Insecticides India - Branded products growing well - ICICI Securities

Three takeaways from Q1FY21: 

(1) In-spite of 16% revenue growth in branded products, lower availability of raw materials and logistical issues resulted in EBITDA margin contraction of 560bps YoY, 

(2) The company has focussed on reducing net working capital and debt which is good for long term health of the company and 

(3) Agrochemical industry is doing well with 

(i) 10% higher sowing, 

(ii) additional demand for herbicides and 

(iii) increase in pesticide consumption due to locust pest attack after 26 years. 

We remain positive on Insecticides due to (1) steady launches of high-margin products, (2) removal of generic products from the portfolio and (3) backward integration of technical. The stock is trading close to 1-year forward 'mean P/E - 1SD'. Return ratios are above cost of capital. Maintain BUY with a target price of Rs560 (9x FY22E, Earlier TP-Rs700).

- Q1FY21 results: Revenue growth was 14.3% YoY. However, EBITDA and PAT declined 22% and 11.8%, respectively. Gross and EBITDA margin contracted 690bps and 560bps, respectively. Due to lower availability of raw and packaging material as well as shortage of labour, EBITDA margin contracted.

- Segment-wise performance: Sales of branded products grew 16% YoY. Branded products contributed to 73% of sales in Q1FY21. Maharatna product revenues grew 3%. Sales of other branded products increased 27%. Institutional and Exports reported revenue growth of 5% and 53%, respectively. The company introduced two new products during the quarter. The revenue contribution of products launched FY13 onwards (i.e. Freshness index) was 34.8% during the quarter.

- Agrochemicals to grow at healthy rates in FY21: The company expects healthy growth in Agrochemicals in FY21 due to (1) normal monsoon, (2) most of the supply chain issues are resolved, (3) locust attack after 26 years increased need of insecticides, (4) 10% higher sowing in Kharif season and (4) lower labour supply has resulted in higher demand of herbicides.

- Write-off Rs100mn of trade receivables: The company has written of Rs100mn due to fraud committed by two employees in collusion with 16 dealers and distributors of the company. While the total amount involved in this transaction in Rs200mn, the company expects to recover Rs100mn.

- Maintain BUY: We model Insecticides to report revenue and PAT CAGRs of 7.3% and 22.3%, respectively, over FY20-FY22E. Return ratios are also expected to improve over the same timeframe. We reiterate BUY rating on the stock with a DCF- based target price of Rs560 (implied target P/E of 9x FY22E). The stock is trading close to its 1-year forward 'Mean P/E - 1SD'.