Dhanuka Agritech: Growth by innovation

Stocks of companies that manufacture agri inputs have been hammered in the past year. This is thanks to the slack demand for agri inputs, particularly crop protection chemicals on account of weak monsoon for two consecutive years, correction in the prices of agri commodities and high channel inventory.
 

However, given that the southwest monsoon is expected to be above normal this year, the underperformance of the stocks presents a good buying opportunity in select companies with good growth prospects.
 

The stock of Dhanuka Agritech is one such. After a modest performance in the last two years, the company’s growth is expected to pick up in 2016-17. The company’s strategic tie-up with global innovators to launch branded products in India has paid off and is expected to drive growth over the next few years. At the current price of Rs. 624, the stock trades at around 21 times its 2017-18 estimated earnings. This implies a 10 per cent discount to its two-year historical average valuation. Investors with a two-year horizon can buy the stock.
 

The strategic decision to adopt an asset light model and focus on marketing and brand-building instead of manufacturing has worked well for the three-decade-old company. Dhanuka Agritech has tied up with eight leading global innovators (three American and five Japanese) with strong R&D and product customisation capabilities and launches innovative products developed by its global partners in India. This has helped the company build a specialty products portfolio.
 

Better margins
 

Given that many of these products are being launched for the first time in the country and are global brands, the margins are very attractive. For instance, Dhanuka was the first company to launch DuPont products in India and the relationship still continues despite the latter’s direct presence in the country. Revenue from brands launched under the partnership pact with global majors accounted for over half the company’s 2014-15 revenue. Over the last three years, Dhanuka has launched 15 innovative products, most of which were through collaboration with MNCs while a few were developed in-house. This has helped the company improve its operating profit margin to 16.8 per cent in 2014-15 from 15.5 per cent in 2010-11.
 

Over the next three to four years, the company plans to launch six-seven specialty molecules. These should not only lift Dhanuka’s revenue but also improve its profitability.
 

Also, the conscious shift in focus towards the fast-growing herbicides and fungicides category should aid growth and margins. For instance, herbicides which accounted for about a fourth of the company’s revenue in 2008-09 now contributes about a third. Further, of the five products launched in 2015, three were herbicides or fungicides.
 

Besides improving margin in the medium term, higher share of weedicides/herbicides and fungicides can make Dhanuka less vulnerable to the vagaries of monsoon in the long term. Reason: While insecticides are applied post sowing, herbicides and weedicides application happens even prior to sowing and hence may be less impacted by weakness in monsoon.
 

On the growth path
 

The company has agri specialists called Dhanuka doctors who provide counselling and training to farmers on superior agricultural practices with the support of State Agriculture Universities. This has helped the company expand its reach and strengthen its brand equity among farmers. The strength of Dhanuka doctors has grown from 850 in 2009-10 to more over 1,500 currently; this should help the company reach out to a larger group of farmers.
 

Dhanuka markets the innovative products launched by international partners through its network of over 8,600 distributors/dealers who supply them to over 70,000 retailers across the country. Dhanuka’s portfolio of 83 brands caters to the needs of over one crore farmers across the country. The company plans to expand its distributor network significantly over the next few years. Dhanuka’s new plant at Keshwana in Rajasthan has been commissioned and has recently been given the licence to manufacture insecticides.
 

The company plans to shift production from its current manufacturing facility in Gurgaon to the new plant. With the new facility, Dhanuka’s powder and liquid manufacturing capacity has trebled. All these should help the company resume the growth path.
 

For the nine months ended December 2015, Dhanuka’s revenue grew 3.4 per cent. This was largely on account of below normal southwest monsoon.
 

Despite this, the company managed to improve its margin by 10 basis points to 17 per cent. However, higher tax outgo dented its net profit, which declined 6.4 per cent.