ValuePickr Forum

Dhanuka agritech

DHANUKA AGRITECH cmp around 70.

The company is a player in the agrochemicals space with majority of revenues coming from pesticides. It has started seeds division recently but the contribution from it is negligible. It also has established windmills as is the fashion with a lot of companies these days.

Promoter holding is around 75%. Total market cap is around 355 crores.

The company has shown very good growth over the past few years as shown from the figures below. The good part of growth is that debt has been within reasonable limits and company has very high return ratios above 35-40 levels.

The agri division has pan India presence with marketing offices in all major states and a dealer network of around 15000 dealers across India. The company claims to reach more than 1 crore farmers across India.

The company has tie ups with various international companies which ensures regular raw material supply and stable input prices, agreed quality and on-demand quantity.

LAST SIX YEARS RESULTS

YEAR

05

06

07

08

09

10

9M FY11

9MFY10

SALES

54

56

200

248

336

407

359

295

RM

42

37

114

151

203

246

OP

6.4

7.7

22.88

34

48.6

59

54

41

NP

3.4

4.18

10.5

17

23.2

36.34

37.45

25.5

DEBT

4

8.5

41

50

52

60

ROCE

40

40

35

41

40

DPS*

4

4

4

5

6

7

DIVIDEND PER SHARE ON SHARE OF RS 10. NOW SHARE HAS A FACE VALUE OF RS 2.

CURRENTLY THERE ARE 4.59 CRORES SHARES OUTSTANDING OF RS 2 EACH.

BASED ON 9M FY 11 RESULTS, THE COMPANY HAS DONE EPS OF AROUND 7.88 PER SHARE AND LIKELY TO DO MORE THAN RS 10 PER SHARE FOR FY 11 ALONG WITH HIGH RETURN RATIOS.

IT LOOKS LIKE A COMPANY WORTH DIGGING INTO.

Hi Hitesh,

Wow this looked like a great find, almost too good to be true until the cash flow statement & closer look at balance sheet exposed it.The company has earned -3.8Crs Cash from operations in the last 5 years & spent 46.4crs on CAPEX in last 4 years. So clearly the P&L statement & Cash Flow don’t quite add up. The reason is that Inventories & A/C Payables have grown at 60% CAGR in last 4 years, which is a red flag & its apparent that they are massaging numbers. Further at P/B of 3.59 it does appear expensive. I shall pass.

Hi Siddharth,

regarding inventories, this seems to be there with the whole sector be it aries or dhanuka or other agri sector stocks. Even debtor days are likely to be high in the sector as a whole.

Regarding company massaging the numbers, I doubt whether that is the case.

About valuations, I consider these companies based on the opportunity they have, the growth they have shown and are likely to show and the pe valuations besides looking for healthy return ratios. From whatever I have seen, I like the story but would like others’ views on the cash flow etc which you have pointed out.

regards

hitesh.

If you look at Cash Flow from Operations for the past 5 years, except for the brief blip between '06 and '07, they have been steadily improving their position. Yes, capex is a concern (haven’t read their annual report yet) but I guess they are a capital intensive company (I will refrain from commenting further on capex till I read their annual report). I would not really hold it against the company which finances their capex through debt and not only through CFO in their growth stage (again, debt has increased only ever so slightly over the past 4 years).

Coming to massaging their numbers, let us compare Sales growth to Sundry debtors growth.

2010 2009 2008 2007

Sales Growth (%) 21.17 35.70 23.84 259.95

Sundry Debtors growth (%) 27.99 18.86 7.49 43.89

Account payables has actually kept pace with Sales Growth (and in some cases, reduced too!) which implies they are increasing their business on credit (good and bad, but I would tend towards good, for a growth stock like this). This has to reduce at some point in the future, but currently not an alarming concern (and probably have not massaged the numbers - look at the cash from operations, it is increasing y-o-y).

Inventories is surely a concern and I had raised this inventories issue in Kaveri Seeds thread too. As Hitesh says, it is prevalent across the agri industry (and I can’t even hazard a guess why).

And yes, I would not enter the stock at these levels. Seems expensive to me. They are quoting at 11 P/E with nothing home to write about the CAGR of EPS over the past 5 years. With very little cash (just 4%), there is little margin of safety at these levels. (The actual P/B might be much more than quoted - Inventory, at such high levels in agri industry might not even fetch you cost value (Agri, Fashion clothing etc. are some of the sectors where I look at book value with a squinted eye). The actual P/B is probably much more). I shall pass the stock for now (we’ve had a very good monsoon and almost all agri stocks will quote at a premium) and will look to enter it at lower levels. Will be on my radar though.

If one separates the Income Statement from Balance Sheet & CF it certainly looks like a very good company but alas it just doesn’t make business sense. If the cash is not coming in i will have to assume the company is massaging numbers. Somehow things don’t quite add up. The company had a good cash flow position between 2001 -2004 during which time the sales were flat & they hardly made any profit. But from 2005 on the company seems to have struck gold & sales & profits seemed to have boomed. The jump between 2006 to 2007 is really astonishing. Hitesh any idea what contributed to this growth. Also of what little i know about the sector, it is quite cyclical but that hardly shows in this companies Income statement in last 5 years.More importantly, the Cash Flow simply hasn’t come since 2005 , the company earned -8.15 crs in last 6 years which i would call a big worry & no small blip. I have no idea about the sector perse & don’t understand the business(One needs to understand this too as Ayush pointed out) but if Debtors & inventories are high throughout the industry, why invest in it?? Reminds me of Textile & Airline stocks. I am sorry but in the end cash pays for everything, i am okay with -ve Free cash flow but consistent -ve CFO is a big no. A company like Rallis India has failed to grow at such a scorching pace during 2006-10 but look at its inventory/debtors & cash flows. I would rather but Rallis over this if at all i am to get into this sector.A lot of Midcap companies with better valuations & Healthier B/S & CFs are available now, so this one can certainly wait.

An interview with the cfo of the company taken sometime in july 2010. Since then the company has allotted 4.13 million shares to an fii-M/s India 2020 fund run by Lighthouse funds. This was done at a price of Rs 80.20 per share and after this allotment the aforesaid entity holds around 8.2% stake in the company. One of the directors made way for a nominee director of the above fund on the board.

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Meanwhile the promoters have sold around 6.7% of their holding during late august and early sep 2010 to bring down their stake to the sebi mandated level of 74.99%.

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**Mr. V.K Bansal, CFO, Dhanuka Agritech Ltd.****,**is a Commerce Graduate and Chartered Accountant joined the Company in 1990 as Internal Auditor. In the year 2009, he assumed the charge of CFO of the Company. During his service period the Company has grown continuously. He has played key role at the time of Rights issue, Merger of various Group Companies, ISO Certification and implementing ERP Project successfully.

Dhanuka Agritech Limitedis the umbrella company for the business of Agro-Chemicals, Fertilizers, and Seeds. The company reaches out to more than 10 million farmers with its eco-friendly high quality crop care products. The Agri-Division has a pan-India presence through its marketing offices in all major states in India. With a dealer network of more than 6000 across India, the Group has been able to make “Dhanuka” the preferred choice of farmers. With the promotion of DKKNT (Dhanuka Kheti Ki Nai Takneek) and the Groupas focus on extension activities coupled with strong R&D setup, Dhanuka has become a household name in the farming community across the country. Dhanuka Laboratories Ltd, another Group Company dealing in pharmaceuticals was started in 1998, with an objective of leveraging the groupsa expertise in providing solutions to Healthcare Industries.

Speaking withJasmine Kohliof**IIFL**, VK Bansal says, “The funds from FPO will be used to acquire a small size company; part would be used to expand production at Sanand, and for the renewal of our facility at Guragaon.”

Brief us about your business model?


**Dhanuka Agritech Limited is engaged in the manufacturing of a range of pesticides and fertilizers. The company manufactures a large number of herbicides/weedicides, insecticides, fungicides, plant growth regulators, plant growth stimulants and foliar fertilizers, in various forms - dust, granules, EC, SC and WDG.

We have four pesticides manufacturing units located at Gurgaon and Sohna (Haryana), Sanand (Gujarat) and Udhampur (J&K). We propose to set up a seed processing plant at our existing factory location at Mandideep in M.P. In addition, a seed processing cum Research Centre is under construction at Turkapalli in A.P.

Briefly take us through your various segments?


**We have Agro-Chemicals, Fertilizers, and Seeds as our main segments. Pesticides include herbicides/weedicides, insecticides, fungicides.

We are also in the business of seeds. In percentage terms, the seed segment accounts for a meager 2-3% of the business.

In Pharma business, we operate through Dhanuka Laboratories Ltd., the Pharmaceutical arm of Dhanuka Group. It is engaged in the manufacturing and marketing of Active Pharmaceutical Ingredients (API) and Advanced Intermediates in the field of Cephalosporin Antibiotics.

Our main suppliers are Ranbaxy, GlaxoSmithKline, Cipla, Alembic etc; two -thirds of this is generic and one-third is indigenous.

Tell us about growth rate, turnover and margins of your businesses?


**Pesticides are the main contributors to our revenues. As a group, our growth is in the positive terrain and our topline for this year (FY10) was Rs4.45bn for pesticides, in Pharma it was more than ~Rs1.5bn. Seed processing contributed ~Rs100-110mn.

Please highlight some of the key figures from your last quarter results? What reasons would you attribute to this growth?


**Growth in Sales was 21% and PAT at 57%. Reasons for this yearas growth are our constant efforts to tap markets for every single opportunity. India is a land of opportunities and has great potential for pesticides.

Please brief us about your capex plans? How do you plan to raise the funds?


**Capex would be around Rs30-50mn. We are coming out with a FPO, by December 2010. As of now the promoters holding in the company is ~ 90% and post the FPO we plan to dilute the same to 75%.

The funds raised from the FPO would be used to acquire a small size technical manufacturing company and part of the funds would be used for expansion of our production facility at Sanand and also for renewal of our facility at Guragaon.

How much do you plan to raise through FPO?


**We plan to raise Rs750mn approx. from the FPO. The amount may vary depending on the expansions at Sanand and Gurgaon

Who are your main customers? What are your growth drivers?


**The main target customers of Dhanuka are farmers, planters and pest control operators. Our growth drivers would be our potential to tap the markets, our field work to reach out to farmers and channel partners, and the schemes offered by us.

What edge do you have over your competitors?


**Our edge over the competitiors is our diverse product range and market reach, our customer base, our marketing strategies and our technical tie-ups. We add new products every year and it requires technical tie-ups. We are in the process of forming new technical tie-ups; as of now it is pre-mature to give out names.

What is your marketing strategy? What is your targeted ad spend for this year?

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**We are very aggressive with our marketing strategies. For a pesticides industry, it is very important to use the right product in right quantity at the right time. For this, we conduct literacy programmes for farmers, by giving product demonstrations and providing technical advice to farmers on right use of technology and about specific crop related problems.

Our marketing team visits villages and with a well trained team we help farmers solve their problems. We also provide them with product literatures, product samples, demo kits etc. to provide on the spot solutions. We also conduct classroom and field training for safety and new products.

Media publicity about the products, diseases and insects is carried out at state and zonal levels apart from large scale campaigning supported by wall paintings and publicity in fairs, and below the line advertising and publicity. Advertising spend per se is not much and it would be ~Rs30mn.

Brief us about your brand portfolio? Among your brands which is the highest contributor to your revenue?


We have around 80 brands in our portfolio. We add new brands every year. This year we are planning to introduce Luster, a fungicide for Paddy.**The highest consumed product is Targa Super, and its contribution to the top line is more than 14%, it can be attributed to our technical tie-up with Nissan Chemical Industries Ltd., Japan.

The top three brands contributing to our revenue are: Quizalofop Ethyl, Cartap Hydrochloride, Propargite.

We have market presence for all the main crops, cereals, oilseeds, cotton, vegetables, plantation crops, sugarcane. We have around 30 depots across the country. We have more than 6000 direct customers. We also have many technical tie-ups with international companies like Nissan, DuPont, Dow, FMC etc.

What is the share of unorganized sector? Any plans to acquire small local player? What is your current share among organized players?

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**Around 80% is organised and 20% is un-organised. Our market share among organised players is very small - around 6%.

We donat see any threat from small players, as in this industry size matters and you need to have a reach.

We have a pan India presence and we have an edge over the small players. So we do not foresee any such threats. We also do not have any plans to acquire any smaller company in our segment as of now. We also do not plan any acquisitions of patents.

What is the main raw material for your company? How do you procure your raw material? What are trend seen in raw material prices?

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** Our main Raw material is Technical Grade Pesticide. We import a lot of raw material from Japan, China, USA and some of them are purchased from multinational companies as well as Indian companies.

Normally the Pesticide prices depend on Crude oil prices. If oil prices are stable, then it does not affect our prices. But if there is a rise in Crude prices, Pesticide prices also increase.

What is the revenue contribution from exports and imports?**
**Dhanuka Agritech has no exports. We are importing materials from Nissan Chemical Industries Ltd., Hokko Chemical Industry Co., Mitsui & Co., etc.

What is your message to the shareholders?


**We assure our shareholders that the management of the company shall put its best efforts in growing their wealth through continuous growth. We shall also be always fair and transparent to the shareholders.

Likely complete ban or scheduled phasing out of Endosulfan is expected to severely affect Excel CropCare as half of its revenues are from the product. Dhanuka is also I think formulating and distributing Endosulfan with the brand name Endodhan… don’t know how much revenue it generates but keep a tab on it…

Rgds.

Mahesh

Hi,

Though this may seem irrelevant but this stock does come up on my technical screen with 30-60% deliverable quantity and even lower on some days.

I doubt its a trading stock :slight_smile: So who does the trading :stuck_out_tongue: A bit fishy seems some people involved

Dhanuka is a leading manufacturer and distributor of branded agrochemicals and seeds in the Indian market.It was recently ranked by Forbes magazine as one of the âBest 200 companies under a billion in Asiaâ.

Lighthouse funds has 15 % stake i the company which obviated the need for the IPO.It seems an interesting PE with lot of investments in cos like Innoventive,Unibic biscuits, Miles software, Imperial spirit.

Few investment experts specialising in agri sector are vey positive on this stock .Pe is only 7-8 currently.

The annual report of dhanuka for fy 13 is worth a read… It explains a lot of details about the agro chemicals sector and the company’s plans… Company turned debt free in fy 13 and seems to have posted good q1 fy 14 results…sep quarter is usually the best quarter and with normal monsoon likely to be good for this company…

Company has posted consistent though not spectacular growth over past many years maintaining a good balance sheet and healthy return ratios… Div payout has been consistent at around 20% over the years…

There seem to be some Lynchish attributes to to this company.

consistent growth.

high promoter holding

good balance sheet.

consistent div payout.

What seems impressive on closer look from screener is that the profit growth over the years has been higher than the sales growth… Company aims to treble its manufacturing capacities in next phase of expansion at a capital outlay of 45 crores by end of fy 14…

And with one of the best distribution networks among agro chem companies, it looks like an interesting stock to keep on radar…

1 Like

And no mutual fund holding :slight_smile: . I really like stocks where mutual fund holding is 0.

Thanks Hitesh for nice explanation. Stock seems quite interesting.

One of the risks mentioned in the crisil report:

Approximately one-third of Dhanukaâs raw materials are imported. This exposes the companyto foreign exchange risks as it hedges only 10% of its exposure on an average.

http://crisil.com/pdf/capitalmarket/ier-reports/CRISIL-Research_ier-report-dhanuka-agritech-2013.pdf

While Dhanuka is interesting, I like PI Industries better. Valued at roughly 11X F14, much bigger in revenue and more profitable too. Growing much faster than Dhanuka. Hvaing said that, I have not done any indepth work here, so would love to get enlightened.

as sanket chaudhary mentioned the higher imported raw material could be a risk factor…

but i think it might be a pass through albeit with a lag period.

Raw material prices have fallen in $ terms. In INR terms, RM prices are flat.

Some work up I have done recently on dhanuka, having had a re look at it.. Even on its previous wealth creating track record I think it merits a closer look.. Would invite views.

DHANUKA AGRITECH

CMP 135 MARKET CAP 680 crores.

No of outstanding shares.. 5 crores.

Promoter holding 75% no pledging.

COMPANY

Dhanuka agritech is an agrochem company with a pan India presence with more than 7000 distributors, which cover 550 districts, and 4500 dealers directly. The business reaches out to more than 10 million farmers.

The company has one of the best marketing networks in India with the ability to penetrate even the interior villages which has given the company a distinct advantage. It has a good reputation with farmers. The company with this edge encourages the MNC companies to partner with Dhanuka and use its extensive marketing distribution network to sell their products.

ASSET LIGHT MODEL.

Dhanuka has a very asset light model as is evident from its financials. Its main focus is to develop strong and widespread distributor network. Also a good brand building among farmers is its USP. It is focusing on colloborations with various global agrochem majors to procure the ingredients for manufacturing and marketing of speciality molecules. This has resulted in the company having low investment in manufacturing assets.

Expansion coupled with launch of new molecules is expected to drive growth driving forward.

EXPANSION

Company is planning a greenfield expansion at Rajasthan ata capex of 50 crores which will be double the existing capacity.. Thus after the expansion the capacity will be trebled.

Location current capacity capex

Udhampur 4720 kL

Gurgaon 5000 kL

Rajasthan 15000 kL 50 cr

Total capacity 24220 kL

FINANCIALS

No of outstanding shares 5 crores of Rs 2 each.

Promoter holding 75%, no pledging.

According to latest fy 13 AR, FII hold 8.25%, corporate bodies hold 5.44%, and Indian public holds only 9.6% shares..

MANAGEMENT COMPENSATION:

Besides Mr R.G.Agrawal, there are four other Dhanukas on list of executive directors of company and in total the five guys drew a total remuneration of Rs 8.6 crores against a total net profit 64 crores for fy 13 registered by the company.

MARKET CAP 680 crores.

Company has become net debtfree in FY 13 according to the AR.

Company has shown good growth in last few years.

Period sales cagr profit cagr ROE

10 year 39.76% 52% 33.88%

5 year 18.6% 30.7% 33%

3 year 12.58% 21.16% 27%

The growth has been very consistent since last ten years and there has not been a single year of de growth in sales or net profits in last ten years.

DIVIDEND PAYOUT has been close to 20% in last few years..Div for fy 13 has been Rs 2.7 per share.

EBIT margin has been close to 13-14% and net profit margin has been between 9-10%.

Operating cash flow has been healthy during past five years except for fy 11. Going forward due to asset light nature of business model, company is likely to generate good free cash flows.

Company features in Forbes magazineâs best under a Billion list since past two years.

A brief view of financials of last five years.

Period

Fy 09

Fy 10

Fy 11

Fy 12

Fy 13

Q1 fy 14

Q1 fy 13

Fy 14E

Sales

336

408

491

529

582

166

108

728

NP

23

36

51

57

64

17

11

77

Debt

50

57

60

39

33

Div payout %

23

18

19

19

21

FY 14 estimated Eps is around 15 which should be a growth of over 20% against a figure of 12.9 for fy 13.

First quarter results for fy 14 has been very encouraging and due to good monsoon is likely to be repeated during subsequent quarters for whole year.. Sep quarter is usually the best quarter for the company.

RISKS:

As Is common with most of the sectoral stocks, the fortunes of the company is dependent on monsoon.

Company is highly dependent on MNCs for technicals because it doesnât have the capability to develop new molecules.

Some of the raw materials are dependent on prices of crude oil and company is a net importer and hence exposed to the fluctuations in crude prices and currency fluctuations.

INVESTMENT THEME:

Consistent growth shown in past ten years.

With anticipated expansion and launch of new molecules, Dhanuka is poised to show strong growth for next few years.

Company has an asset light business model

Negligible debt.

High Return ratios.

High promoter holding with no pledging.

Based on fy 13 eps of 12.9, it is available at a PE of around 10.5 and based on estimated FY 14 estimated eps of 15, it is available at PE of 9. For an asset light company with negligible debt and high return ratios, and good sectoral tailwinds, stock seems attractively priced with a medium to long term view.

If company continues its consistent growth trajectory and with impending expansion, shows strong growth going forward, there are chances of some re-rating.

Company has been a consistent wealth creator over the years .. Its stock price adjusted for splits has been around 3.5 in 2004, 18 in 2006, 37 in 2008, 50-90 in 2010 and 80-110 in 2012.. Stock has given around 40 times returns in last 9 years since 2004. Its stock price chart shows a consistent upwards slant.

**The numbers look good; avg roce of last 3-4 years has been above 27-28%; co has generated fcf in every single of the last 3 years atleast; more so, the avg fcf / sales of last 3 yrs is 5% which testifies the company’s asset light model (a distinction given by Mr. Pat Dorsey); the company has signed in Amitabh Bachhan as its brand ambassador; this would definitely increase its brand awareness;
**

**Concerns
**

**1). I had tried approaching the management last year but in vain. If someone could share views about management or if we could actually interview them (following our Valuepickr method), it would be great.
**

**2). With 75% holding and rich dividend payouts, a promoter family taking home **13-14% of net profit in form of remuneration is a concern. I recently read an article in Business Standard which mentioned promoters taking home high salaries (as a proportion of net profit). It also mentioned of a rule “promoter director can take home remuneration of upto 5% net profit”. I would like to know more about this. Views invited.

Regards Meet

DHANUKA AGRITECH

The company does concall. One can read trasnscripts and participate in concalls.

Hiteshbhai,

With agri stocks gaining attention (Monsanto too rallying around 8.5% today), do you think Dhanuka would be a stock pick based on Fundamental / Technical / Opportunistic bet? It is close to its first support around 130.

Regards and hope you had a good time during Navratri.

Kuntal

DHANUKA AGRITECH

kuntal,

Yes dhanuka looks next in line for some fireworks… first quarter has been excellent… the management in the fy 13 AR indicates that they will be expanding product portfolio…Plus they have a good reach in terms of geographical presence… Company is nearly debt free with low floating stock… And as you say support is near 130 which is around its 200 dema .