INDUSTRY AGROCHEMICAL CMP (as on 29 May 2017) Rs 648 Target Price Rs 710 Nifty 9,605 Sensex 31,109 KEY STOCK DATA Bloomberg INST IN No. of Shares (mn) 21 MCap (Rs bn) / ($ mn) 13/208 6m avg traded value (Rs mn) 29 STOCK PERFORMANCE (%) 52 Week high / low Rs 704/410 3M 6M 12M Absolute (%) 14.0 33.1 46.0 Relative (%) 5.8 15.2 29.3 SHAREHOLDING PATTERN (%) Promoters 68.75 FIs & Local MFs 12.19 FPIs 4.17 Public & Others 14.89 Source : BSE Satish Mishra satish.mishra@hdfcsec.com +912261717334 Deepak Kolhe deepak.kolhe@hdfcsec.com +912261717316 Sustainable growth Insecticides India s (INST) 4QFY17 revenue was muted at Rs 1.8bn (1% YoY), owing to poor northeast rains and impact of demonetisation. Change in the product mix led to strong EBITDA margin of 7.6% (+303 bps). Consequently, EBITDA was at Rs 134mn (+ 64% YoY). Lower interest cost and tax rates boosted PAT to Rs 60mn vs Rs 5mn YoY. Normal SW monsoon and favourable govt. polices led to record sowing in Kharif and Rabi seasons in 2016. The situation turned challenging (demonetisation, lower pest attacks, poor NE rains) for agrochem players in 2HFY17. However, we see these headwinds as temporary. In the long term, rising farm income, irrigation facilities and increased penetration of agrochemicals will drive growth. INST has additional levers like (1) Focus on highgrowth and highmargin products (Navratna, Super 11), (2) INST has signed agreements with Nihon (Japan) and MPM (USA) for marketing their products, RESULTS REVIEW 4QFY17 30 MAY 2017 Insecticides India BUY and (3) Entered into a 5050 JV with OAT Agrio (Japan) to capitalise on molecules going offpatent, and (4) A postemergence herbicide, Green Label, for paddy (whose technical is similar to PI s flagship product Nominee gold ). INST is currently operating at ~50% utilisation, and we see no major capex over the next two to three years, even to aid revenue CAGR of 1520%. Maintain BUY with a TP of Rs 710/sh (16x FY19E EPS). Highlights of the quarter Revenue mix: Insecticides (63%), Herbicides (25%), Fungicides (10%) and Plant nutrients (2%). Product launches: Launched bio product Kayakalp to improve soil health in 4Q. INST has guided for the launch of 34 new 9(3) or 9(4) products every year. Nearterm outlook: The monsoon is key for the Indian agricultural sector. The stock will closely track the sentiments around this season. Financial Summary (Standalone) Year Ending March (Rs mn) Q4FY17 Q4FY16 YoY (%) 3QFY17 QoQ (%) FY16 FY17P FY18E FY19E Net Sales 1,760 1,781 (1.2) 1,591 10.6 9,881 11,074 12,739 14,614 EBITDA 134 81 64.3 161 (16.9) 911 1,139 1,362 1,606 APAT 60 5 1,151.3 54 10.6 393 581 740 919 Diluted EPS (Rs) 2.9 0.2 1,151.3 2.6 10.6 19.0 28.1 35.8 44.5 P/E (x) 34.1 23.0 18.1 14.6 EV / EBITDA (x) 16.6 13.6 11.0 9.1 RoE (%) 11.2 13.3 14.8 15.9 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
Revenue growth was muted, owing to poor northeast rains and impact of demonetisation. Other expenditure declined owing to lower provision Lower interest cost owing to improvement in rating Improvement in EBITDA margin on account of change in product mix Quarterly Financials Snapshot (Standalone) (Rs mn) Q4FY17 Q4FY16 YoY (%) 3QFY17 QoQ (%) Net Sales 1,760 1,781 (1.2) 1,591 10.6 Material Expenses 701 929 (24.5) 733 (4.3) Stock In Trade 501 171 192.2 229 118.7 Employee Expenses 102 116 (12.3) 111 (8.2) Other Expenses 322 484 (33.3) 357 (9.7) EBITDA 134 81 64.3 161 (16.9) Depreciation 40 40 0.1 40 (1.7) EBIT 94 42 125.2 121 (22.0) Other Income (Including EO Items) 3.3 4.1 (18.3) 1.2 177.5 Interest Cost 27 32 (15.1) 47 (41.4) PBT 70 14 411.4 75 (6.8) Tax 11 9 18.3 21 (50.5) RPAT 60 5 1,151.3 54 10.6 EO (Loss) / Profit (Net Of Tax) APAT 60 5 1,151.3 54 10.6 AEPS (Rs/sh) 2.9 0.2 1,151.3 2.6 10.6 Margin Analysis (% Of Net Sales) Q4FY17 Q4FY16 YoY (bps) 3QFY17 QoQ (bps) Material Expenses As % Of Net Sales 39.9 52.2 (1,230) 46.1 (624) Stock In Trade As % Of Net Sales 28.5 9.6 1,884 14.4 1,406 Employee Expenses As % Of Net Sales 5.8 6.5 (73) 7.0 (118) Other Expenses As % Of Net Sales 18.3 27.2 (883) 22.4 (412) EBITDA Margin (%) 7.6 4.6 303 10.1 (252) EBIT Margin (%) 5.3 2.3 300 7.6 (223) Net Profit Margin (%) 3.4 0.3 311 3.4 (0) Tax Rate (%) 15.1 65.3 (5,020) 28.5 (1,335) Page 2
Revenue contribution from Technical has improved to 41% vs 39% Increased focus on highgrowth products and tieup with MNC s will lead to better EBITDA margins, going forward Quarterly Performance Revenues Mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 31 26 69 74 1QFY15 2QFY15 17 83 3QFY15 Formulations 45 55 4QFY15 26 74 1QFY16 17 14 83 86 2QFY16 3QFY16 Formulation Business Performance 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1QFY15 Formulations 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Technicals Q4FY16 39 61 Q4FY16 1QFY17 24 76 1QFY17 2QFY17 16 14 84 86 2QFY17 3QFY17 3QFY17 YoY Growth (RH) Rs mn % Q4FY17 41 59 Q4FY17 30.0 20.0 10.0 10.0 20.0 30.0 Standalone Performance Net Sales YoY Growth (RH) EBITDA Margins (RH) 5,000 Rs mn % 40 4,000 30 20 3,000 10 2,000 10 1,000 20 30 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Q4FY16 1QFY17 2QFY17 3QFY17 Q4FY17 Technical Business Perfomance Technicals YoY Growth (RH) 1,400 Rs mn % 250.0 1,200 200.0 1,000 150.0 800 100.0 600 50.0 400 200 50.0 100.0 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 Q4FY16 1QFY17 2QFY17 3QFY17 Q4FY17 Page 3
Return ratios to improve owing to focus on highermargin products Yearly Performance Revenues Mix Branded Formulation Technicals Bulk Formulation Packaging 120 % 0.1 0.2 5.1 3.6 0.0 0.0 0.0 0.0 100 10 11 10 11 16 14 12 11 11 10 10 16 7 6 6 6 80 Improving Return Ratios ROE (%) ROCE (%) 25 20 15 60 40 20 79 79 75 70 77 79 81 83 10 5 FY12 FY13 FY14 FY15 FY16 FY17P FY18E FY19E FY12 FY13 FY14 FY15 FY16 FY17P FY18E FY19E Lower Capex Leads To Positive FCF DebtToEquity To Be Comfortable There will be no major capex over the next 23 years 1,000 800 600 400 200 200 400 600 800 1,000 Rs mn Capex (LHS) FCF (RHS) 1.2 1.0 0.8 0.6 0.4 0.2 0.9 Debt/Equity (x) 1.1 1.0 1.0 Interest Cover (x) RHS 0.5 0.4 0.3 0.2 14 12 10 8 6 4 2 FY12 FY13 FY14 FY15 FY16 FY17P FY18E FY19E FY12 FY13 FY14 FY15 FY16 FY17P FY18E FY19E Page 4
Robust growth in specialty molecules Higher jump in FY1819, led by launch of Green Label Change in estimates owing to margins improvement and lower interest cost Assumptions Revenue Growth (%) FY14 FY15 FY16 FY17P FY18E FY19E Navratna + Super 11 42.2 20.2 7.0 20.5 20.0 20.0 Other Branded Sale 22.3 (17.5) 22.6 8.0 12.5 9.9 Technical 54.0 68.4 (55.9) 8.0 15.3 15.0 Gross Profit Margins (%) 30.4 32.8 31.7 33.0 33.0 32.9 Branded Formulation (GPM %) 36.0 36.5 36.0 Institutional Sales (GPM %) 21.3 18.0 18.0 Change In Estimates Rs mn FY18 Old FY18 New YoY Gr (%) FY19 New FY19 New YoY Gr (%) Net Sales 12,952 12,739 (1.6) 14,870 14,614 (1.7) EBIDTA 1,298 1,362 4.9 1,563 1,606 2.7 APAT 686 740 7.9 866 919 6.1 AEPS (Rs) 33.2 35.8 7.9 41.9 44.5 6.1 Source: HDFC sec Inst Research Peer Valuations Mcap (Rs bn) CMP (Rs/sh) Rating* TP (Rs/sh)* EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E AGROCHEMICALS UPL 428.8 846 NEU 780 35.6 40.0 48.8 23.7 21.2 17.3 5.8 4.8 3.9 27.2 24.8 24.9 PI Industries 111.4 810 BUY 950 33.4 32.7 37.8 24.3 24.7 21.4 6.8 5.6 4.6 32.8 24.9 23.6 Rallis India 46.0 237 BUY 280 9.6 11.0 14.0 24.7 21.4 16.9 4.1 3.7 3.2 18.7 18.2 20.3 Dhanuka Agritech 40.6 828 NEU 780 24.3 28.4 35.4 34.0 29.2 23.4 7.8 6.6 5.5 23.9 24.5 25.8 Insecticides India 13.4 648 BUY 710 28.1 35.8 44.5 23.0 18.1 14.6 2.9 2.5 2.2 13.3 14.8 15.9 FERTILISERS Coromandel Int 111.9 384 BUY 385 16.4 20.6 25.7 23.5 18.6 14.9 3.9 3.4 3.0 17.3 19.5 21.4 Chambal Fertilisers 49.6 119 NEU 120 9.2 11.2 12.0 12.9 10.6 9.9 2.3 2.0 1.7 19.2 20.2 18.5 CHEMICALS SRF Ltd 92.4 1,609 NEU 1,660 89.7 95.5 110.7 17.9 16.8 14.5 2.9 2.5 2.2 17.3 16.1 16.4 Vinati Organics 51.6 883 BUY 960 27.0 33.6 38.4 32.7 26.3 23.0 6.7 5.5 4.6 22.9 23.1 21.7 Navin Fluorine 29.0 2,966 NEU 3,300 113.4 137.8 165.0 26.2 21.5 18.0 3.8 3.4 3.0 15.8 16.6 17.5, *As per previous published reports Page 5
Income Statement (Standalone) (Rs mn) FY15 FY16 FY17P FY18E FY19E Net Revenues 9,642 9,881 11,074 12,739 14,614 Growth (%) 11.6 2.5 12.1 15.0 14.7 Material Expenses 5,987 6,067 5,994 6,959 8,076 Traded Goods 496 679 1,429 1,571 1,729 Employee Expenses 344 401 433 498 573 Other Operating Expenses 1,704 1,824 2,078 2,349 2,630 EBITDA 1,111 911 1,139 1,362 1,606 EBITDA Margin (%) 11.5 9.2 10.3 10.7 11.0 EBIDTA Growth (%) 35.8 (17.9) 25.0 19.5 17.9 Depreciation 142 159 160 185 197 EBIT 969 752 980 1,176 1,409 Other Income (Including EO Items) 4 6 6 6 6 Interest 332 259 185 140 121 PBT 642 499 800 1,042 1,294 Tax 93 106 219 302 375 RPAT 548 393 581 740 919 Minority Interest EO (Loss) / Profit (Net Of Tax) APAT 548 393 581 740 919 APAT Growth (%) 37.2 (28.3) 48.0 27.2 24.2 AEPS 26.5 19.0 28.1 35.8 44.5 AEPS Growth (%) 37.2 (28.3) 48.0 27.2 24.2 Balance Sheet (Standalone) (Rs mn) FY15 FY16 FY17P FY18E FY19E SOURCES OF FUNDS Share Capital 127 207 207 207 207 Reserves 2,787 3,882 4,464 5,146 6,008 Total Shareholders Funds 2,914 4,089 4,670 5,353 6,215 Longterm Debt 537 280 153 110 110 Shortterm Debt 2,679 1,520 2,063 1,645 1,399 Total Debt 3,216 1,800 2,216 1,754 1,509 Longterm Provisions & Others 45 69 71 71 71 Net Deferred Tax Liability 156 176 203 203 203 TOTAL SOURCES OF FUNDS 6,331 6,134 7,159 7,380 7,997 APPLICATION OF FUNDS Net Block 2,047 1,939 2,331 2,345 2,348 CWIP 377 512 100 100 100 Investments 111 111 111 111 111 LT Loans & Advances 15 27 21 21 21 Other Noncurrent Assets 66 59 47 47 47 Total Noncurrent Assets 2,616 2,649 2,610 2,624 2,627 Inventories 3,914 3,506 4,258 4,886 5,605 Debtors 1,668 2,076 2,146 2,443 2,603 Other Current Assets 945 1,039 986 986 986 Cash & Equivalents 66 95 92 200 346 Total Current Assets 6,592 6,716 7,482 8,515 9,540 Creditors 2,098 2,109 1,965 2,792 3,203 Other Current Liabilities & Provision 779 1,122 967 967 967 Total Current Liabilities 2,877 3,231 2,932 3,759 4,170 Net Current Assets 3,715 3,485 4,550 4,756 5,370 TOTAL APPLICATION OF FUNDS 6,331 6,134 7,159 7,380 7,997 Page 6
Cash Flow (Standalone) (Rs mn) FY15 FY16 FY17P FY18E FY19E Reported PBT 642 499 800 1,042 1,294 Nonoperating & EO Items (1) 1 (6) (6) (6) Interest Expenses 240 205 185 140 121 Depreciation 142 159 160 185 197 Working Capital Change (999) 119 (1,059) (98) (468) Tax Paid (80) (138) (219) (302) (375) OPERATING CASH FLOW ( a ) (57) 845 (139) 961 763 Capex (335) (196) (139) (200) (200) Free Cash Flow (FCF) (392) 650 (277) 761 563 Investments 0.1 Nonoperating Income 4 6 6 6 6 Other 3 3 INVESTING CASH FLOW ( b ) (328) (188) (133) (194) (194) Debt Issuance/(Repaid) 645 (1,120) 416 (462) (245) Interest Expenses (240) (205) (185) (140) (121) FCFE 13 (675) (47) 159 197 Share Capital Issuance 808 Dividend (45) (112) (47) (57) (57) FINANCING CASH FLOW ( c ) 360 (629) 184 (659) (423) NET CASH FLOW (a+b+c) (25) 29 (88) 108 146 EO Items, Others Closing Cash & Equivalents 66 95 92 200 346 Key Ratios (Standalone) Ratios FY15 FY16 FY17P FY18E FY19E PROFITABILITY (%) GPM 32.8 31.7 33.0 33.0 32.9 EBITDA Margin 11.5 9.2 10.3 10.7 11.0 EBIT Margin 10.0 7.6 8.8 9.2 9.6 APAT Margin 5.7 4.0 5.3 5.8 6.3 RoE 20.4 11.2 13.3 14.8 15.9 Core RoCE 16.6 10.7 11.4 11.9 13.7 RoCE 14.9 9.8 10.8 11.5 13.1 EFFICIENCY Tax Rate (%) 14.5 21.2 27.3 29.0 29.0 Asset Turnover (x) 1.7 1.6 1.7 1.8 1.9 Inventory (days) 148 130 140 140 140 Debtors (days) 63 77 71 70 65 Other Current Assets (days) 32 37 31 27 23 Payables (days) 79 78 65 80 80 Other Current Liab & Provns (days) 19 31 25 22 19 Cash Conversion Cycle (days) 144 134 152 135 129 Debt/EBITDA (x) 2.9 2.0 1.9 1.3 0.9 Net D/E (x) 1.1 0.4 0.5 0.3 0.2 Interest Coverage 2.9 2.9 5.3 8.4 11.7 PER SHARE DATA (Rs/sh) EPS 26.5 19.0 28.1 35.8 44.5 CEPS 33.4 26.7 35.9 44.8 54.0 DPS 1.5 2.5 2.0 2.5 2.5 BV 141.0 197.8 226.0 259.0 300.7 VALUATION P/E (x) 24.4 34.1 23.0 18.1 14.6 P/BV (x) 4.6 3.3 2.9 2.5 2.2 EV/EBITDA (x) 14.9 16.6 13.6 11.0 9.1 OCF/EV (%) (0.3) 5.6 (0.9) 6.4 5.2 FCF/EV (%) (2.4) 4.3 (1.8) 5.1 3.9 FCFE/MCAP (%) 0.1 (5.0) (0.3) 1.2 1.5 Dividend Yield (%) 0.2 0.4 0.3 0.4 0.4 Page 7
RECOMMENDATION HISTORY 800 700 600 500 400 Insecticides TP Date CMP Reco Target 13May16 441 BUY 535 1Jun16 421 BUY 535 10Aug16 473 BUY 535 7Oct16 486 BUY 580 8Nov16 517 BUY 600 9Feb17 576 BUY 635 13Apr17 550 BUY 670 30May17 648 BUY 710 300 Rating Definitions 200 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than ()10% returns over the next 12 month period Page 8
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