Production ramp-up to help Insecticides India narrow valuation gap2 min read . Updated: 22 Jun 2015, 09:59 AM IST
Over the last three years, the firm invested about `200 crore to augment manufacturing capabilities
Insecticides (India) Ltd’s fourth-quarter sales disappointment did not last long. The stock lost almost 10% in the fortnight after the results announcement as concerns about the monsoon season riled investors. But as fickle as the weather, the stock climbed back to the pre-results level as soon as the monsoon took off to a good start. The timely rains will set farming activity in motion, reducing risks to agrochemical sales.
Even as the monsoon season still has a long way to go, Insecticides (India) stock now is double the year-ago level now. Despite the sharp rise in the share price, analysts continue to maintain positive ratings on the stock.
Two factors are driving the positive views. One of them is the ramp-up of production. Over the last three years, the firm invested about ₹ 200 crore to augment manufacturing capabilities. Post the capacity expansion, the utilization levels stood at 65% at the end of the previous fiscal. As the firm ramps-up production at the new lines and launches new products, analysts expect utilization levels to pick up, driving revenue. “We expect strong growth, given its measures to ramp up revenue on existing branded products, launch of new molecules, potential scaling up of technicals business, and strong room to improve capacity utilization from ~65% currently," Motilal Oswal Securities Ltd said in a note. According to the brokerage, the management believes the current capacity has the potential to almost double the firm’s revenue.
The second factor is valuation. Even after the sharp rise, Insecticides (India) is still trading at a substantial discount to established peers in the domestic agrochemicals industry. The stock is trading at 13 times the current fiscal earnings per share estimates. Companies such as Rallis India Ltd and Dhanuka Agritech Ltd are quoting at a price to earnings multiple of 22 times. As the firm ramps up production, analysts expect its return ratios to improve, narrowing the valuation gap. “With capex behind, RoE/RoCEs (return on equity/return on capital employed) are set to improve over FY15-17E," B&K Securities India Pvt. Ltd said in a note. “Insecticides is currently trading at 30-40% discount to one-year forward average P/E (price/earnings ratio) of agrochemical industry. We expect part of this valuation gap to narrow gradually, going forward."
That said, the weather remains the major risk for agrochemical firms now. With farmer sentiments already weak, companies hope that the current season finishes off with no major crop damages. Another season of crop damages can further dim the outlook for agriculture investments.