Stock To Buy: This Agro Chemicals Stock Has Good Upside Potential

Insecticides: Mixed performance

Insecticides India reported a mixed bag Q1FY2023 performance as higher-than-expected revenue growth of 19.7% y-o-y to Rs. 561 crore (9% above our estimate) was largely offset by miss of 87 bps in OPM at 10.4% (down 91 bps y-o-y).

"The strong revenue growth was supported by 12-13% y-o-y volume growth and a 7-8% benefit of price hike. Revenue from B2C/B2B businesses grew strongly by 21%/31% y-o-y to Rs. 370 crore/Rs. 163 crore on account of appointment of co-partners for new products , ramp-up of new products (that accounted for 12.2% of revenues) such as Hachiman & Shinwa launched in FY22 and demand traction for Maharatna products," the brokerage has said.

Herbicides business has done well

According to Sharekhan, the Herbicides business has done extremely well with a 44% y-o-y revenue growth in Q1FY23. However, OPM miss was on the account of rise in raw material cost (gross margin of 23.9%, up 77 bps y-o-y but was 86 bps below our estimate of 24.8%), higher energy costs and M2M forex impact of Rs. 6.5 crore. "Consequently, operating profit/PAT grew by 10.1%/9.6% y-o-y to Rs. 58 crore/Rs. 38 crore and was in line/2% above estimates as revenue growth gets offset by margin miss while PAT beat was led by lower-than-expected tax rate of 24.8% (versus assumption of 25.2%)," the brokerage has said.

Price target of Rs 1170 on the stock

Sharekhan expects the company to benefit from ramp-up of new products post capacity expansion and a potential rise in share of branded products (Maharatna brands). "Thus, we expect strong revenue, EBITDA, and PAT CAGR of 20%/31%/34% over FY2022-FY2024E on the low base of FY2022 along with decent RoE of 17%. Hence, we maintain our Buy rating on IIL with a revised price target of Rs. 1,170 (valued at 12x FY24E EPS). At the current market price, the stock is trading at an attractive valuation of 13.7x its FY2023E EPS and 10.4x its FY2024E EPS.

Solid revenues guidance

According to Sharekhan, the management guided for double-digit (18-20% y-o-y) revenue growth for FY23 mainly driven by expansion of facilities, addition of new-generation products and adding significant number of product registrations in the current fiscal. The management expects similar growth momentum to be maintained in FY23.

New patents

The company has received new patents for one fungicide (Novel Fungicidal Carbamate Compounds) and for three pesticides (Novel Miticidal Benzylamides, Novel Dithiolane Compound and Novel Granules & its Pesticidal Compositions). All the patents for 20 years period and commercialization may take 3-4 years post receipt of the patent.

Key risks for the stock

According to Sharekhan, the key risks for the stock is demand or delayed product launches which is likely to affect revenue visibility, while volatility in input costs may impact margins. "The government's intention to ban 27 pesticides could impact the company's performance; but the final decision is yet to come," Sharekhan has said.