Insecticides India - Investment report

Insecticides India is a good long-term bet, as it promises strong topline & profits and has limited downside risks

INSECTICIDES INDIA is a relatively new player in the agro-chemical and house pesticides segment. It manufactures and distributes a range of crop protection and pest control products in the domestic market. It competes with multinational peers like Clariant, Monsanto Chemicals and Bayer, besides leading homegrown players including United Phosphorus, Rallis and Excel Crop Care. It is on the verge of emerging as a fully integrated player in the agrochemicals business, which makes it an interesting long-term pick.

BACKGROUND:

Insecticides India started its journey several years ago by entering into a technical collaboration with US major Amvac, whose brand Thimet is now among the more well-accepted generic pesticides in the country. Subsequently, it tied up with Vanguard of the US to market its agro-chemicals products in India. The company has also acquired three well-known pesticide brands, including Tractor, from Montari Industries. Its plant in Jammu & Kashmir (J&K) enjoys tax advantage, which makes it more cost-competitive compared to its peers. The Rs 250-crore company took a major leap last year, when it came out with its maiden public offer. It raised around Rs 36 crore from the primary market to fund its growth plans.
It is on track to expand its manufacturing capabilities in two phases. Under the first phase of its capex plan, the company has set up a formulations manufacturing unit in J&K at a total cost of Rs 15 crore. Its capacity has now increased to 7,000 tonnes per annum for granules, 1,000 tonnes per annum for wetable dispensable powder and 10 lakh litres for concentrates. It has started work on the second phase of its expansion at Dahej for manufacturing specialised chemicals, besides setting up an R&D centre. A part of the second phase includes further expansion of its unit in J&K. The successful completion of the second phase will make Insecticides India a fully integrated player in its segment.

FINANCIALS:

Insecticides India’s net sales during the June ’08 quarter nearly doubled to Rs 85.7 crore, compared to the corresponding period last year. Commissioning of the J&K formulations plant was a major boost. The tax-free unit helped the company to improve its operating margin to 9.3% of net sales in June ’08, against 7% a year ago. Better margins helped the company treble its net profit to Rs 6.2 crore in the first quarter, from around Rs 2 crore a year ago.
As the company is in the crop-protection business, the June and September quarters are traditionally the strongest due to sowing of paddy, cotton and sugarcane. In the past three years, the company’s net sales have more than doubled, while net profit jumped by two-and-a-half times.

VALUATIONS:

On an equity base of Rs 12.7 crore, its Q1 net profit translated into EPS of Rs 4.88. At the current market price of around Rs 51, the stock is valued at 2.5 times its estimated EPS for
FY08 of nearly Rs 20 per share. This is much lower than its historical P/E of 4 and the industry’s average ratio of 7. The company is set to continue growing its topline and improve its profitability, thanks to its J&K unit and the second phase of expansion. There is limited downside risk in the stock at its current price and long-term investors can accumulate it.
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