Strong Q4 beat leads to upgrades for Dhanuka; margin sustenance a concern


MUMBAI: Given favourable agricultural conditions, the Dhanuka Agritech Ltd stock has given returns of more than 70% in the last year. The company has impressed the Street with its growth numbers and margin improvement. During the March quarter (Q4), the company beat estimates largely due to higher-than-expected gross margins, said analysts. Even though revenues grew 21%, it was aided by the low base of last year. The Ebitda growth of 41.2% surpassed expectations by a wide margin despite rising input costs.

Analysts at Emkay Global Financial Services Ltd said, “Dhanuka beat our Revenue/EBITDA/net profit estimates by 6%/21%/11% respectively. The company was able to maintain gross margins (up 3bps y-o-y) despite raw material cost pressures.” EBITDA margins expanded by 334bps year-on-year to 23.5% on cost-control initiatives and covid-19 related savings added the brokerage. One basis point or bps is one-hundredth of one percentage point.

The Street will, however, be watchful on margin sustenance moving forward. The covid-19 led cost savings may be behind with promotional expenditure and field engagements are likely to increase, say analysts.

“The management remains optimistic to keep EBITDA margins flat at FY2022 though we believe raw material-related challenges and operating costs normalization may challenge margins,” say analysts at Kotak Institutional Equities. The management plans to take care of headwinds and maintain Ebitda margins led by a better product mix.

The company has a strong portfolio of generic and speciality molecules in segments; hence, it should tweak the product mix in favour of speciality and better-margin molecules.

Though margins could moderate, analysts have maintained their positive stance on the stock.

The company plans to increase backward integrations. It is investing in Dahej to set up insecticide active ingredients plant for pyrethroids and subsequently a herbicide active ingredients facility as well. Meanwhile, its strategy to reduce external RM dependence also bodes well, but benefits may take some time to accrue.

Meanwhile, analysts looking at a strong beat in Q4 have raised their forward estimates and are thereby maintained positive ratings. Those at Emkay Global Financial Services Ltd have raised FY22/23 EBITDA estimates by 9%-10% and net profit estimates by 7%, they have increased their margin and revenue growth assumptions.

Analysts at Kotak Institutional Equities too say “We tweak EPS estimates by 3% for FY2022/23 on better 4Q performance and raise target 2023 estimated earnings multiple from 15X to 16.5X on account of consistent improvement in working capital.” Working capital improvement from 148 days in FY2019 to 96 days in FY2021 is commendable, lowest ever, they added.

News Source:- Livemint

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