,Brigade Dow Agrosciences,US Wrap-up,Zargon,One-up Sumitomo Chemical Co , Japan Caldan,Sheathmar Mitsui Chemicals ,Japan Nukil,Bombard Hokko Chemical Ind.Co,Japan Kasu Nissan Chemical Industries, Japan Targa Super Yara International,Norway Samadhan Chemtura , US Omite,Vitavax,Dimilin,Banmite Bater AG Fluid

Diversified Product basket


• Dhanuka Agritech derives about 27% of its revenues from paddy, 20% from pulses, 18% from vegetables, 15% from cotton and 20% from others. • Dhanuka Agritech derives its revenues from a diversified product basket which de-risks its business as any demand contraction in one segment will be compensated by others there by ensuring that it is not exposed to a particular crop. • Dhanuka Agritech has been able to build this diversified product basket due to its partnership with international giants such as Sumitomo, Nissan, DuPont, Chemtura, FMC etc which share technological know-how. • This diversified product basket gives them the scale to grow its distribution network across regions. A wide mix also enables the company to reduce its overall overheads in the business.

Key Products of Dhanuka


• Dhanuka Agritech ‘s growth will be driven by launch of new products in the coming years along with the existing portfolio of blockbuster products such as Targa Super, Omite, Calden, Luster, etc. • Dhanuka Agritech launched Luster in H2FY13 which was jointly developed with DuPont. Initially the product will go live on paddy and has good potential for various cash crops and horticulture crops. The company claims that Luster is a unique product and there is no such formulation in India so far. • Dhanuka Agritech has a very strong portfolio of products for paddy crops which are the largest consumer of agrochemicals in India. • Dhanuka Agritech’s top 5 products include Targa Super (herbicide), Marker, Calden (Insecticide), Omite (Miticide) and Dhanzyme Granules (PGR).

Play on In-Licensing Deal


of large • The Indian market has a fragmented presence of large players, lacks structured farmer training and has a lot of generic-driven local brands. • However, given the rising support prices and government focus on raising productivity, we believe the market shall become more open to new products and in licensing deals. • Major domestic companies have business models varying from non-patented to patented, technical to formulations, and those involving no research at all to those with process research. The market is fragmented, with most of them being small regional players. The larger ones focus more on distribution and R&D in order to scale rapidly.

Dhanuka Agritech – Investment Arguments


Porters Five Forces Model


Asset Light Business Model


• Dhanuka Agritech has an asset light model and focuses more on marketing and distribution network rather than manufacturing technicals which are capital intensive in nature. • Dhanuka Agritech focus on marketing and distribution and this has led to a higher ROE of 27% compared to 16% of the industry. • Dhanuka Agritech enjoys a fixed asset turnover of >8x as compared to the industry average of 3x. • Dhanuka focuses on high margin products like Targa Super, Luster which has higher EBITDA margins of 14-15% as against the industry average of 12.7%.

Strong Growth potential in Herbicides


• Dhanuka Agritech in FY13 derived around 64% of its revenues from Insecticides,20% from herbicides and 16% from fungicides.

• Going forward we expect herbicides to grower faster on account of non availability of farm labourers due to NREGA scheme and sharp rise in wage cost. We expect this trend of shortage of agricultural labour and huge increase in agricultural labour cost to persist which will increase demand for herbicides.

• Dhanuka Agritech is likely to benefit from demand from herbicides as the company has products like Targa Super which has a 29% market share in the herbicides segment and the market for the product has been growing at about 20% per annum which will drive its growth.

• The advent of the NREGA scheme has resulted in labour moving to non-agriculture sectors which has resulted in higher growth for herbicides which will benefit Dhanuka due to its strong product portfolio basket in the segment. awareness of the benefits of pesticides.

Consistent new product launches to drive growth


• Dhanuka Agritech has been consistently launching new products which has enabled the company to grow ahead of its peers in the domestic market. • During FY13 the company has launched 5 new products viz. Fluid, Fuzi Super, Lustre, Onestar and Dhanzyme Gold Granules. • Currently the company is working on 6-7 new molecules and plans to launch 2 products every year for next three years which gives good visibility for growth. • Going forward the revenue share of new products would increase. New products to contribute higher margins compared to older products which are of low margins with the exception of Targa Super.

New Product Launches


• Dhanuka Agritech is on track to launch two new products in segments with limited or no competition for the next 3-4 years. • Dhanuka Agritech plans to launch 2-3 new variants of existing products which would support growth in the medium term . • Historically new product launches have driven growth and we expect this trend to continue in the medium term through sustainable product launches.

Period Product/Brand Category

FY14 Not Disclosed Herbicide 1

Not Disclosed Herbicide 2

FY15

Not Disclosed Paddy Insecticide

Not Disclosed Varsatile Fungicide

Not Disclosed Horticulture Fungicide

Country wide distribution network


• Dhanuka Agritech has three decade old association with farmers and stockists which has helped the company to be a preferred choice of MNC’s in India. • Dhanuka Agritech has a strong marketing and distribution foundation with over 8,000 distributors / dealers and 80,000 retailers. The company has good understanding of the needs of end users and incorporates them into its marketing and product avenues. Regular interactions with farmers have helped the company to increase brand reach. • Dhanuka Agritech employs technical experts – ‘Dhanuka Doctors’ (1,000 field force) – who train farmers for safe and judicious use of pesticides.

Aggressive Marketing to create brand awareness


of • Dhanuka Agritech has roped in Amitabh Bachchan as their brand ambassador. • Dhanuka Agritech has some block buster products in its portfolio. With Mr. Bachchan endorsing its products, brand visibility and brand recognition will increase. • Bachchan’s popularity in rural India will help the company to penetrate into newer territories and build brand awareness much more quickly than traditional types of advertising. It will also help to attract new customers. • Dhanuka’s focus on such marketing will help in creating long term competitive advantages.

Pricing Power & Input Cost


• Dhanuka Agritech ‘s revenues have grown steadily on account of the company’s ability to increase prices with a lag of 3-5 months which gives an insight into the decent pricing power enjoyed by the company.

• Dhanuka Agritech imports its raw materials on fixed contracts which are determined with the innovator company at the beginning of the year.

• Dhanuka Agritech does not pay any royalty or share revenues with the innovator companies. All payments are in buying the raw materials for the formulations where all royalties are included in its price.

• Dhanuka Agritech has margins of about 24% in innovator products while generics has margins of 10%. Dhanuka Agritech derives around 60% of its revenues from innovator companies while the balance is generated through generics.

Competitive Landscape


• Dhanuka Agritech has brands which are growing ahead of the industry and are among the top three in its addressable market. • Dhanuka Agritech has Targa Super which is one of its top brands and has an addressable market of Rs 5 Bn. The company has a 29% market share in this product and is ranked second in the category. • Dhanuka Agritech has Calden and Omite which form the top three products of the company with addressable market size of Rs.3 Bn and Rs.2 Bn and is the top brand in the market. • Dhanuka Agritech during the past four years launched 12-13 new products which includes 6 products through tie up with innovator companies. Innovation turnover index which measures revenues generated through introduction of new products over the last 5 years stood at 15% for Dhanuka Agritech.

Financials


Earnings Projection – P&L Account • Dhanuka Agritech revenues are expected to grow by 19% and 17% in FY14 & FY15 driven by new product launches and growth in existing block buster products.

• Dhanuka Agritech has EBITDA margins in the range 12-14%. We estimate EBITDA margins of about 12% in FY14 and FY15.

• Dhanuka Agritech is likely to report PAT of Rs.65.98 Cr in FY14 and 76.93 Cr in FY15 with an EPS of Rs.13.20 and Rs.15.39 in FY14 and FY15 respectively. • Dhanuka Agritech EPS is likely to record a growth of about 13.20% and 15.39% in FY14 and FY15 respectively.

Specialists in discovering Multibagger stocks “

Particulars FY11 FY12 FY13 FY14E FY15E

Net Sales 541.22 576.16 646.4 768.06 895.26

% Chg 6.46 12.19 18.82 16.56

Total Expenditure 491.02 499.22 565.74 678.97 791.41

% Chg 1.67 13.32 20.01 16.56

EBITDA 50.2 76.94 80.66 89.10 103.85

EBITDA Margins(%) 9.28 13.35 12.48 11.60 11.60

Profit before Interest,Depreciation & Tax 78.57 80.04 88.85 96.10 110.85

Interest 6.46 5.49 4.54 4.275 3.8

Depreciation 4.85 4.52 3.53 3.84 4.48

PBT 67.26 70.03 80.78 87.98 102.57

PAT 51.11 57.13 64.45 65.98 76.93

EPS 9.89 11.07 12.68 13.20 15.39

Balance Sheet


• Dhanuka Agritech investment in Fixed Assets saw a huge jump in 2013 with Fixed Assets being Rs.63.87 Cr as against Rs.39.33 Cr in 2012. Since the company is expanding its capacities the share of Fixed Assets is likely to be higher in FY14 & FY15. • Dhanuka Agritech debt has moved down in FY13 to Rs.46.94 Cr as against Rs.59.31 Cr in FY12. We expect the company to incur all its remaining capex through internal accruals and the debt in FY14 and FY15 to be Rs.45 Cr and Rs.40 Cr respectively. • Dhanuka Agritech Inventory days is likely to be around from 165 days in FY14 which is above the industry average of 88 days and we expect this trend to continue in FY14 and FY15 respectively.

Balance Sheet FY11 FY12 FY13 FY14E FY15E Share Capital 10 10 10 10 10

Reserves & Surplus 160.47 204.59 252.76 306.33 359.54 Net Worth 170.47 214.59 262.76 316.33 369.54

Total Debt 71.69 59.31 46.94 45 40

Total Liabilities 242.16 273.9 309.7 361.33 409.54

Fixed Assets 39.07 39.33 63.87 90.33 102.39

Investments 0 15.27 8.21 9.03 10.24

Net Current Assets 203 219.3 237.62 261.96 296.92

Total Assets 242.16 273.9 309.7 361.33 409.54

One of the best ROE’s


• Dhanuka Agritech has one of the best ROE’s in the industry at 24.5% which is higher than any other peer in the industry. • Dhanuka Agritech has an asset turnover which is the best industry due to its asset light business model. • Dhanuka Agritech financial leverage stands at 1.05x and is in line with industry peers. Dhanuka Agritech is a low debt company which gives it the option to invest its money into new products which will generate superior return ratio’s vis-a vis its peers.

Concerns & Reasoning


1.) Unpredictable weather conditions :

The performance of the Agrochemical industry remains highly dependent on the weather, which can affect the presence of disease and pest occurrences in the short term which changes from area to area. Thus, it may affect the demand for crop protection solutions accordingly. Indian crops depend highly on monsoons. Deficiency, delay or normal distribution of rainfall poses a key risk. Floods, droughts and other extremes like severe winter or summer may also lead to uncertainty of demand. 2.) Presence in a single market :

Larger players such as UPL, Rallis and PI Industries have a presence in the technicals segment, with revenues from exports. Dhanuka is completely focused on domestic markets and erratic weather conditions in India affects its revenue growth much more than it does for diversified companies with multiple continents as markets. 3.) Regulatory Risk :

The Agrochemical industry is a highly regulated by government across the world. Every product launch, patented or off-patent, have to go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits, which are expensive and time consuming and comes with risk of being banned anytime. Recent example can be cited as ban on Endusulfan in India by Supreme Court. 4.) Higher working capital days :

Dhanuka Agritech has a higher working capital of 165 days compared to industry average of 88 days which might affect its cash flows and affect its profitability.

Price Chart

• Dhanuka Agritech had been volatile during the past 2 years and had hit a 52 week high of Rs.162.5 before correcting over the last year. • The Stock has exhibited volatility typical of any mid cap stock considering the low liquidity in the stock. • Promoter’s continue to hold a substantial 75% of the company and their interests are well aligned.


Share Holding %

Sep Jun Mar Dec

2013 2013 2013 2012

Promoters 74.99 74.99 74.99 74.99

FII 8.25 8.25 8.25 8.25

DII 0.81 0.81 0.72 0.72

Others 15.95 15.95 16.04 16.04

Conclusion

The current year’s monsoon have been encouraging after 2 consecutive years of below average rain fall. Dhanuka’s performance during the rough phases of the past 2 years is giving us confidence about its expected performance during this year and going forward too. We believe that Dhanuka’s strong Business model along with the structural tailwinds in the sector should help the company to post strong growth for many more years to come. We believe that new products like “Luster” and it’s exclusive pipeline will help the company to grow its bottom line strongly. None of this growth would require additional capital and the company would continue to generate Free Cash flow which is a result of its business model. We also believe that the young promoter has shown aggressiveness in building the business and this gives us confidence in the future of the company. Margins may come under pressure with the increasing competitiveness in the Industry. Dhanuka would need to feed its pipeline with robust Innovator products to help it grow with good margins. We would like to track this over time by accessing the dynamic Industry trends. Also company’s healthy balance sheet and execution quality over the last decade provides us good “Margin of Safety”.

Despite all these factors, the stock continues to trade at very attractive valuations of around 8X forward EPS. Even though we have some concerns regarding the company’s Margins sustainability, we believe that the current Valuations is attractive enough to starting accumulating the stock. With strong growth combined with a re-rating, the stock can truly be a Multibagger.


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