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We have released our new stock recommendation for our Premium Members and would like to share with you details on the same.
It’s an agrochemical company and we believe it will benefit immensely from the ongoing rise in the prices of farm output and food inflation.
The prices of the common elements of the diet, from dairy to fruits and vegetables, are rising at double or triple their usual rate across the world. This will put more money in the hands of the farmers and is likely to result in higher demand for farm inputs including agrochemicals.
Some key positives and differentiating factors about the company:
- Company sells in 50 + countries and is well diversified geographically. Thus, geopolitical or weather impact in one country doesn’t impact it much
- It has a huge product portfolio with registrations across multiple countries. Thus, it is quite nimble footed and in case of a low demand or low margin in certain products, it is able to quickly shift to other products
- One of the major risks in the agrochemical industry is the ban on products. Here again, as the company isn’t tied to manufacturing a certain product, it is able to quickly shift to other products with strong demand
Do the above advantages translate into better financial track record for the company? Let’s look at the numbers:
- Market cap - < than 10,000 crore
- Operating profit growth – 15% + CAGR over the last 9 years
- PBT growth – 15% + CAGR over the last 9 years
- Average ROAE – 20% + for FY 12-FY 16; 16% + for FY 17-FY 21
- Debt to Equity ratio – Cash rich company
- Average Cash flows from operations – Rs 104 crore for FY 12–FY 16; Rs 229 crore for FY 17–FY 21
- Valuations – Less than 12 times pre-tax earnings
That’s the past; how does the future look like – Well, the company has already reported much-2 improvement in performance in FY 22 and an otherwise conservative management is guiding for 20% YOY growth for the next few years with an expected improvement in margins.
What about the promoters – We like companies wherein promoters have skin in the game and here the promoters hold more than 60% stake in the company.
Over the last 10 years, they have never diluted the equity and have largely run the operations debt free. Most importantly, we have found them to be very forthcoming and straightforward, especially when the times are tough.
What about the valuations – For one of the leading companies with a differentiated business model which has enabled it to scale up and record strong growth year after year, we believe the valuations are quite reasonable at less than 12 times pre-tax earnings.
The company has also been quite consistent in terms of dividend pay-out at around 20% of the profits.
Overall, looking at positive growth outlook, excellent track record and reasonable valuations, we have recommended the stock to our members and also added it to our model portfolios and smallcases.
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