Dhanuka reported weak Q1FY18 results, as channel destocking ahead of GST rollout impacted shipments, revenues down 2% y-o-y, and adverse operating leverage eroded profitability, PAT down 19% y-o-y. Normal monsoon progress has kept outlook over industry demand intact; management maintains guidance of 15% revenues growth in FY2018E. Earnings growth trajectory should improve from here; however, stiff valuations prohibit a positive stance. Retain ‘reduce’. Dhanuka reported revenues of Rs 2.2 billion in Q1FY18, down 2% y-o-y, broadly in line with expectations and trend seen in the Q1FY18 results of its peers, as industry faced inventory rundown by dealers ahead of GST rollout.
Management noted that revenue growth could have been 10-12% y-o-y in the quarter under normal circumstances, as secondary demand is strong on account of normal monsoon progress. Gross margins improved only 100 bps y-o-y, much below estimates, as benefits of low-cost inventory accumulated by Dhanuka in the last quarter were absent, though given uneven demand in Q1FY18, we would await Q2FY18 results to judge the trend here.
EBITDA, at Rs 245 million, declined 14% y-o-y, below estimates, mainly on account of adverse operating leverage (staff and other operating expenses were up 3% and 14% y-o-y, respectively. Weakness in EBITDA level impacted PAT, down 19% y-o-y as well. Management sees industry demand improving to 10-12% in FY2018E from 6-8% in FY2017, as monsoon progress in FY2018E is expected to be normal. It maintained its guidance of 15% revenue growth for the company in FY2018E, supported by strong scale-up in molecules launched in the past three years. Margins are expected to decline to 18-18.5% , gross margins are expected to stay intact, in FY2018E, from 19.7% in FY2017, as it plans higher investments in marketing initiatives in FY2018E, given significant number of new launches, total 17, including 7 exclusive launches, in the past three years.
We have cut our FY2019-20E EPS estimates by 7% to account for higher effective tax rate, as guided by the management. We continue to project robust growth in Dhanuka’s earnings in FY2017-20E, expect EPS CAGR of 16%, despite rising tax rate. However, as of now it remains stretched, and leaves limited room for further upsides from current level. We cut our TP to Rs 750, Rs 800 earlier, on 24X FY2019E EPS, and retain our ‘reduce’ rating on the stock.