SPA report
We met the management of Insecticides India (IIL) to get a feel of company’s strategy amidst rising risk of reduced monsoon (as a result of El Nino) resulting in lower crop production & decline in use of agro chemicals. IIL, promoted by Hari Chand Agarwal & Rajesh Agarwal, is engaged in manufacturing of Formulation & Technical agro-chemicals and has more than 110 formulation & 10 technical products in its portfolio. IIL has formed a JV with OAT Agri Techno to focus on research & invention on new agro-chemicals. Given below are the key takeaways from the visit:-
Targeting 35% growth in top-line in FY15
The company is targeting ~35% growth in top-line in FY15 on the back of higher sale of technicals from Dahej plant, which the company had started recently. IIL is planning to ramp-up the utilisation at Dahej plant to ~80% in the current year which was ~40% in FY14. On the margin front, IIL expects EBITDA margin to hover around 10% (up 54 bps YoY), on the back of higher operating leverage. The company is planning to launch 1 technical & 3 formulation products between FY15-16. The technical product would be an insecticide & one of the formulation products would cater to the cotton crop.
3 pronged strategy to improve market share
IIL enjoys domestic market share of 5%. The company has 3 pronged strategy to improve market share, which are as follows- (a) Brand establishment- IIL has a policy of acquiring “high recall but off the shelf” brands. It then re-launches it & turn into leading brands through a mix of good product quality & intense advertising. It has acquired leading brands from Montari industries & Monocil brand from NOCIL and had turned Lethal & Monocil into success stories. It also adopts umbrella strategy, wherein it relies on product extensions of established brands for new application & crops. (b) Brand collaboration- It has tie-up & collaborations with leading global agrochemicals players like AMVAC (Technical collaboration) & Nissan Chemicals (Marketing tie up). © R&D- IIL, with its JV partner OAT, has set up a R&D Centre to focus on research & invention on new agro-chemicals. The JV has been granted 1 process patent & over 8 process patent has been filed. IIL intends to leverage
its expertise in successful brand launches, enhanced R&D focus and expanded manufacturing capacity to fuel its future growth.
Capex & Debt outlook
IIL has recently started the Dahej facility by investing ~INR 600-700 mn. No major capex is lined up going forward and it intends to invest ~INR 100-150 mn both in FY15 & FY16. Debt currently stands at INR 2426 mn of which ~INR 400 mn is ECB loan & rest is CC facility. IIL is likely to repay ECB of ~INR 70-80 mn both in FY15 & FY16.
Outlook & Valuation
Agrochemical industry is likely to grow at ~12%-13% over the medium to long term aided by need to increase the crop yield, deeper penetration of products & oppurtunities from patent expiry (~$ 9.3 bn worth of patented products are expected to expire between FY10-20 & patents of ~ 29 active ingredients of agrochemicals are expected to expire between 2013-2017). Prevention of crop losses is the immediate requirement to bridge the demand-supply gap in food grains, which necessitates deeper penetration of agrochemicals.
IIL with its vast distribution reach (50000 dealers, 3200 distributors & 25 Depots), large product portfolio, focus on R&D and strategy of brand collaboration & brand establishment is likely to be a key beneficiary of thrust on improving agriculture productivity in the country. The company is eyeing ~35% growth in top-line aided by higher sale of technicals in FY15. Top-line & bottom-line has registered a CAGR of ~23.0% & ~8.9% between FY10-14. The stock is trading at a PE of 12.8x its FY15 earnings.