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 “

Our Research Desk’s views on the Stock Idea
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


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.


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 Market Price – Rs. 137.90
Current Dividend Yield – 2.04 %
Bloomberg / Reuters Code – DAGRI. IN/
DHNP.BO

Current Accumulation Range :- 130-140 Rs
BSE / NSE Code – 507717/ DHANUKA
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.

Market Cap (INR BN / USD Mn) – 6.27
/110.85 [1 USD – Rs. 62]
Total Equity Shares [Mn] – 50.00

Core Investment Thesis :

Face Value – Rs. 2

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.

52 Week High / Low – Rs. 112.35 / 162.5
Promoter’s Holding
FII
DII
Other Holdings


- 74.99 %
- 8.25 %
- 0.81 %
- 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 CoMarketing 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 biopesticides 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.
• 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
In process can take upwards of 4 is highly
ground water. The registration India agrochemical industry to 6 years, and the total cost incurred could be
anywhere between Rs 7-10 regulated by registering under section 9(3) is that company gets exclusive rights
crs. Benefit of multiple
to sell the product.
government agencies. Manufacture, sale,

import, export and use of
• 9(4) registrations - Molecules which are already registered can be registered by some other company
under section 9(4). This is a pesticides require multiple clearances from
much simpler process and requires less time. Registration can be done within 6various obtained, This is an
8 months. Once 9(4) registration is agencies. the company can sell the molecule under a different brand
name. This is extremely popular among andIndian consuming companies.
expensive the time In-Licensing process and
• Currently Dhanuka has 80 can often delay the launchgeneric, 54 are 9(4) and only two are under section
products out of which 24 are
of new products
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
Company
E.I.Dupont, US
FMC Corporation,US
Dow Agrosciences,US
Sumitomo Chemical Co , Japan
Mitsui Chemicals ,Japan
Hokko Chemical Ind.Co,Japan
Nissan Chemical Industries, Japan
Yara International,Norway
Chemtura , US
Bater AG

Products
Dunet,Hook,Qurin,Dhawa Gold,Hi-Dice,Cursor
Aatank,Markar,Brigade
Wrap-up,Zargon,One-up
Caldan,Sheathmar
Nukil,Bombard
Kasu
Targa Super
Samadhan
Omite,Vitavax,Dimilin,Banmite
Fluid

• 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.


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 large
of
• The Indian market has a
fragmented presence of large
players, lacks structured farmer
training and has a lot of genericdriven 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 1415% 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
Period

Product/Brand

Herbicide 1

Herbicide 2

Not Disclosed

Paddy Insecticide

Not Disclosed

Varsatile Fungicide

Not Disclosed

FY15

Not Disclosed

Not Disclosed

FY14

Category

Horticulture Fungicide

• 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.


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
Particulars
Net Sales

% Chg
Total Expenditure
% Chg
EBITDA
EBITDA Margins(%)
Profit before
Interest,Depreciation & Tax

FY11

FY12

FY13

• Dhanuka Agritech revenues are
541.22 576.16 646.4 768.06 895.26 expected to grow by 19% and
17% in FY14 & FY15 driven by
6.46 12.19 18.82 16.56 new product launches and
growth in existing block buster
491.02 499.22 565.74 678.97 791.41 products.
1.67 13.32 20.01 16.56 • Dhanuka Agritech has EBITDA
margins in the range 12-14%. We
50.2 76.94 80.66 89.10 103.85 estimate EBITDA margins of
about 12% in FY14 and FY15.
9.28 13.35 12.48 11.60 11.60

78.57 80.04 88.85

Interest

6.46

5.49

4.54

Depreciation

4.85

4.52

3.53

PBT

67.26 70.03 80.78

PAT

51.11 57.13 64.45

EPS

FY14E FY15E

• Dhanuka Agritech is likely to
report PAT of Rs.65.98 Cr in FY14
96.10 110.85 and 76.93 Cr in FY15 with an EPS
4.275
3.8 of Rs.13.20 and Rs.15.39 in FY14
and FY15 respectively.
3.84 4.48
• Dhanuka Agritech EPS is likely to
87.98 102.57 record a growth of about 13.20%
and 15.39% in FY14 and FY15
65.98 76.93 respectively.

9.89 11.07 12.68 13.20 15.39

Specialists in discovering Multibagger stocks “

Balance Sheet
Balance Sheet
Share Capital
Reserves & Surplus
Net Worth
Total Debt
Total Liabilities
Fixed Assets
Investments
Net Current Assets
Total Assets

FY11

FY12

FY13

FY14E

FY15E

10
160.47
170.47
71.69

10
204.59
214.59
59.31

10
252.76
262.76
46.94

10
306.33
316.33
45

10
359.54
369.54
40

242.16

273.9

309.7

361.33

409.54

39.07
0
203

39.33
15.27
219.3

63.87
8.21
237.62

90.33
9.03
261.96

102.39
10.24
296.92

242.16

273.9

309.7

361.33

409.54

• 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.


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

Share Holding Sep
%
2013

Jun

Mar

Dec

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

• 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.


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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