Buy Dhanuka Agritech - Microsec

We rate Dhanuka Agritech Limited (Dhanuka) a BUY. The company is in the business of pesticides, seeds and wind mill. It was incorporated in 1985. Dhanuka has 4 manufacturing facilities at Gurgaon and Sohna in Haryana, Sanand in Gujarat and Udhampur in J&K for formulation of various grades of pesticides. In addition to that, the company has 2 seed processing units at Mandideep in Madhya Pradesh and Turkapalli in Andhra Pradesh. The company has a research and development (R&D) unit, established in 1984 by the name of Dhanuka Agriculture Research Centre to carry out in-house field research and process development. The R&D unit received recognition from the Department of Science and Industrial Research and Ministry of Science and Technology. Dhanuka has technical collaboration with Du Pont, FMC Corporation, Chemtura Corporation, Sumitomo Chemical Co. and Mitsui Chemicals to introduce internationally proven products in the domestic market.

Focus on products launch boost revenue growth. During CY2012, company launched "Fuzi Super" (Rice Herbicide) and "Fluid" (Insecticide for control of caterpillars in pulses, vegetables, rice). 6-8 products to be launched over 2-3 years.

Expansion of distribution network leads to volume growth. Currently, it has 7,200 distributors (against 6,400 distributors in FY11) across India.

Valuation

Dhanuka traded at an average P/E of 10x in last 3 years. Currently, the stock trades at a P/E of 8.06x of FY2012 EPS. At the CMP of Rs.92.05, the stock discounts it's FY2013E EPS of Rs.13.50 at 6.8x.

Key Risks

1. The adverse crop conditions due to unpredictability of weather are likely to affect the demand of pesticides.

2. The volatility of exchange rate may impact margins as 30% of raw materials are being imported.

3. Lack of diversification in revenue as 99% revenue is coming from pesticide business and it has the dependency on domestic market only.

4. Restriction on import of cheaper raw materials from China along with the inability to pass on raw material costs may hamper margins.

Source : Equity Bulls

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