Insecticides India: Reap the harvest - Buy

Even as the market was turbulent in 2016, there were a few themes that bucked the trend. Agrochemical makers have been in focus, thanks to the normal south-west monsoon in 2016, after two consecutive years of deficient rainfall. The stock of Delhi-based agrochemicals producer Insecticides India has been among the top performers in this space. Since our last recommendation in August 2016, the stock has gained more than 23 per cent. This was aided by strong performance in the first half of the current fiscal.

Given the healthy pipeline of products lined up for launch over the next two years, the company is poised to sustain good growth. Besides healthy fundamentals, the government’s thrust on making agriculture sustainable and improving farming income is positive for the agri sector in general, and should have a positive rub-off on Insecticides India too.

The stock currently trades at about 13 times the 2018-19 earnings. Historically, it has traded between 12 and 14 times its two-year forward earnings. Investors with a two- to three-year horizon can consider buying the stock.

Despite a good monsoon in 2016, the overall volume growth for the agrochemical industry during the April-September 2016 period was modest, according to industry observers. Notwithstanding a relatively docile offtake by farmers, Insecticides India has managed to post strong performance in the first half of 2016-17. The company posted revenue and operating profit growth of 18 per cent and 21 per cent, respectively, during the first half of the 2016-17 fiscal.

The operating profit margin for the period improved to about 11 per cent, compared with 10.6 per cent during the same period last year. This was thanks to the 10 products launched this year, particularly its post-emergence herbicide brand Green Label. The product, which is used to decimate and control existing weeds, is expected to be a strong growth driver in the medium term. Launched for the first time in India, the market for Green Label is estimated to be ₹100 crore. The product does not have any patent protection and is now being imported from Japan.

Insecticides India plans to launch 11 new products next year, in line with the trend in the current year; this includes about three to four niche, low-competition products such as Green Label. This will not only support revenue growth but also boost profitability. The company is looking to launch three to four bio-fertiliser products in the near term.

Besides launches, promoting and strengthening its top 20 existing brands — Navaratna and Super 11 — of its total portfolio of over 100 products, should also help improve margin. The top 20 products accounted for 68 per cent of the company’s consolidated revenue in 2014-15. The company’s current distribution reach stands at over 5,000 distributors and 60,000 dealers across the country. According to Crisil, the company has a 7 per cent share in the $4.4-billion domestic agrochemical industry as of 2015.

Insecticides India has strategic tie-ups with global chemical majors, such as the American Vanguard Corporation’s subsidiary AMVAC, and Japanese fine chemicals producer Nissan Chemical Industries, for licensing and marketing their innovative products in India. It has been strengthening its ties with global innovators for expanding its product portfolio in India.

The company’s agreement with Nihon (Japan) for marketing its insecticide product Suzuka in India is a case in point. In July 2016, the company entered into an agreement with Momentive Performance Materials (USA) for marketing their product AgroSpred Max and Agrospec Max.

These tie-ups should help the company build a differentiated product portfolio and give it an edge over competition. Also, given that these products enjoy higher operating profit margin, more contribution from in-licensed products should provide a leg up to the company’s overall profitability.

The company is also building a portfolio of generic products. With over $6.3 billion worth agrochemicals expected to lose patent protection by 2020, there is huge opportunity in the generics space to be tapped. This should support Insecticides India’s generic product pipeline.

Insecticides India’s research and development (R&D) JV initiative with OAT Agri Co is under progress. It envisages three to four product launches over the next few years from the JV stable that should support the company’s medium- to long-term performance.

The government’s budget initiatives such as increasing agricultural credit to ₹10 lakh crore will address working capital requirements of farmers and should thereby support growth in sales of agri-inputs.

The company has also repaid its long-term borrowing to the tune of ₹750 crore.

Its total debt-to-equity ratio has come down to 0.42 times by September 2016 from 0.44 times in March 2016.

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