We entered Dhanuka Agritech at Rs 328 per share in Dec 2019. At that time the trailing twelve months profit for the company was Rs ~115 Cr. while its market capitalization stood at Rs 1,558 Cr implying a price-earning multiple of 13.5x, even though the business generated a consistent RoCE of 30%. The only missing element probably was the earnings growth and some risk around pledging of promoter stake to fund the acquisition of Orchid Pharma by promoter group.

The industry growth for FY17-19 was muted due to erratic monsoons and lower pest infestation, but thanks to a good monsoon followed by unseasonal and excessive rainfall in Sep-Oct 2019, the reservoir levels across India reached their highest in the past decade lowering dependence on upcoming monsoon showers. Further, Government’s focus on increasing farm income, the need for ensuring crop protection to lower imports, and rising MSPs gave us the confidence in the cycle turning in Dhanuka’s favor in the upcoming Agri season.

Thankfully our investment thesis played out perfectly - the company’s recently declared FY21 results show the profitability of Rs 211 Cr, driven by substantial growth in sales as well as operating margins. The market has rewarded this remarkable execution by re-rating the stock to over 19x earnings leading to a current market capitalization of Rs 4,034 Cr. The current stock price of Rs 866 is 2.6 times our entry price of Rs 328, yielding 164% returns in about 18 months.

We were able to catch the earnings cycle at an opportune time when the stock was available at cheap valuation despite reasonable strength in the business model backed by a robust balance sheet and capital allocation track record.

The management has guided for continued double-digit sales growth in FY22 and the business is positioned to continue doing well. However, we see significant positives already built into the current price and accordingly find it prudent to exit the stock at the current price.