PL Stock Report: Dhanuka Agritech (DAGRI IN) - Q1FY24 Result Update - Weak quarter; all hopes pinned on 2Q’24 performance - BUY

Dhanuka Agritech (DAGRI IN) - Himanshu Binani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs746 | TP: Rs950

Q1FY24 Result Update - Weak quarter; all hopes pinned on 2Q’24 performance

Quick Pointers:

§ Volume and price decline of 3.5%/2.5% YoY.

§ ITI for 1QFY24 stood at 19.6% as against 12.75% in FY23.

DAGRI reported subdued results (in-line with our estimates but below consensus estimates) with Revenue/EBITDA/PAT decline of 6%/15%/33% YoY amid challenges related to higher channel inventory and cost pressure. Management remains confident of achieving double digit revenue growth in FY24E with 50-100bps YoY improvement in EBITDA margins given new product introductions (launched 2/1/6 new products in herbicide/insecticides and biological range; intends to launch 2-3 new 9(3) and 3-4 new 9(4) molecules in FY24E) coupled with better portfolio mix. Further, expect ~Rs500mn revenue contribution from technical plant at Dahej in FY24E (to be commissioned in August’23-delayed by a month) with initial loss at EBITDA level due to lower utilization. We haven’t factored this in our estimates, as the impact would be insignificant during FY24E. We broadly maintain our FY24/25E EPS estimates and expect Revenue/PAT CAGR of 13%/11%. Maintain ‘Buy’ with an unchanged TP of Rs950 based on 15xFY25E EPS.

§ Gross margins flat YoY led by higher sales return and inventory provisions: DAGRI reported revenue decline of 6% YoY to Rs3.7bn (PLe Rs3.77bn) primarily led by volume and price decline of 3.5% and 2.5% respectively. Superior product mix on the back of higher ITI at 19.6% in 1Q’24 (FY23 at 12.75%) was offset by higher sales return of Rs240mn in 1Q’24(Rs140mn in 1Q’23) and provisions of high cost inventory which in turn has restricted gross margins at 32.8% (flat YoY). Further, management alluded that RM cost has been largely stable currently, with few molecules witnessing upward trend which in turn should provide some stability to the margin profile going forward. EBITDA margins contracted by 130bps to 11.8% due to higher employee cost (up 100bps YoY) and lower absorption of fixed cost (opex up 30bps). While, lower other income at Rs66mn (Rs169mn in Q1’23- includes one-off of Rs120mn pertaining to sale of 2 properties) have resulted into PAT decline of 33% YoY to Rs329mn (PLe Rs377mn).

§ Ramping up of Biological products to drive growth: During 4QFY23, DAGRI had launched a new range of Biological products under the sub-brand name BIOLOGIQ, with an initial portfolio of 3 products. Further, the company launched 3 more products in 1QFY24. These products are currently being sourced from the best third party vendors in the industry. While on the crop protection side, DAGRI launched 2 new 9(4) molecules in 1QFY24 namely Implode- maize herbicide and Mesotrax- selective herbicide for maize and sugarcane. Going forward, management intends to launch 2-3 new 9(3) and 3-4 new 9(4) molecules in FY24 to drive growth.

§ Capex plans well on track: Management had earlier guided for Rs3bn capex to be spend over FY22-24 (Rs500mn/Rs1.5bn/Rs1.1bn in FY22/FY23/FY24). Capex is largely towards setting up of formulation unit and 2 MPP’s (Multi-purpose plant) of pesticides in Dahej. The formulation unit is delayed by 4 months and is now expected to be operational by August’23 (2QFY24) and technical unit by FY24. DAGRI targets to achieve Rs500mn of revenues in FY24 with loss at EBITDA levels, as the plant would be underutilized in FY24. Going forward, they intend to gradually improve the plant utilization and are in continuous talks with Japanese partners for supply of intermediates. On a longer term they intend to do Rs3bn/PA from the technical plants with EBITDA margins in the range of 12-15%.

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