Insecticides (India): Resilient show - Buy

Agri stocks are back in focus, thanks to the near normal monsoon in the last two years after two consecutive years of weak monsoon. Historically, it is pesticide sales that has responded directly to monsoon and has been more vulnerable to its vagaries, compared with other agri-input players such as seed and fertiliser makers.

For instance, in years of deficient monsoon rains, the consumption of pesticide has declined too. In 2009-10, for example, pesticide technical sales dropped by 4.7 per cent. Similarly, in 2012-13, 2014-15 and 2015-16, sales of pesticides declined by 13.9 per cent, 6.9 per cent and 10.2 per cent respectively. This is largely because crop losses due to deficient rainfall may imply less usage of pesticides, leading to slow demand.

Also, the demand for pesticides is contingent on pest incidence. But not all pesticide makers saw their revenue slide during these weak monsoon years. Insecticides India is one of those that bucked the trend.

The company has managed to remain resilient and outperform the industry through concerted efforts to expand its product offering and market reach, in addition to building a strong brand presence. Insecticides (India) has managed to sustain growth even during challenging times.

Growth from existing products besides innovative launches (through partnerships and licensing tie-ups with global majors), which helped the outperformance in the past, should continue to support growth over the medium term too.

At the current price, the stock trades at about 16 times its 2018-19 estimated earnings, which implies an over 50 per cent discount to peers such as Dhanuka Agritech and Bayer CropScience. Though the stock has rallied almost 60 per cent since our last recommendation in August 2016, given the healthy growth potential over the near to medium term, investors can consider adding the stock to their portfolio.

Insecticides (India)’s growth in the medium term will be driven by three factors.

First, the company’s tie-ups with leading global players has enabled it to bring differentiated products into the market. It has a technical collaboration with global crop protection major AMVAC and is currently selling its two large global brands — Thimet and Nuvan.

Its marketing tie-ups with global innovators to sell patented products in India have enabled the company to expand its differentiated product portfolio in a timely manner. These tie-ups include the existing one with Japanese agrochemical major Nissan Chemical Industries to market patented products – Pulsor and Hakama – and the more recent one with Momentive Performance Materials (USA) for two products.

These being innovative products, the margins are very high and thus have aided improvement in profitability.

Besides licensing large brands, the company is also expanding its biological product portfolio that started off with its Mycoraja brand in 2015, which is a Mycorrhiz-fungus based product. This year Insecticides (India) launched a new product called Kayakalp, which works as a natural catalyser to improve soil’s organic capacity, strengthen its nutrient value and thereby improve field productivity.

The product is approved by National Centre of Organic Farming. According to the company, the product has potential to reduce chemical fertiliser usage by up to 25 per cent, under recommended agronomical practices. In all, Insecticides (India) plans to launch 5-6 products every year; this should support the company’s growth in medium term.

Next, besides launches, the company’s concerted marketing efforts by reaching out to farmers is also aiding strong growth of its existing brands.

For instance, the top 15 brands currently account for about three fourth of the company’s revenue. This is much higher than in 2014-15, when top 20 brands accounted for 68 per cent of the company’s consolidated revenues.

Finally, besides in-licensed molecules, launch of patented products from its Research and Development (R&D) joint venture with Japanese major OAT Agri Co is also expected to happen over the next couple of years. The launch of products from the JV, when it happens, can be a big revenue and profit driver in the long term, given that these products typically enjoy very high margins.

While the company has been immune to the vagaries of monsoon in the past, successive bad monsoon spells may have a bearing on its performance.

In the June quarter, the company posted a healthy 14 per cent growth in revenue, despite reduction in offtake by dealers and distributors due to GST implementation.

During the quarter, Insecticides (India)’s operating profit margin expanded by 3.4 percentage points, compared with the same period last year, aided by better product mix.

Higher contribution from technical sales (institutional) mitigated the impact of GST on retail sales. Strong operating performance coupled with lower interest outgo translated into 67 per cent jump in net profit. In 2016-17, the company’s revenue rose 12 per cent to ₹1.107 crore while net profit grew a much faster 48 per cent to ₹581 crore.

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