Investors with a two-three year investment horizon can consider accumulating the stock of Delhi-based agrochemical maker Dhanuka Agritech. An expected recovery in the global agrochemical market, a ramp-up in sales of its new products launched for the first time in the country, good monsoon rainfall and demand for crop protection products should help the company sustain healthy growth in the near-to-medium term. At the current price of ₹1,501, the stock trades 29 times FY24 earnings and about 24 times and 19 times its estimated FY25 and FY26 earnings. The estimated earnings for FY25 and FY26 are at a good discount to large-cap players such as PI Industries. We recommend investors to accumulate the stock on declines, considering that the global agrochemical market is expected to recover from FY25.

Dhanuka Agritech started operations through acquisition of a sick unit — Northern Minerals Pvt Ltd, with an office in Delhi, in 1980. Over the years, the company has built capabilities both on the manufacturing and research and development (R&D) front. The company currently has four formulation manufacturing units located at Udhampur (Jammu), Keshwana (Rajasthan), Sanand (Gujarat) and Dahej (Gujarat), wherein it manufactures the over-330 active SKUs that are currently sold in the market.

In 2023, the company commissioned its technical manufacturing plant in Dahej as a backward integration initiative, aimed at improving profitability and operational efficiencies. The first full-year impact of Dahej plant is expected to accrue in the current fiscal.

On the R&D front, the company operates an R&D facility at Gurgaon for generating scientific data and evaluation of new chemistry. Besides this, Dhanuka has tied up with several global innovators such as Oro Agri, Sumitomo Chemicals, FMC, Bayer, OAT Agri Co, Mitsui and Nissan Chemical Industries to name a few for launching new products in India and also collaborate for other markets.     

With a large distribution network of over 6,500 distributors and 75,000 dealers, the company caters to North, West, East and South Indian markets. South and West are the two large markets accounting for over two-thirds of the company’s revenues. 

Sustaining growth

We believe Dhanuka to be well poised to sustain healthy growth in the next two-three years for three reasons.

For one, a recovery in prices and good domestic volumes. Global agrochemical markets have been under the weather over the last two years due to significant dumping by China and channel inventory pile-up. With most of the capacity expansions at China done, prices are expected to stabilise from hereon. The favourable base is expected to aid growth globally. Good monsoons in India is another positive for volumes domestically.

This should help the company’s revenue and operating profit margin in the near to medium term. Though exports currently contribute less than a fifth of the company’s total revenue, stable prices globally will help growth and margins in this segment. This will also support prices in the domestic market, as the pricing for key molecules largely track the global market.

Second, the Dahej plant, which houses technical and formulation manufacturing units, commenced production during the second half of last year. FY25 will be the first full year of operations at Dahej. The company has already started manufacturing two technical formulations from Dahej and expects to scale up going forward. Efficiencies and cost savings from backward integration will help margins in the medium to long term. 

Third, Dhanuka had launched three new products in Q1FY25, the full benefit of which is expected In FY25. New launches include Lanevo(an insecticide), in collaboration with Nissan Chemicals, Japan, with a ₹1,050-crore addressable market; Purge(a herbicide), targeting soybean and groundnut with an addressable market of ₹700 crore; and Mycore Super(PGR) with a ₹470-crore addressable market. The company targets mid-single-digit market share in these products in the current year. Further, the company is working on a robust pipeline of products in herbicides and fungicides, besides insecticides. These should help fuel the company’s growth over the next two-five years.

Financials

A strong balance sheet with negligible debt is yet another positive. Despite being in an inventory and working-capital intensive business, the company’s cash flow from operations remains comfortable at 40 per cent of the operating profit. While the working capital cycle has seen a marginal increase in FY24, owing to global factors and the cascading effect on the home market, there is scope to improve its cash conversion cycle from FY24’s 170-days level to the 130-levels as seen in FY23. The inventory de-stocking in the global market should help this.

In FY24, though Dhanuka reported a flat revenue growth at ₹1,759 crore, thanks to better product mix, operating profit margins improved over 300 basis points to 19 per cent. However, higher depreciation due to Dahej plant and marginally higher tax, led to a flat performance at the net profit level. In FY25, the management targets mid-teen growth in revenue and flattish margins. However, in FY26, Dhanuka is expected to clock higher revenue growth at about 20 per cent with an improvement in operating profit margin too.

Delay in the ramp-up in operations at Dahej plant as well as in the recovery of the global agrochemical industry are risks.

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