Dhanuka Agritech gained nearly 125% during the last year, owing to good Rabi sowing season, full reservoir levels and improved farmer incomes
Lately, the rising chemical prices are looked at with concern as they can have some impact on the company's margins
Dhanuka Agritech Ltd, after having gained almost 125% in the last year, remains in a sweet spot. The good Rabi season sowing, full reservoir levels and improved farmer income keep prospects of the company firm like other agrochemical players. However, the Street now remains watchful as rising input prices that can pose some challenges on margins. Also, the company had reported moderate Q3 performance and thereby recovery in Q4 can help lift street sentiments.
The company’s moderate revenue growth Q3 was led by some impact of prolonged rainfall, especially in southern India. As South India contributes about 1/3rd of the industry's agrochemicals sales, the two cyclones in November 2020 too are to have resulted in lower consumption of agrochemicals feel analysts. Further, the lower pest infestations had meant tepid growth in the insecticide category. On the positive side, herbicide and fungicide categories continued good performance and the healthy performance of few top-selling products supported the show.
The analysts nevertheless had maintained a positive view on the company expecting a rebound. The factors that remain supportive were the company’s revenue mix being well-diversified segment-wise amongst insecticides, fungicides, herbicides and others. Analysts at Anand Rathi Research had said that they are positive on Dhanuka Agritech due to its asset-light model, tie-up with global agrochemical companies, high operating margins, strong balance sheet and growing product pipeline.
As the same remains favourable, however, off late the rising chemical prices are looked at with concern as they can have some impact on margins. Over 50% of Dhanuka's revenue comes from specialty products (mainly in-licensed) where the cost of technical/formulation is already fixed and hence Dhanuka does not need any price hikes in the specialty segments say analysts at Emkay Global Financial Services Ltd. It is the generic portfolio, where the costs of raw materials and packaging are up by 6%-25% across products, where price hikes may be required. The company may though resort to price hikes in line with the industry. Nevertheless, the impact of price hikes on volumes will remain to be watched.
Analysts at Emkay say “we remain watchful of near-term headwinds from high raw material prices". Even though they remain positive on the company looking at the strong balance sheet, high revenue contribution from the specialty portfolio, and strong distribution network.
Efficient capital allocation to manufacturing assets also remains a long term catalyst. The company has approved for setting up a plant for technical manufacturing of pesticides i.e. backward integration process, at Dahej, Gujarat which is expected to be a growth driver.