CoValue Markets

Insecticides India: High Risk

Stock is trading at Low valuation due to the proposed ban on selected Insecticides. Is it worth the Risk? Know What’s built-in CMP & Value

Insecticides manufacturers agrochemicals and formulations based pesticides. The Formulation segment, which is a high margin business, is around 77% and the agrochemical segment is at around 13%.

The Company has been growing its sales by around 9% during the past 5 Years. The Sales grew by 14.3% to INR 13.63 Billion for FY 2020. In Q1 FY2021, the Sales grew by 15.7% to INR 4.09 Billion with an OPM of 8%. The Margins were impacted due to fluctuations in Raw Material Costs caused because of Coronavirus Pandemic.

COVID19 disrupts the business!

The Company reported growth in Q1 FY2021 but there was a fall in Margins due to higher Raw Material Costs and the Pandemic. Post the shutdown, the Company’s facility is now returning to normalcy. 

China supplies about 30% of Insecticides India Ltd’s raw material requirements, which is disrupted due to COVID19. However, operations in China are now being normalized. Although there is an impact on the company’s raw materials and sales, as India is on a countrywide lockdown with businesses running on low sales and factories presently likely to be operating at Low Capacity Utilisation.

Strategy

The Management says that the new product launches continue to have high acceptability in the market due to its strong value proposition and the Company will continue to leverage its R&D expertise to develop innovative molecules. The management team remains fully committed to driving growth through new innovative products, improving product mix, and increasing brand business sales. The Company plans to introduce around 10 products in the current year. With a clear strategic direction, they look forward to delivering sustainable growth and enhanced profitability in the time ahead.

Immediate Concerns and Projects

The Government of India has released a draft proposal to ban 27 Insecticides – some of which are produced by Insecticides India. If the draft is finalized, then it will have a negative impact on the business of the Company. However, there seems to be strong opposition to the proposal and there could be many changes to it.

The Company is expanding its manufacturing facilities in Rajasthan and Dhej and the Work is in Progress. The first phase of the project is expected to be completed by Q2 FY2021. The Company is also working on Backward Integration to improve its sourcing and thereby margins.

The Company’s Share Price has fallen from a high of about INR 580 in January 2020 to a Low of INR 206 on 23rd March 2020. Since the Low, it has now recovered to about INR 514 on 21st August 2020, when this Valuation was undertaken.

Expectations Valuations

What’s in Price?

If one iterates the Value Drivers (Price Scenario) to equate the Current Market Price of INR 514 or justify it – one can conclude that the Market is Pricing about 5% Compounded Growth for 10 years (Inflation 5% Plus Real Growth 0%) with a 9% Target Operating Profit Margin (OPM).

What could be Value If?

If one further analyzes in the Value Scenario of the App, one can say that the Company can Compound its Sales for the next 10 Years by 9% in Nominal Terms (Inflation assumed at 5%, Real Growth 4%) with a Target OPM of 14%. Further, the company is moving more towards Branded Products and Premiumization. The Value under this Scenario comes to INR 1073 Per Share. 

Risk and Reward are Balanced.

Import Valuation to analyze/iterate all the Value Drivers to understand What is in Price and build your own assumptions to Compute Value.

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About the author

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Ajit Singh

Ajit Singh is a Chartered Accountant and Investment Professional for over 20 Years. He loves exploring Companies and Valuing them. He is fond of Start-ups and very passionate about Entrepreneurs.

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