Nagarjuna Agrichem

Higher Profit Growth, Capacity Expansion Plans To Decide Its Stock Movement Now

 

THE Hyderabad-based agrochemical manufacturer Nagarjuna Agrichem (NACL) has significantly outperformed the markets in 2009. In the past one year, the scrip has gained over four times, while the benchmark Sensex rose 1.8 times. Apart from the re-rating of the agrochemical industry, the company's earnings growth also contributed to this upsurge. For the 12-month period ended September 2009, NACL's profit jumped 90% against the year-ago period.

   The company currently operates three plants in Andhra Pradesh — the largest at Srikakulam manufactures technical agrochemicals and undertakes contract manufacturing while the smaller ones at Ethakota and Shadnagar are engaged in formulations.

   The company is currently expanding its existing capacities through a capex of Rs 16.5 crore. This envisages doubling its formulation capacity and 37% expansion to its technical capacity at its existing plants. Additionally, the company plans to set up a greenfield project in an SEZ in Vishakhapatanam at a capital cost of Rs 205 crore, which will double its current technical pesticides capacity. The company is expected to raise around Rs 125 crore of equity for the same with Rs 30 crore from internal accruals and Rs 50 crore through fresh issue of equity. At the current market price, this may entail nearly 13% dilution in equity.

   The company has a bouquet of products in the retail market offered under 43 brands. The company distributes its products through a network of 8,850 dealers across the country. The proposed expansion will boost its exports going forward.

   The western states of the country — Maharashtra, Haryana, Gujarat, Punjab and Karnataka — apart from Andhra Pradesh, constitute nearly 70% of the company's domestic sales. Nearly half of the company's annual revenues come from exports to over 15 countries, including the US, Europe and Japan. The company, which was traditionally managed by the promoter group, has recently brought in professional management by appointing a new chief operating officer in January 2009. The company has also set up a vision to expand its sales to $500 million by 2015. Considering Rs 605 crore turnover for FY09, this envisages a CAGR above 25%. The company, which paid Re 1 per share as interim dividend last year, has doubled it to Rs 2 per share this year. For FY09, it had paid further Rs 3 per share as final dividend.

   The company, which is currently commanding a price-to-earnings multiple of 13.5, appears fully justified in view of the healthy growth outlook. The company's future profit growth and proposed equity dilution will be the key issues that shareholders should watch out for.