Stock Review: Dhanuka Agritech

 

Debt-To-Equity Ratio Gradually Shaping Up, Absence Of Natural Forex Hedge A Worry

 

THE stock price of Dhanuka Agritech witnessed higher volatility amid high trading volumes on Wednesday. The stock fell to a low of Rs 421 before closing 6% down to Rs 459 from the previous day's level. The counter was active following a partial sale of equity by its promoters.

   The scrip has, however, grossly outperformed the broader market over a period of one year. It gained almost 160% as against the 18% increase the benchmark Sensex. The Delhi-based agro-chemicals company has reported robust double-digit growth in sales and profits in the June 2010 quarter. Given its expansion plans, it is well poised to take advantage of growing demand for pesticide.

   On Wednesday, the company's promoters sold 7.5 lakh shares or 9% of earlier stake in the open market. The company is also in talks to sell another 8.25 lakh shares to a mid-market fund managed by Lighthouse Funds for a consideration of Rs 34 crore. Given this, the promoter group's stake is expected to fall from 90% to 75%.

The pure-play formulations company, Dhanuka, had a decent June quarter with sales growing 30% to Rs 80 crore and profits by 84% to Rs 9 crore. The company improved its operating profit margin by 180 basis points against the year-ago period.

   The company's debt-to-equity ratio has been improving continuously over the past few years, dropping below 0.7 as on March 31, 2010. The fund infusion by Lighthouse and strong operating cashflows could reduce the company's net debt considerably by the end of FY 11.

   Dhanuka is consistently expanding its product base and market reach through various strategic and technical tie-ups. The company has lined up a capex of Rs 25 crore for expanding capacities at its existing facilities over the next two years. The company also has plans to acquire a small technical manufacturing company, which can support its existing formulation products.

   Over the past several years, the company has established a pan-India presence with a network of more than 6,000 distributors. Dhanuka has recently entered retail chain business of agrochemicals with seven outlets in Uttar Pradesh and two in Gujarat with 10 more in the pipeline. While the UP outlets are all company-owned, most of the Gujarat outlets would be based on franchisee model.

   At the current market price of Rs 486, the company's stock trades at nearly 11 times its earnings per share for the trailing 12 months. Given the company's expansion plans and pan-India presence, it appears well positioned to benefit from rising demand for pesticides. However, the company being India-focussed doesn't have a natural forex hedge against the imported raw materials, which remains a concern.