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DHANUKA AGRITECH LIMITED (DAL) INITIATING COVERAGE (NOT RATED) Dhanuka Agritech Limited (DAL) is a leading manufacturer of crop

p care products focusing on agro-chemicals, fertilizers and seeds for the farm sector. The strong growth in rural economy has led to sustained demand for the companys products and has helped it to maintain high RoE. The Group also has a pharmaceutical division, Dhanuka Laboratories Ltd, a major player in the oral Cephalosporin Antibiotics in India as well as South Asia. Agricultural growth to be key focus area Indias increasing population will continue to spur demand for agricultural output growth and increase in productivity with same level of area under cultivation and focus on prevention of crops from being destroyed. This will encourage farmers to continue using pesticides to sustain agricultural growth. Prices of end products have been continuously rising over the last 2-3 years and that has led to pesticides becoming easily affordable to Indian farm-land cultivators. We expect Indias domestic pesticide industry to see sustained growth of 1214% over the next 5 years. Focus on growth and operational competence Management is continually focused on expansion of its distribution network to enhance sales growth. DAL has managed to post an impressive growth of 27% CAGR over FY07-10, while the overall industry has seen lower growth of 18% CAGR for similar period. The company has also shown impressive performance in the first quarter of FY12 with a 17% growth in revenues over the same quarter last year, despite being the quarter with lowest revenue during the entire year. Operating profit margin (EBITDA) for Q1FY12 is slightly lower at 16.7% vs. 17% during the same period last year. Q1FY12 net profit is up 15.2% (YoY) at Rs 10.08 cr vs. Rs 8.75 cr last year. Lack of Diversification: Risk that needs to be monitored DAL is dependent on solely one business geography, viz. India. Diversification of revenues is a key risk for the companys business model. Also regulatory factors, unpredictable weather conditions in India, threat of pest persistent biotech seeds and inability to pass on the increase in costs to customers are some of the business risks in the pesticide formulations manufacturing sector. Valuation DAL is currently quoting Rs 101.6, at a multiple of 9.8x FY11 EPS. KEY FINANCIALS (Rs. Mn) Operating income EBITDA Adj. Net income Adjusted EPS Rs EPS growth (%) PE (x) P/BV (x) RoCE (%) RoE (%) EV/EBITDA (x)

FY09 3,369 480 232 5 37 6 2 41 39 4

FY10 4,085 586 363 8 57 7 2 40 44 5

FY11 4,862 711 510 10 29 9 3 38 38 7

INVESTMENT POSITIVES Ability to maintain market share In comparison to some of the larger players in the industry such as Bayer Cropscience, Syngenta, United Phosphorus and Rallis India, DAL has managed to maintain its domestic market share in excess of 5%. The company has no presence in the export market. The top 5 players in the Indian pesticide market are Bayer Cropscience (17%), Syngenta (10%), Rallis India (9), United Phosphorus (6%) and DAL (6%). The rest of the market is fragmented and has a number of smaller players who take up a share of the balance 50% plus of the overall pie with unorganized players having a market share in excess of 22% (FY10 industry data). Pesticide consumption is skewed towards generics and that is why a large section of the market is unorganized and manages to survive. Crop productivity needs to improve in India Consumption of pesticides in India is close to 600 gm/hectare, while in countries such as Taiwan it is 17 kg/hectare, in US the number stands at 3 kg/hectare, and Japan consumes 2 kg/hectare. Demand for food products is on the rise and there is a pressing need for the country to improve productivity. Crop losses are caused due to insects, rodents, weeds and diseases these damage 10-25% of the produce every year depending on the severity of the attack and also the climatic and environmental conditions. India loses nearly US$ 20 billion worth of crop each year as a result of inadequate and improper use of pesticides (Source: ASSOCHAM). Increased degrees of penetration will be key requirement to curtail crop damages and players like DAL are well placed to capitalize on this opportunity. Pesticide industry growth on track The domestic pesticide industry is worth Rs 84 billion and is expected to grow at a CAGR of 12-14% over the next 5 years. The industry has grown at a CAGR of 15.4% over FY07-FY10 from Rs 55 billion in FY07. Crop Protection Industry Segments There are three broad segments in the pesticides market based on application, viz. Insecticides, Herbicides and Fungicides. Due to tropical nature, India sees higher consumption of insecticides forming 70% of the total chemicals-based crop protection market. Herbicides and Fungicides account for the balance 30% taking an equal share of 15% each. DALs product portfolio is geared in a similar manner with a higher bent towards insecticides that form 49% of the overall pesticide sales for the company. Fungicides and herbicides form 14% and 36%, respectively.

Porter Analysis Buyer Power Moderate DAL has a diverse customer base across the country and is able to negate purchasing power of customers. The company is able to service its pan-India customer base via its large network of distributors. Supplier Power Moderate to High DAL gets 50% of its sales via tie-ups with collaboration partners. This places higher bargaining power amongst its suppliers for these products. Threat of New Entrants Low The sector has a large number of requirements like product registrations, extensive data submission, and regulatory compliance that together serve as entry barriers for new players to enter the sector. Threat of Substitutes Low Threat of substitutes is low as product development is an expensive and time consuming process which only large players can afford. DAL also has tie-ups with innovator companies and can make use of its extensive network to market products that are in demand. Rivalry Very High Indian pesticide industry has large number of unorganized players that form 22% plus of the overall market size. This makes DAL vulnerable to price competition and inability to pass on raw material price hikes to customers. Intense rivalry will only lead to a lag effect in passing on price increases.

DALs International Tie-Ups DALs collaborating partners in India include the following: o E.I. Du Pont, USA o FMC Corporation, USA o Chemtura Corporation, USA o Dow Agrosciences, USA o Sumitomo Chemical Co, Japan o Mitsui Chemicals, Japan o Hokko Chemical Industries, Japan o Nissan Chemical Industries, Japan o Yara International, Norway DAL is able to offer a large number of products due to its international tie-ups and these product sales comprise 50% of the total revenue of the company. Distribution Network & Marketing Strategy DAL has over 80 products under its umbrella and 400 stock keeping units across India. The companys distributor channel of over 6000 helps in procuring sales across all the major farming states. The company also has a strong network of nearly 2000 Doctors called as Dhanuka Doctors who work across villages conducting product demonstrations and providing counseling for the right product based on type of pest infestation and soil. Companys contact person who interacts with farmers is called as Dhanuka Doctor whose job is to ensure the companys brand image is maintained and encourage use of DAL products amongst the farmers. Competitive Intensity DAL lacks backward integration and has been historically faced with a key issue higher raw material costs. But, due to its collaborations and international tie-ups, the company has managed to tide over this problem. DAL exclusively markets some of the molecules that put it in a dominant position. For example, Targa Super contributing 20% to DALs revenue is exclusively marketed by the company in India. This helps the company to maintain competitive intensity and also enables an asset light business model.

Key Business Risks Delay in hiking Minimum Support Prices (MSP) Government has the authority to dictate MSP and any delay is likely to severely impact costs, especially when input costs are on the rise. Farmers buying power of pesticides is dependent on realization received from farm output. Consumption of pesticides and fertilizers is partly driven by the MSP fixed by the government. Pest Attacks, Unpredictable Indian Weather Indian weather conditions are unpredictable and any adverse climate will hurt demand for pesticides and crop protection industry overall. DALs major part of sales for the year is dependent on the monsoons and thus majority of sales happens during the second quarter of the year July to September period. Revenue Concentration in Single Geography India DAL derives its entire revenue from India and has no exposure to overseas markets to generate sales. This increases the business risk on geographic diversification, but the company also becomes an interesting investment choice with its focus on the domestic consumption theme. Regulatory Risks & Challenges Indias pesticides sector is faced with ever increasing regulatory challenge and compliances that become a hurdle in smooth and fast-paced growth. Every product launch must go through field trials and comply with several requirements to keep environmental safety and toxic levels under acceptable limits. These make the process of new launches time consuming and the company is continually faced with an overhang of product ban at any point of time. Despite these challenges, any new alliances by the company will be positive and add to growth momentum.

PAT & PAT margin

Revenue and revenue growth

EBITDA and EBITDA margin

Management Overview The promoters, Mr. R. G. Agarwal (Chairman) and Mr. M. K. Dhanuka (Managing Director), are brothers, and have been steering the company well through their vast experience in the field of pesticides and sound business knowledge. Mr. Agarwal began his career as a trader of pesticides and fertilizers. With a trading experience of 12 years, he got into the business of manufacturing pesticides by acquiring Northern Minerals Ltd (in 1980). Mr. Dhanuka, who also has over 30 years experience in the pesticide industry, looks after the day-to-day responsibilities of the company. The companys management has a decentralized structure, with highly experienced personnel holding key positions. CFO, Mr. V. K. Bansal, has been with the company for over 20 years. Mr. K. B. Kejariwal, a wholetime director, has also spent 18 years with the company and oversees production across plants. He has been instrumental in setting up production facilities for specialty molecules. Director Marketing, Mr. Rahul Dhanuka (Mr. Agarwals son) oversees the companys technical collaborations with large multinational pesticide companies. Mr. M.K. Dhanukas son, Mr. Harsh Dhanuka, is Director seeds division and is actively involved in the day-to-day operations of the same. Competent second line of management Key personnel from the second line of management have considerable industry experience and some have been with the company for a long time. Dr. O. P. Singh (President, Research & Development) has over 25 years of experience and has been with Dhanuka for the past 10 years. On the operations side, Mr. Vijay Kumar, senior general manager (Quality Control), has been with the company for the past 14 years; he holds an MTech degree from IIT Delhi and has an industry experience of 32 years. Mr. P. K. Mishra (GM Business Development) has been with the company for two years and was specifically brought on board to spearhead new initiatives such as retail outlet sales; he has an industry experience of 28 years. Company Overview Dhanuka commenced operations in 1980, when the promoters acquired the UK-based Northern Minerals Limited (NML), a sick company engaged in the manufacturing of pesticide formulations. Dhanuka Pesticides Ltd was incorporated in 1985 with the commissioning of the Haryana unit. This unit was primarily engaged in manufacturing technical grade (bulk) pesticides. In 1992, the company entered into a technical tie-up with E I DuPont De Nemours & Co. Inc., US to formulate, brand and market, on an exclusive and all-India basis, Methomyl under the brand name Dunet 12.5 L. In 1996, following a fire at the factory premises, manufacturing of technical was discontinued. Dhanuka Pesticides Ltd (DPL) was rechristened Dhanuka Agritech Ltd (DAL) in 2007 after the merger of two Dhanuka group companies DPL and Northern Minerals Ltd (NML). DPL was a listed company and NML was merged into this company. The promoters shareholding in DPL was 44%. It was 90% in the merged co NML. DAL has pesticide formulations centers in Gurgaon in Haryana, Sanand in Gujarat and Udhampur in Jammu & Kashmir, and seed processing plants in Mandideep in Madhya Pradesh and Turkapalli in Andhra Pradesh.

Plant wise Revenue FY10

Product wise Revenue FY10

Financials
INCOME STATEMENT Particulars (Rs. cr) FY 09 FY 10 Operating income EBITDA EBITDA margin Depreciation EBIT Interest Operating PBT Other income PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT 336.90 48.00 14.3% 2.70 45.30 10.30 35.10 0.50 35.60 12.40 23.20 23.20 408.50 58.60 14.4% 3.10 55.50 6.80 48.70 0.30 49.00 12.70 36.30 36.30 FY 11 486.20 71.10 14.6% 4.90 66.30 6.50 59.80 7.40 67.30 16.20 51.10 0.10 51.00 BALANCE SHEET Particulars (Rs. cr) FY 09 Liabilities Equity Share Capital Reserves Net worth Convertible Debt Other Debt Total Debt Defered Tax Liability (Net) Total Liabilities Asset Net Fixed Asset Capital WIP Total Fixed Asset Investment Current Asset Inventory FY 10 FY 11 Sundry Debtors Loans & Advances 36.1% 45.0% 37.3% 37.3% 21.3% 22.0% 56.3% 56.3% 19.0% 21.3% 40.4% 28.8% Cash & Bank Balances Total Current Asset Total Current Liabilities Net Current Asset Intangibles / Misc. Exp Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoCE (%) RoIC (%) Total Asset 14.3% 6.9% 38.8% 41.3% 31.8% 14.4% 8.9% 43.9% 40.2% 32.2% 14.6% 10.5% 38.1% 38.0% 34.3% 24.4 0.6 25.0 0.0 38.2 0.4 38.6 0.0 38.4 0.6 39.0 0.0 52.3 52.3 0.4 121.0 9.2 59.1 68.3 59.7 59.7 1.7 158.4 9.2 87.9 97.1 60.2 60.2 2.8 233.4 10.0 160.5 170.5 FY 10 FY 11

RATIOS Particulars Growth Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) FY 09

92.7 74.7 15.9 4.1 187.4 91.4 96.0 0.0 121.0 CASH FLOW FY 09 8.8 (4.1) (4.6) 0.1

109.4 95.6 17.7 4.0 226.7 106.9 119.8 0.0 158.4

141.9 137.7 37.4 4.9 321.9 128.2 193.7 0.7 233.4

Particulars (Rs. cr)

FY 10 16.7 (16.8) (0.1) (0.1)

FY 11 (16.7) (5.2) 22.9 1.0

Net cash from operations Net cash from investments Net cash from financing

Valuations Price-earnings (x)

Change in cash position Opening cash

6.3 Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout (%) Dividend yield (%) 2.2 4.1 0.6 27.8 4.4

6.5 2.4 5.0 0.7 20.6 3.2

10.0 3.0 7.9 1.0 19.6 2.2 Particulars (Rs. cr) Net Sales Q on Q growth (%) EBDITA Closing cash

4.0 4.1

4.1 4.0

4.0 4.9

Quarterly Financials Q1 FY Q2 FY 11 11 80.0 -29% 12.7 -23% 15.9% 8.7 8.7 -19% 10.9% 1.7 166.0 108% 21.1 66% 12.7% 16.3 16.3 87% 9.8% 3.3

Q3 FY 11 113.1 -32% 17.6 -17% 15.6% 12.4 12.4 -24% 11.0% 2.5

Q4 FY 11 127.1 12% 19.7 12% 15.5% 13.7 13.6 10% 10.7% 2.7

Q1 FY 12 94.2 -26% 15.2 -23% 16.1% 10.1 10.1 -26% 10.7% 2.0

B/S Ratios Inventory days Creditors days Debtor days Working capital days Gross asset turnover (x) Net asset turnover (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage 127 106 72 90 8.2 14.3 2.1 0.8 0.7 4.4 124 103 78 93 8.0 13.0 2.1 0.6 0.6 8.2 125 101 91 114 7.9 12.7 2.5 0.4 0.3 10.3

Q on Q growth (%) EBDITA Margin PAT Adjusted PAT Q on Q growth (%) Adjusted PAT Magrin Adjusted EPS

PER SHARE Particulars Adjusted EPS CEPS Book Value Dividend (Rs.) Actual o/s shares (mn) FY 09 5.1 5.7 14.9 1.4 45.9 FY 10 7.9 8.6 21.2 1.6 45.9 FY 11 10.2 11.2 34.1 0.2 50.0