Insecticides (India): Growth springs - Buy

Bountiful rainfall this year, which followed two consecutive years of below-normal monsoon, has brought cheer not just to farmers but also to investors in agri stocks. Even as the offtake of agri-inputs remained sluggish in the June quarter due to a delayed monsoon onset, pick-up in rainfall during July and August has come in as a big relief for the sector.

The positive impact of improved sales in the last two months should reflect in the current quarter performance of agri-input players, particularly agro chemical producers. While the stocks of many crop protection manufacturers have rallied in the last few months, there are still value picks in this space that can deliver healthy gains in the long term. The stock of Insecticides (India) is one such. The stock has delivered 44 per cent gains since our last recommendation this February.

Yet, given the long-term prospects of the company, the stock looks attractive from a two to three-year horizon. At the current price, it trades at about 13 times its 2017-18 expected earnings, compared to its historical band of 12-14 times.

After two consecutive years of weak performance, Insecticides (India) is well geared to return to the growth path in the current year. The company’s growth prospects seem healthy over the next two years on three counts. First, it has a strong pipeline of products developed on its own. It has a formulation portfolio of nearly 120 products.

For instance, the company in June launched the generic version of Nominee Gold brand (sales of about ₹200 crore by peer PI Industries, under the brand name Green Leaf); this is a post emergence broad spectrum herbicide which can be used for all types of rice cultivation — direct sown, nursery and transplanted rice. Contribution from this product has been improving steadily and this should provide a leg up to sales and profitability.

Also, the company plans to strengthen its second line brands — Super 11 brands — such as Prime Gold, Sargent, Selector and Indan, besides the top nine navarathna brands. This should boost revenue growth.

Besides crop protection chemicals, the company is also looking to expand its product portfolio by setting up a bio products wing, with a dedicated bio R&D laboratory. It launched its maiden bio fertiliser product, Mycoraja in 2013, and the research team is working on developing three-four new products to be launched in the next few years.

Second, the company is expanding its partnership with MNCs for selling their branded products in India. This should not only help accelerate the company’s revenue but also add significantly to its margins, given that these are innovative branded products. For instance, in July, Insecticides (India) announced a tie up with Momentive Performance Materials Inc for selling its products Agrosprec Max and Agrospred Max. In August, it firmed up an agreement with Japan’s Nihon Nohyaku Co to launch new products for paddy, pulses and vegetable crops. Insecticides (India) will launch a new generation insecticide - Suzuka and plans to introduce Hakko, an insecticide targeting brownplant hopper in paddy crop. The company has already partnered with American Vanguard Corporation’s subsidiary AMVAC and Japan-based fine chemicals producer Nissan Chemical Industries.

Third, over the next couple of years, the company expects to launch its own innovative products which are currently being developed under a joint venture with Japanese crop chemicals manufacturer OAT Agrio Co. This, when it happens, should provide a leg up to Insecticides (India’s) profitability.

While Insecticides (India) holds good growth promise, thanks to its strong portfolio, given that a large part of the agricultural land is still rainfed, agrochemical sales are closely linked to monsoon. A below monsoon rainfall can hamper the company’s prospects.

In the latest June quarter, Insecticides (India) reported 7 per cent revenue growth mainly led by formulation sales. The company’s technical (bulk) sales was impacted by high channel inventory. To address this, Insecticides India offered discounts to dealers.

Despite this, the company managed to maintain operating profit margin of about 12 per cent during the June quarter, helped by better product mix and higher contribution from new launches such as Green Leaf.

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