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Dhanuka Agritech Ltd

Detailed Report

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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

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Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

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Dhanuka Agritech Ltd

Going strong despite industry headwinds
Fundamental Grade Valuation Grade Industry 4/5 (Superior fundamentals) 3/5 (CMP is aligned) Chemicals

July 05, 2013 Fair Value CMP CFV MATRIX

Excellent Fundamentals

132 133

Fundamental Grade

Dhanuka Agritech Ltd (Dhanuka) manufactures branded pesticide formulations and holds ~5% share of the domestic crop protection market. Adverse weather-led subdued demand for agrochemicals slowed down Dhanukas revenue growth in FY13. However, with a normal monsoon expected through most of FY14, we believe Dhanuka is well positioned to take advantage of the growth prospects in the industry. Based on its pan-India distribution network, diversified product basket, product pipeline, management experience and higher RoE than that of peers, we reiterate the fundamental grade of 4/5 for Dhanuka. Expect industry to rebound in FY14; remain positive on long-term prospects Monsoons are expected to be normal in FY14. Consequently, we expect the pesticide industry to post higher growth in FY14. Over a longer horizon, burgeoning population coupled with stagnant agricultural output will make it imperative to arrest crop loss and, therefore, increase the usage of agrochemicals. We estimate the agrochemical industry to grow by 1215% per annum going forward. Management continues to focus on product tie-ups and augmenting distribution Tie-ups with innovator companies and expansion of the distribution network have led to an impressive growth in the operations over FY08-11. The company currently has ~7,400 dealers/distributors (~7,200 in FY12) across India and a well-diversified product portfolio (80+ products). It has launched three specialty molecules (one each of insecticide, herbicide and fungicide) during FY13 in small regional pockets and received an encouraging response. The products are now slated for pan-India introduction. Dhanuka also plans to launch three specialty molecules over 2014-15 in collaboration with global chemical companies. Key risks: Weather conditions, pest occurrence and exchange rate volatility Adverse weather conditions and inadequate pest occurrence have direct implications on demand for pesticides. Since Dhanukas import exposure is more than 30% of its raw material costs, volatility in /$ exchange rate could impact margins. Other risks are lack of presence in exports (a pure domestic play), difficulty to completely pass on hikes in raw material costs to farmers and the governments ban on toxic products. Expect two-year revenue CAGR of 16% and EBITDA margin of 15% We expect revenues to increase to 7.9 bn by FY15, at a two-year CAGR of 16%, driven by a rebound in industry demand and Dhanukas continued thrust on launching new products as well as marketing and distribution. We expect EBITDA margin and PAT margin to remain at 15% and ~10% levels respectively. Valuations: Current market price is aligned We have used the discounted cash flow (DCF) method to value Dhanuka and maintain our fair value at 132. This value implies P/E multiples of 9.6x and 8.3x FY14E and FY15E EPS respectively.

5 4 3 2 1

Poor Fundamentals

Valuation Grade
Strong Downside Strong Upside

KEY STOCK STATISTICS

NIFTY/SENSEX NSE/BSE ticker Face value ( per share) Shares outstanding (mn) Market cap ( mn)/(US$ mn) Enterprise value ( mn)/(US$ mn) 52-week range ()/(H/L) Beta Free float (%) Avg daily volumes (30-days) Avg daily value (30-days) ( mn) 5837/19411 DHANUKA 2 50.0 6,653/111 6,929/115 141/81 0.7 25.0 29,281 3.9

SHAREHOLDING PATTERN
100% 90%
80% 70% 60% 50% 40% 30% 20% 15.5% 15.5% 1.35% 8.3%

8.3%

16.0% 0.72% 8.3%

16.0% 0.72% 8.3%

75.0%

75.0%

75.0%

75.0%

KEY FORECAST
( mn) Operating income EBITDA Adj Net income Adj EPS () EPS growth (%) Dividend Yield (%) RoCE (%) RoE (%) PE (x) P/BV (x) EV/EBITDA (x) FY11 4,928 777 509 10.2 28.6 1.5 38.1 38.1 13.1 3.9 9.3 FY12 5,293 795 566 11.3 11.3 1.7 30.8 29.5 11.7 3.1 8.6 FY13# 5,869 865 644 12.9 13.8 2.1 30.3 27.0 10.3 2.5 8.0 FY14E 6,904 1,036 693 13.9 7.6 1.9 30.2 23.9 9.6 2.1 6.6 FY15E 7,903 1,186 800 16.0 15.4 1.9 29.0 22.8 8.3 1.7 5.7

10% 0% Jun-12 Promoter Sep-12 FII Dec-12 DII Mar-13 Others

PERFORMANCE VIS--VIS MARKET

Returns 1-m DHANUKA NIFTY 1% -1% 3-m 9% 3% 6-m 2% -3% 12-m 37% 11%

ANALYTICAL CONTACT
Mohit Modi (Director) Prateek S Chauhan Bhaskar Bukrediwala Client servicing desk +91 22 3342 3561 clientservicing@crisil.com mohit.modi@crisil.com prateek.chauhan@crisil.com bhaskar.bukrediwala@crisil.com

NM: Not meaningful; CMP: Current market price; # Based on abridged financials Source: Company, CRISIL Research estimates

For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

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Table 1: Dhanuka Agritech - Business environment

Parameter Revenue CAGR (FY09-13) Revenue CAGR (FY13-15) Product application Pesticides formulations 15% 16% Pesticides include three major categories insecticides, fungicides and herbicides Insecticides: Used for preventing, destroying, repelling or mitigating pests in order to protect crops Herbicides: Used largely to kill weeds Fungicides: Applied on crops to treat diseases, surface fungi on crops, etc.

Plant growth regulators influence formation of flowers, stems, leaves and the development and ripening of the fruit/grain

Geographic presence

Absence of the technical segment restricts Dhanukas presence in the export market unlike large players such as United Phosphorus and Rallis. Though Dhanuka is a 100% domestic play, it has a presence across major agricultural regions with southern and western regions contributing ~60% to the top line. ~5% share of the domestic market with focus on formulations. Collaborates actively with MNCs to introduce high end specialty products Rallis India, Bayer CropScience, Insecticides India, PI Industries, United Phosphorus Burgeoning population amid declining rate of crop production make it essential to arrest crop loss and, therefore, lead to increase in the usage of pesticides Despite a rise in pesticide prices due to increased raw material costs, consistent increase in MSP (minimum support price) of major crops and the governments support to the agriculture sector by way of subsidies have kept the cost of pesticides affordable for farmers While pesticides may form only ~15% of a farmers operating costs, not applying pesticides may cause crop losses which are much higher in comparison to the cost of pesticides. Therefore, a farmers decision to spend on crop protection is mainly determined by the cost of crop production and farm produce prices Unpredictable weather and occurrence of pests/diseases Fluctuation in foreign exchange rates as one-third of Dhanukas raw materials are imported Delay in increase of MSP / decline in farm profitability

Market position Key competitors

Demand driver

Key risks Source: Company, CRISIL Research

Dhanuka Agritech Ltd

Grading Rationale
Long-term growth story intact
Owing to deficient monsoon - and consequently lower demand for agrochemicals - during the kharif season in FY13, the domestic agrochemical industry, including players such as Dhanuka, registered a slower growth rate in FY13; the industry reported a growth rate of 1215% over the past few years except FY12. Though the industry remains susceptible to adverse weather conditions, we believe that a well-entrenched player such as Dhanuka is fairly positioned to take advantage of the long-term growth opportunities: increasing need to improve agricultural productivity, thrust on usage of agrochemicals to minimise crop losses and fiscal stimulus from the government.

Dhanuka has continuously expanded its dealer/distributor network; it has 7,400 direct accounts across the country as of FY13 catering to over ~10 mn farmers in India. Dhanuka has also launched three specialty molecules (one each of insecticide, herbicide and fungicide) during FY13 in collaboration with MNCs. The products were launched in a few regional pockets and the off-take has been encouraging; the management now intends to launch these products on a pan-India basis. Dhanuka expects to launch three more products over FY14-15 in collaboration with MNC partners; these products will be introduced for the first time in India with Dhanuka having the exclusive marketing and distribution rights. We believe that Dhanuka is likely to introduce more products sourced from MNC partners going forward and we are confident of its ability to leverage its distribution network to increase sales.

Focus on improving agricultural productivity, usage of agrochemicals to minimise crop losses and fiscal stimulus from the government offer long-term growth opportunities

Table 2: Performance of pesticide players

Company Dhanuka Agritech Rallis India Insecticides India United Phosphorus (domestic) Bayer CropScience **CAGR over FY08-11 Source: Industry, CRISIL Research FY07-11 revenue CAGR 25 14 28 23** 27** FY11-12 revenue growth 9 7 16 15 1 FY12-13 revenue growth 11 13 18 18 18

While Dhanukas revenue growth has slowed, it has been able to maintain a healthy balance sheet on account of the managements focus on debt reduction and receivables collection. D/E ratio has declined from 0.2x in FY12 to 0.1x in FY13. Debtor days, although historically high compared to other players, have moderated during FY13.

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Table 3: Kharif crop output declined due to erratic monsoons during 2012-13
2011-12 (mn tonnes) Crop name Rice Jowar Bajra Maize Ragi Small millets Coarse cereals Cereals Tur Urad Moong Other kharif pulses Total pulses Total food grains 2nd Advance estimates 90.2 3.0 9.7 16.1 2.3 0.7 31.8 122.0 2.7 1.3 1.5 0.9 6.4 128.4 Final estimates 92.8 3.3 10.3 16.5 1.9 0.5 32.5 125.2 2.7 1.2 1.2 0.9 6.1 131.3 2012-13 (mn tonnes) Target 90.0 3.5 10.0 17.0 2.3 0.7 33.5 123.5 3.1 1.4 1.1 1.5 7.1 130.6 2nd Advance estimates 90.7 2.6 8.2 15.6 1.8 0.4 28.5 119.2 2.8 1.3 0.8 0.6 5.5 124.7 Relative change in output compared to 2011-12 kharif season (%) (2.3) (21.2) (20.4) (5.5) (5.3) (20.0) (12.3) (4.8) 1.9 6.7 (30.0) (31.1) (9.8) (5.0)

Source: Ministry of Agriculture, CRISIL Research

Normal monsoons in FY14 expected to revive agrochemical industry

While the area under sowing for the FY13 rabi crop was higher by 1.6% compared to FY12, the crop output based on the 2nd Advance Estimate released by the Department of Agriculture is expected to surpass the target for FY13. Also, MSPs for rabi crops have increased by 1020%. Consequently, higher farm incomes from rabi crops may support growth in agrochemicals during the first quarter of FY14. The south-west monsoon remains a key monitorable; if normal, it could propel a healthy kharif crop over a low base of FY13 and, thereby, accelerate agrochemical sales.

Dhanuka Agritech Ltd

Table 4: Rabi crop output expected to surpass 2012-13 targets

2011-12 (mn tonnes) Crop name Rice Wheat Jowar Maize Barley Coarse cereals Cereals Gram Urad Moong Other rabi pulses Total pulses Total food grains 2nd Advance estimates 12.57 88.31 3.06 5.5 1.68 10.24 111.12 7.66 0.44 0.25 2.54 10.69 122 Final estimates 12.6 94.9 2.7 5.3 1.6 9.6 117 7.7 0.5 0.4 2.4 11 128.1 2012-13 (mn tonnes) Targets 14 83 3.5 5.5 1.5 10.5 112.5 8 0.5 0.4 2.3 11.1 123.6 2nd Advance estimates 11.1 92.3 2.7 5.5 1.8 10 113.4 8.6 0.47 0.43 2.6 12.1 125.5 Relative change in output compared to last rabi season (%) (11.90) (2.74) 3.77 12.50 4.17 (3.08) 11.69 (6.00) 7.50 8.33 10.00 (2.03)

Source: Ministry of Agriculture, CRISIL Research

However, we expect agrochemical sales in the southern region to lag the national average over the next few months. While the water levels of the 84 major reservoirs across India are above the long-term average, levels in reservoirs in southern (Karnataka) and western (Maharashtra and Gujarat) regions have depleted significantly. Also, the likelihood of continued power shortage/use of high cost power during first half of FY14 may impact the southern region. These factors coupled with lower cash availability with farmers - owing to three consecutive crop failures - are expected to result in lower agrochemical sales volume during H1FY14 but the same is expected to revive by the second half of FY14. Though normal south-west monsoons are likely to increase agrochemical consumption in the western region, low reservoir levels and a significant correction in prices of cash crops such as cotton over FY13 may play spoilsport. Stable farm incomes owing to bumper wheat production due to better irrigation facilities are expected to result in steady agrochemical consumption in the northern region. In the eastern region, healthy rabi and kharif output, government support through subsidies (10 bn was allocated to the eastern states in the Union budget 2013-14 to usher in green revolution), agricultural thrust via green manuring and hybrid rice are expected to result in higher farm incomes which in turn should boost the consumption of agrochemicals.

We expect normal monsoons during FY14 to revive agrochemical consumption

CRISIL IERIndependentEquityResearch

Update on the monsoons:

The cumulative rainfall for India during FY14 monsoons up to June 26, 2013 has been 37% above long period average (LPA). Rainfall was above normal levels across regions except East and North-east India, where it was 45% below LPA. The key pesticide consuming states of Andhra Pradesh, Karnataka, Tamil Nadu, Haryana and Maharashtra have received excess rainfall. Also, as the rainfall was 37% above average in the week to June 26, water level in the main reservoirs was at 25% of their capacity, up 8 percentage points from the year-ago period. The reservoir levels are above the 10-year average of 17% for the week. This is a positive development as these reservoirs provide water to irrigate the rabi crops later in the year.

Agrochemical industry to benefit from

1. Increase in MSPs to enhance affordability
The government has consistently raised the MSPs of major crops such as wheat, rice, sugarcane and cotton since FY07. MSPs have registered a CAGR of 11-15% over FY07-12 compared to 1-5% CAGR over FY02-07. The increase in MSPs has cushioned the volatility in farm income over the past few years wherein deficient rainfall has resulted in fluctuations in agricultural production. During 2012, MSPs were raised by 10% (wheat) to 53% (jowar), which enabled the sustenance of farm income despite a lower kharif output. In FY14, MSPs for the rabi crop have been hiked by 5-20% which will result in better farm economics and support agrochemical sales during the first half of FY14.

Paddy and cotton are the major pesticide consuming crops

Figure 1: Historical hikes in MSP

(/quintal) 3,500 3,000 2,500 2,000 1,500 1,000 500 FY09 Wheat Barley FY10 Gram FY11 Masur FY12 Mustard FY13 Safflower

Source: Ministry of Agriculture, Govt. of India

Dhanuka Agritech Ltd

Table 5: Increase in MSPs of rabi crops

Old Prices Crops Wheat Barley Gram Masur (Lentil) Rapeseed Safflower (/quintal) 1,285 980 2,800 2,800 2,500 2,500 Revised Prices (/quintal) 1,350 980 3,000 2,900 3,000 2,800

Increase 65 200 100 500 300

Increase (%) 5.1 7.1 3.6 20.0 12.0

Source: Ministry of Agriculture

2. Growth in agricultural credit disbursements to help improve farm economics

Agricultural credit backed by the governments initiative to promote the sector registered a 16% CAGR over FY06-11. Higher government spending has resulted in improved farm economics and has provided a thrust to farmers to undertake production of different crops which, in turn has boosted the demand for pesticides. The Indian crop protection industry was valued at 164 bn (domestic consumption) in FY12. While the industry registered an 11-year CAGR of 9% over FY00-11, it registered 15% CAGR over FY06-11. Higher growth is due to higher MSPs of key pesticide products, thus making it more remunerative for farmers to undertake cultivation. Also, this has enabled the manufacturers to pass on the increase in raw material prices. The government is expected to continue to provide support to agriculture and allied sectors to increase food grain production to support the burgeoning population. Consequently, the government has increased agri-credit target by 1,250 bn for FY14. We believe this to be a positive for the agrochemical industry.

3. Shortage of economical labour to drive growth in herbicides

In India, traditionally, removal of weeds is done manually. However, the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), introduced in 2005, has been providing better employment opportunities and higher wages to labourers in non-agricultural sectors. So, deployment of manual labour for removal of weeds has become a costly affair. Farmers, therefore, are increasingly shifting from manual weeding to usage of herbicides. With labour shortage slated to continue in the longer run, Pesticides Manufacturers and Formulators Association of India anticipates the sale of herbicides to grow at 25% per annum over the next couple of years. Herbicides account for ~30% of Dhanukas revenues.

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Dhanuka: Thrust on branded formulations

Formulations being a B2C play, wherein retail offtake is determined by brand strength and reach of the distribution network, Dhanukas focus on branded formulations (in tie-ups with MNCs) and its extensive pan India distribution network are its key growth drivers. Dhanukas product basket, comprising over 80 products, has a judicious mix of insecticides (38), herbicides (21) and fungicides (21). The company has 16 products in the plant growth regulators/biofertilisers/wetting agents segment. This diversified product basket enables the company to cater to a wide spectrum of crops, such as wheat, paddy, sugarcane, cotton, pulses, soyabean, vegetables, etc.

Continues to focus on specialty molecules

Dhanuka continues to focus on specialty molecules (introduced in collaboration with MNCs), which are eco-friendly having crop/disease specific usage and command a higher margin (more than 20%) than generic products (10-15% margin). Typically, in case of specialty molecules sourced through tie-ups with MNC chemical companies, the active ingredient (overall chemistry) is supplied by MNCs to Dhanuka under purchase contracts. Dhanuka receives the product know-how as well as the right to manufacture and market the products in India. While this alliance provides Dhanuka a wider product basket to cater to different kinds of crops/types of pests, MNCs benefit from increased off-take of their products owing to Dhanukas pan-India presence. Products sourced through these collaborations contribute more than 60% to Dhanukas revenues. Dhanuka has announced plans to launch three specialty molecules (one insecticide and two herbicides) during FY14-15 in collaboration with MNCs. As per the management, these molecules will be introduced for the first time in India with Dhanuka having the exclusive marketing and distribution rights for the same. Post introduction, these molecules are expected to have a dominating life cycle of 8-10 years. We believe this development is positive for the company as it not only allows Dhanuka to launch hitherto unavailable molecules in the Indian market but also strengthens its relationship with the active ingredient manufacturers.

Dhanuka continues to augment its specialty products basket

Dhanuka Agritech Ltd

Figure 2: Dhanukas product basket caters to various crops

Others 20% Paddy 27%

Figure 3: Herbicides account for ~30% of Dhanukas revenue

(% revenue share) 100%
90% 80% 70% 60% 50% 26% 27%

6% 13%

6% 13%

10% 13%

11%
12%

10% 13%

33%

32%

28%

Cotton 15%

40% 30% 20% 10% 0% Vegetables 18% Pulses 20% FY09 Insecticides FY10 Herbicides FY11 FY12 Fungicides FY13 Others 55% 53% 45% 46% 49%

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Table 6: Dhanukas tie-ups with MNCs

Tie-up E. I. du Pont, US FMC Corporation, US Dow AgroSciences, US Sumitomo Chemical Co., Japan Mitsui Chemicals, Japan Hokko Chemical Ind. Co., Japan Nissan Chemical Industries, Japan Yara International, Norway Chemtura, US Bayer AG Source: Company, CRISIL Research Products marketed by Dhanuka Dunet, Hook, Qurin, Dhawa Gold, Hi-Dice, Cursor, Lustre, Fuzi Super Aatank, Markar, Brigade Wrap-up, Zargon, One-up Caldan, Sheathmar Nukil, Bombard Kasu Targa Super Samadhan Omite, Vitavax, Dimilin, Banmite Fluid

Success of recently launched products - a key monitorable

During FY13, Dhanuka launched three products in tie-ups with Bayer Crop Science (Fluid - an insecticide) and DuPont (Fuzi Super - a herbicide; Lustre - a fungicide). As per the

management, the products were launched in small regional pockets to assess their acceptance among the farmer community. With good off-take of the launched products, the management intends to introduce these across India. The management expects the new products to contribute significantly to Dhanukas revenues in four to five years. However, longterm success of the products is a key monitorable.

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Table 7: Dhanukas new launches in FY13

Brand Fluid Fuzi Super Lustre Foreign partner Bayer AG E. I. du Pont, US E. I. du Pont, US Product group Insecticide Herbicide Fungicide Active ingredient Flubendiamide active Bispyribac Sodium 10% SC Flusilazole 12.5% Description Insecticide for control of caterpillars in pulses, vegetables and rice segments Herbicide for application in paddy cultivation For application on paddy

Source: Company, CRISIL Research

Strong distribution network

Dhanuka has been able to expand its distribution network from 4,529 direct accounts in FY08 to 7,400 in FY13. This extensive distribution network supports Dhanukas existing product offerings and plays an important role in attracting global agrochemical majors to launch their products in tie-up with Dhanuka.

Figure 4: Growth in distribution network

(No.) 8000 7000 6000 5000 9% 4000 9% 13% 18% 20% 18% 16% 14% 12% 10% 8% 6% 2000 1000 4,529 0 FY08 FY09 FY10 FY11 FY12 FY13 No. of Dealers / Distributors Growth (RHS) 4,953 5,402 6,383 7,200 7,400 3% 4% 2% 0%

3000

Source: Company, CRISIL Research

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Dhanuka Agritech Ltd

along with farmer engagement initiatives to support growth

Owing to the competitive nature of the agrochemical industry, product differentiation and brand recall assume significant importance. Product demonstrations, counselling, awareness campaigns regarding quantity and periodicity of usage and after-sales services are important channels to enhance farmer/company engagement. Dhanuka via its Dhanuka Doctors has been able to increase the visibility of its products, thus resulting in strong brand recall for products such as Targa Super, Caldan and Omite. Dhanuka employs ~1,500 Dhanuka Doctors on a contract basis (2,000 in peak season) to work closely with farmers. Activities include product demonstrations, educational campaigns and group meetings and

workshops/seminars. With the incentives for Dhanuka Doctors deployed in a region linked to sales generated by Dhanuka in that region, it also helps in recovering costs associated with these activities.

Expect working capital intensity to remain higher than industrys

Dhanukas 94 receivable days is higher than the industry average of 70-80 days. We believe this is attributable to the companys business model which does not include sales of technicals where number of receivables days is shorter compared to the formulations business. Hence, we believe that Dhanukas working capital intensity is likely to remain higher than that of its competitors.

Figure 5: Dhanukas debtor days on the rise

(Debtor Days) 140

120
100 80 60 40 20 UPL FY10 Rallis Bayer FY11 PI Ind FY12 Insecticides FY13 Dhanuka

Source: Industry, CRISIL Research

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Figure 6: Inventory of industry players

(Inventory Days) 250

Figure 7: Payable days of industry players

(Creditor Days) 140
120

200 100 150 80 60 40 50 20 UPL FY10 Rallis Bayer FY11 PI Ind FY12 Insecticides Dhanuka FY13 UPL FY10 Rallis Bayer FY11 PI Ind FY12 Insecticides Dhanuka FY13

100

Source: Industry, CRISIL Research

Source: Industry, CRISIL Research

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Dhanuka Agritech Ltd

Key Risks
Unpredictable weather and pest/disease occurrence
The performance of the agrochemical industry is highly dependent on weather conditions, which determines the occurrence of disease and pest infestations in the short term and on a regional basis. Normal monsoons are an important but not the only factor that drive demand for pesticides. Pest occurrence is also critical in driving sales volumes of agrochemical companies. Therefore, adverse weather conditions and inadequate pest occurrence can negatively impact the performance of agrochemical companies.

Foreign exchange rate fluctuation

Approximately one-third of Dhanukas raw materials are imported. This exposes the company to foreign exchange risks as it hedges only 10% of its exposure on an average. According to the management, in case of an adverse currency movement leading to high raw material costs, the company is able to take price hikes in some of its key products (specialty molecules). Depreciation of the rupee for a longer duration may increase Dhanukas raw material costs and adversely impact its operating margins.

Lack of export revenues

Larger players such as United Phosphorus and Rallis have a presence in the technicals segment, which opens up the export avenue. Dhanuka does not enjoy this advantage as it is a 100% domestic play. Complete dependency on the domestic market may impact revenues, in case of a slowdown in demand. However, within India, Dhanuka has a presence in all major agricultural regions.

Delay in increase of MSP / decline in farm profitability

Farmers purchasing power with regard to agricultural inputs depends on the realisation of farm output. Therefore, consumption of fertilisers and pesticides is partly dependent on the MSPs fixed by the government and on other subsidies. In an environment of increasing raw material costs, inadequate/delayed increase in MSPs may restrict the pesticide

manufacturers ability to pass on higher raw material costs to farmers, consequently affecti ng the manufacturers margins.

Regulatory risks
The pesticide industry is highly regulated. Every product launch, patented or off-patent, has to go through field trials and comply with several requirements to keep the environment safe and toxic levels under acceptable limits. These processes are expensive and time consuming, and come with the uncertainty of facing a ban anytime. About 8% of Dhanukas revenues are derived from highly toxic (red triangle category) products, which have a high probability of facing a government ban. We do not view this as a significant risk as the companys product basket is highly diversified (over 80 products).

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Financial Outlook
Revenues estimated to grow at 16% CAGR over FY13-15; EBITDA margin likely to remain stable
We estimate revenues to grow at a two-year CAGR of 16% to 7.9 bn in FY15. We believe sales volumes will increase in FY14 on expectations of a normal monsoon. We expect Dhanuka to post 15% EBITDA margin on a sustainable basis on account of its focus on highmargin specialty molecules. The company has already introduced three specialty molecules during FY13 and three more product launches are on the anvil. We expect these will be highmargin products and, if successful, will result in margin expansion.

Figure 8: Revenues to grow at a two-year CAGR of 16%

( mn)
9,000 8,000 36.1% 40% 35% 30% 21.3% 20.6% 5,000 4,000 3,000 7.4% 10.9% 17.6% 14.5% 25%

Figure 9: EBITDA margin to sustain at 15%

( mn)
1,400 1,200 15.8% 16.0%

7,000
6,000

15.5%
1,000 800

15.0%
14.7% 14.3% 14.4%

15.0%

15.0%

15.0%

20%
600 15% 10% 5% 400 200 480 0% FY09 FY10 EBITDA FY11 FY12 FY13 FY14E FY15E EBITDA margin (RHS) 586 777 795 865 1,036 1,186 13.5%

14.5%

2,000
1,000 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Revenue Growth (RHS) 3,369 4,085 4,928 5,293 5,869 6,904 7,903

14.0%

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Adjusted PAT to grow at 11.4% CAGR over FY13-15; RoE expected to decline
Dhanukas adjusted PAT is expected to grow from 644 mn in FY13 to 800 mn in FY15 at a CAGR of 11.4%. We expect PAT margin to decline from 11.0% in FY13 to 10.1% in FY15 on account of diminishing income tax benefits at the companys Udhampur plant. This plant is entitled to 30% income tax holiday over FY14-18. Return on equity is also expected to decline from 27% in FY13 to 22.8% in FY15 due to contraction in PAT margin and reduction in debt.

14

Dhanuka Agritech Ltd

Figure 10: PAT to grow 11.4% over FY13-15

( mn)
900 800 8.9% 10.3% 10.7%

Figure 11: RoE will decline from 27% in FY13 to 23% in FY15
(%)
12% 50 41.3 10% 8% 43.9 38.1 38.8 40.2

11.0%
10.0% 10.1%

700
600 500

40 38.1

6.9%

30.8

30.3

30.2

29.0

30 6%
29.5 27.0 23.9

400 300 4% 2% 100 FY09 FY10 PAT FY11 FY12 FY13 FY14E FY15E PAT margin (RHS) 232 363 509 566 644 693 800 0%

20

22.8

200

10

0 FY09 FY10 FY11 ROCE FY12 FY13 FY14E ROE FY15E

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Debt likely to remain low

Dhanuka is likely to pay its existing debt entirely over the next two-three years. According to the management, the company plans to undertake a capex (capacity expansion) of 450 mn over FY14-15 to commission a formulations facility in Keshwana, Rajasthan. The required capex will be funded through internal accruals. Although we expect the working capital as a percentage of sales to remain at current levels, we believe this is a key monitorable going forward as Dhanukas receivable days have increased continuously over FY09-12.

Figure 12: Debt to reduce further going forward

( mn) 700
600 0.6 500 400 0.4 300 200 0.2 0.1 0.1 0.1 313 0.8

Figure 13: Working capital expected to remain high

(X) 0.9
0.8 0.7 0.6 0.5

(No. of Days) 160

140 120 100 27.3% 28.3% 38.3% 35.1%

(%) 45% 37.6%

37.6% 37.6% 40% 35% 30% 25%

80
0.4 0.3

20%
60 40 20 100 FY09 FY10 WC Days FY11 FY12 FY13 FY14E FY15E 103 140 128 137 137 137 15% 10% 5% 0%

0.2 0.1
-

100 523
FY09 FY10 FY11 FY12 FY13 FY14E

597

602

460

330

443
FY15E

Total Debt

D/E (RHS)

WC as % of revenue (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

15

CRISIL IERIndependentEquityResearch

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.

Experienced senior management

Extensive experience in the agrochemical industry and sound business knowledge of the promoters, brothers - Mr R.G. Agarwal (chairman) and Mr M.K. Dhanuka (managing director) have been instrumental in taking the company forward. Mr Agarwal began his career as a trader of pesticides and fertilisers. With a trading experience of 12 years, he got into manufacturing pesticides by acquiring Northern Minerals Ltd in 1980. Mr Dhanuka, who has over 30 years of experience in the pesticide industry, looks after the day-to-day responsibilities of the company. The finance function is headed by Mr V.K. Bansal (CFO), who has been with the company for over 20 years. Dr. O.P. Singh (president, research & development) has over 25 years of experience and has been with Dhanuka for the past 10 years.

Highly experienced senior management; expect second generation of promoters to play a bigger role going forward

Second generation of promoters assuming bigger roles

Among the second generation of promoters, Mr Rahul Dhanuka (Mr Agarwals son) and Mr Mridul Dhanuka (Mr M.K. Dhanukas son), hold senior management positions in the company. Mr Rahul Dhanuka is director-marketing and has an experience of 13 years. He has been associated with the company since 2002. Mr Mridul Dhanuka (director-operations) looks after production, processes and quality control. We expect the second generation of promoters to play a greater role in the companys growth going forward. However, the company has not announced any succession plans as yet.

Competent second line of management

Key personnel from the second line of management have considerable industry experience and some have been with the company for a long time. On the operations side, Mr Vijay Kumar, senior general manager (quality control), has been with the company for 14 years; he holds an M-Tech degree from IIT Delhi and has an industry experience of 32 years. Mr Y.K. Goel, senior general manager (production), has over 35 years of experience and has played a key role in expansion and automation of production capacities. The company has also augmented its marketing leadership by recruiting two professionals in the recent past at the vice president level.

16

Dhanuka Agritech Ltd

Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Corporate governance practices at Dhanuka meet the minimum levels, reflected in the constitution of its board, and by the presence of audit and other committees, which support the boards processes. Based on the disclosure levels, attendance record of independent directors and their level of engagement in the companys affairs, CRISIL Research believes that the company has good corporate governance standards.

Board comprises six independent directors

The companys board comprises 12 directors, six of whom are independent. Mr R.G. Agarwal is the chairman of the board. Other board members from the promoter group include Mr M.K. Dhanuka, Mr A.K. Dhanuka, Mr Rahul Dhanuka and Mr Mridul Dhanuka. Mr Sachin Bhartiya (non-independent director), who represents 2020 Equity Investors, is a qualified chartered accountant and has previously worked in lending and advisory functions with IDBI, GE Capital and IL&FS. Based on our previous interactions with the board members, we believe that the independent directors have a good understanding of the companys business. Mr Priya Brat, chairman of the audit and remuneration committees, has previously served as a director on the boards of several public sector banks and has been on Dhanukas board since 2002. Mr Brat previously headed State Bank of Indias international operations. Mr Indresh Narain has previously worked as Head of Compliance and Legal, HSBC Group and currently serves as director on the boards of Cholamandalam DBS Finance, Intex Technologies and Mindteck India. Other independent directors are Mr Vinod Jain, Mr S.C. Gupta Mr S.K. Khetan and Mr Subhash Lakhotia.

Board processes have improved over a period of time, based on recommendations made by independent directors

Boards processes have evolved gradually

The companys quality of disclosure can be considered good judged by the interaction with independent directors, level of information and details furnished in the annual report, websites and other publicly available data. The company has the necessary committees audit, remuneration and investor grievance. As per our recent discussions with independent directors, board practices at Dhanuka have evolved over time. The board meetings have become more meaningful as the interaction between independent directors and management has improved. The management has also implemented various suggestions made by the independent directors.

17

CRISIL IERIndependentEquityResearch

Valuation Grade

3/5
Our fair value for Dhanuka is 132 per share and the valuation grade is 3/5

We have used the DCF method to value Dhanuka and arrived at a fair value of 132 per share, implying P/E multiples of 9.6x and 8.3x FY14E and FY15E EPS respectively. The stock is currently trading at 133 per share. Consequently, we assign a valuation grade of 3/5, indicating that the market price is aligned.

Key DCF assumptions

We have considered the discounted value of the firms estimated free cash flow. We have made explicit forecasts until FY22. We have assumed a terminal growth rate of 4% beyond the explicit forecast period.

WACC computation
FY14-21 Cost of equity Cost of debt (post tax) WACC Terminal growth rate 16.0% 8.1% 14.4% Terminal value 16.0% 8.1% 14.4% 4.00%

Sensitivity analysis to terminal WACC and terminal growth rate

Terminal WACC Terminal Growth Rate 12.4% 2.0% 3.0% 4.0% 5.0% 6.0% 142 130 120 113 106 13.4% 151 137 126 117 110 14.4% 162 145 132 122 114 15.4% 176 155 140 128 118 16.4% 194 169 149 135 124

Source: CRISIL Research estimates

One-year forward P/E band

()
160 140 120 100 80

One-year forward EV/EBITDA band

( mn)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000

60
40 20 0

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13

Dhanuka 7x

4x 8x

6x 9x

Source: NSE, CRISIL Research

Source: NSE, CRISIL Research

18

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13

EV

4x

5x

6x

7x

Dhanuka Agritech Ltd

P/E premium / discount to Nifty

0%

P/E movement
(Times)
12

-10%
-20% -30% -40% -50% -60% -70% -80% 4 2 0 10 8 6 -1 std dev +1 std dev

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13

Premium/Discount to NIFTY Median premium/discount to NIFTY

Source: NSE, CRISIL Research

Source: NSE, CRISIL Research

Peer comparison
M.cap Companies Dhanuka Agritech** Insecticides India** Rallis India Bayer CropScience United Phosphorus PI Industries ( mn) 6,653 4,921 27,702 58,422 60,415 17,880 FY13 10.3 13.8 18.9 22.0 6.7 16.8 P/E (x) FY14E 9.6 11.6 17.0 19.4 7.7 12.1 FY15E 8.3 9.3 14.0 14.8 6.6 9.6 FY13 2.5 2.4 3.6 4.6 1.1 3.6 P/B (x) FY14E 2.1 2.0 3.7 3.8 1.3 2.9 FY15E 1.7 1.7 3.1 2.5 1.1 2.2 EV/EBITDA (x) FY13 8.0 9.6 10.6 14.0 4.5 10.9 FY14E 6.6 7.8 10.5 12.8 5.0 8.3 FY15E 5.7 6.4 8.8 10.1 4.4 6.8 FY13 27.0 18.8 20.3 42.7 17.6 25.0 RoE (%) FY14E 23.9 19.0 22.4 15.5 17.0 25.7 FY15E 22.8 19.9 23.5 15.6 17.3 25.9

**CRISIL Research estimates Source: CRISIL Research, Consensus estimates

CRISIL IER reports released on Dhanuka Agritech Ltd

Date 06-Apr-10 04-Jun-10 11-Aug-10 12-Nov-10 04-Feb-11 03-Jun-11 11-Jul-11 04-Aug-11 16-Nov-11 16-Feb-12 25-Jun-12 23-Aug-12 09-Nov-12 12-Mar-13 24-May-13 05-Jul-13 Nature of report Initiating coverage Q4FY10 result update Q1FY11 result update Q2FY11 result update Q3FY11 result update Q4FY11 result update Detailed report Q1FY12 result update Q2FY12 result update Q3FY12 result update Detailed Report Q1FY13 result update Q2FY13 result update Q3FY13 result update Q4FY13 result update Detailed report Fundamental grade 3/5 3/5 3/5 3/5 3/5 3/5 4/5 4/5 4/5 4/5 4/5 4/5 4/5 4/5 4/5 4/5 Fair value 52 67 72 79 87 87 109 109 109 109 117 117 117 132 132 132 Valuation grade 3/5 3/5 3/5 2/5 4/5 3/5 4/5 3/5 3/5 4/5 4/5 5/5 3/5 3/5 3/5 3/5 CMP (on the date of report) 50 71 82 93 72 84 91 110 102 88 96 93 126 122 129 133

Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13
1yr Fwd PE (x) Median PE

19

CRISIL IERIndependentEquityResearch

Annexure: Financials
Income Statement
( m n) Operating Incom e EBITDA EBITDA Margin Depreciation EBIT Interest Operating PBT Other Income Exceptional inc/(exp) PBT Tax provision Minority interest PAT (Reported) Less: Exceptionals Adjusted PAT FY11 4,928 777 15.8% 49 728 65 663 8 1 672 162 510 1 509 FY12 5,293 795 15.0% 45 750 55 695 5 5 705 134 571 5 566 FY13E# 5,869 865 14.7% 45 820 35 785 23 808 163 644 644 FY14E 6,904 1,036 15.0% 57 979 51 928 14 942 249 693 693 FY15E 7,903 1,186 15.0% 69 1,117 44 1,073 8 1,081 281 800 800

Balance Sheet
( m n) Liabilities Equity Share Capital Reserves Minorities Net Worth Convertible Debt Other Debt Total Debt Deferred tax liability (net) Total liabilities Assets Net fixed assets Capital WIP Total fixed assets Investm ents Current assets Inventory Sundry debtors Loans and advances Cash & bank balance Marketable securities Total current assets Total current liabilities Net current assets Intangibles/Misc. expenditure Total assets FY11 100 1,598 1,698 602 602 28 2,328 381 8 389 1,412 1,377 362 50 3,201 1,265 1,937 2 2,328 FY12 100 2,046 2,146 460 460 26 2,632 388 145 532 0 1,386 1,512 283 85 156 3,421 1,325 2,096 3 2,632 FY13E# 100 2,528 2,628 330 330 28 2,986 639 639 82 1,599 1,507 321 54 3,481 1,219 2,262 3 2,986 FY14E 100 3,076 3,176 443 443 26 3,644 782 48 830 0 1,797 2,081 380 60 156 4,473 1,662 2,811 3 3,644 FY15E 100 3,730 3,830 313 313 26 4,169 912 48 961 0 2,057 2,382 435 79 156 5,108 1,903 3,205 3 4,169

Ratios
FY11 Grow th Operating income (%) EBITDA (%) Adj PAT (%) Adj EPS (%) Profitability EBITDA margin (%) Adj PAT Margin (%) RoE (%) RoCE (%) RoIC (%) Valuations Price-earnings (x) Price-book (x) EV/EBITDA (x) EV/Sales (x) Dividend payout ratio (%) Dividend yield (%) B/S ratios Inventory days Creditors days Debtor days Working Capital Days Gross asset turnover (x) Net asset turnover (x) Sales/operating assets (x) Current ratio (x) Debt-equity (x) Net debt/equity (x) Interest coverage 20.6 32.6 40.2 28.6 FY12 7.4 2.3 11.3 11.3 FY13E# 10.9 8.8 13.8 13.8 FY14E 17.6 19.8 7.6 7.6 FY15E 14.5 14.5 15.4 15.4

15.8 10.3 38.1 38.1 30.8

15.0 10.7 29.5 30.8 26.3

14.7 11.0 27.0 30.3 26.3

15.0 10.0 23.9 30.2 23.8

15.0 10.1 22.8 29.0 22.3

Cash flow
( m n) Pre-tax profit Total tax paid Depreciation Working capital changes Net cash from operations Cash from investm ents Capital expenditure Investments and others Net cash from investm ents Cash from financing Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Others (incl extraordinaries) Net cash from financing Change in cash position Closing cash FY11 671 (151) 49 (731) (161) (52) 0 (52) 339 5 (117) 1 229 16 50 FY12 700 (136) 45 29 639 (189) (156) (344) (0) (142) (128) 5 (265) 30 85 FY13E# 808 (161) 45 (352) 340 (152) 73 (78) (130) (163) (293) (31) 54 FY14E 942 (251) 57 (387) 361 (248) (73) (322) 113 (145) (33) 6 60 FY15E 1,081 (281) 69 (376) 493 (200) (200) (130) (145) (275) 18 79

13.1 3.9 9.3 1.5 19.6 1.5

11.7 3.1 8.6 1.3 19.3 1.7

10.3 2.5 8.0 1.2 21.7 2.1

9.6 2.1 6.6 1.0 18.0 1.9

8.3 1.7 5.7 0.9 15.6 1.9

135 101 93 140 8.1 12.9 12.7 2.5 0.4 0.3 11.2

122 95 102 128 8.2 13.8 11.5 2.6 0.2 0.1 13.7

117 81 94 137 7.2 11.4 10.0 2.9 0.1 0.1 23.2

120 93 97 137 6.5 9.7 9.4 2.7 0.1 0.1 19.2

120 93 97 137 6.3 9.3 8.8 2.7 0.1 0.0 25.5

Quarterly financials
( m n) Operating incom e Change (q-o-q) EBITDA Change (q-o-q) EBITDA m argin PAT Adj PAT Change (q-o-q) Adj PAT m argin Adj EPS Q4FY12 1,301 18% 228 80% 17.5% 182 182 132% 14.0% 3.6 Q1FY13 1,081 -17% 158 -31% 14.6% 112 112 -38% 10.4% 2.2 Q2FY13 2,063 91% 306 94% 14.8% 237 237 112% 11.5% 4.7 Q3FY13 1,397 -32% 158 -48% 11.3% 117 117 -51% 8.4% 2.3 Q4FY13 1,328 -5% 243 54% 18.3% 179 179 53% 13.5% 3.6

Per share
Adj EPS () CEPS Book value Dividend () Actual o/s shares (mn) FY11 10.2 11.2 33.9 2.0 50.0 FY12 11.3 12.2 42.9 2.2 50.0 FY13E# 12.9 13.8 52.5 2.8 50.0 FY14E 13.9 15.0 63.5 2.5 50.0 FY15E 16.0 17.4 76.6 2.5 50.0

Note: #- based on abridged financials FY13 financials are not strictly comparable with that of the previous years due to the new format of disclosure under Schedule VI of the Companies Act Source: CRISIL Research

20

Dhanuka Agritech Ltd

Focus Charts
Revenue and growth trend
( mn)
9,000 8,000 7,000 6,000 21.3% 36.1% 40% 35% 30%

EBITDA and EBITDA margin trend

( mn)
1,400 1,200 15.5% 1,000 15.0% 14.7% 15.0% 15.0% 15.0% 15.8% 16.0%

20.6% 5,000
4,000 10.9% 7.4% 2,000 17.6% 14.5%

25% 800
20% 600 15% 10% 5% 5,869 FY13 6,904 FY14E 7,903 0% FY09 FY10 EBITDA FY11 FY12 FY13 FY14E FY15E EBITDA margin (RHS) FY15E 400 14.4%

14.3%

14.5%

3,000

14.0% 200 480 586 777 795 865 1,036 1,186 13.5%

1,000
-

3,369 FY09

4,085 FY10

4,928 FY11

5,293 FY12

Revenue

Growth (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

PAT and PAT margin trend

( mn)
900 800 10.3% 10.7%

RoE and RoCE trend

(%)
11.0% 10.0%
10.1% 10% 8% 12%

50 41.3 43.9 38.1 38.8 40.2

8.9%
700 600 6.9%

40 38.1

30.8

30.3

30.2

29.0

500
6% 400

30
29.5 27.0 23.9

20
4%
2%

300
200

22.8

10

100
-

232 FY09

363 FY10 PAT

509 FY11

566 FY12

644 FY13

693 FY14E

800 0% FY15E

0 FY09 FY10 FY11 ROCE FY12 FY13 FY14E ROE FY15E

PAT margin (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Debt and D/E ratio

( mn) 700
600 0.6 500 400 0.4 300 200 0.2 0.1 0.1 0.1 313 0.8

Share price movement

(X) 0.9
0.8 0.7 0.6 0.5 0.4 0.3

450 400

350
300

250
200

150
100

0.2 0.1
-

50
0

100 523
FY09 FY10 FY11 FY12 FY13 FY14E

Feb-08

Feb-10

Feb-11

Feb-12

Feb-09

Feb-13

Oct-08

Oct-09

Oct-10

Jun-08

Jun-09

Jun-11

Jun-12

Oct-12

Oct-07

Oct-11

FY15E

Total Debt

D/E (RHS)

Dhanuka

NIFTY

Source: Company, CRISIL Research

Source: NSE, BSE, CRISIL Research

Jun-13

Jun-10

597

602

460

330

443

21

CRISIL IERIndependentEquityResearch

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CRISIL Research Team

President
Mukesh Agarwal CRISIL Research +91 22 3342 3035 mukesh.agarwal@crisil.com

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