The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper

    Smallcap Hunters: This smallcap agrochemicals stock is worth a look


    The company has set a target to achieve a Rs 300-350 crore turnover within next two years.

    Getty Images

    Related Companies



    By Soumya Malani & Arun Mukherjee

    Aimco Pesticides, incorporated in 1987, is a leading company in manufacturing, formulation and marketing of agrochemicals. Promoted by Pradeep P Dave, the company produces insecticides, fungicides and herbicides. Aimco is a manufacturer of various technical-grade pesticides and markets its products under the brand name Aimco. Today, it is one of the leading companies manufacturing chlorpyrifos, triclopyr & other formulations.

    It is the second company, globally, to produce certain products after leading MNCs. The in-house research and development facilities at Lote-Parshuram are recognised by DST (Department of Science and Technology), Government of India. Aimco is also a government-recognised export house.

    Here is the business at a glance:-
    • Financial leverage: It’s a debt-free business
    • Cash conversion cycle: Negative working capital almost, very healthy cash conversion cycle
    • Profits to cash flow: Profits getting converted to cash, as depicted by comparing cumulative addition figures for both over the past decade
    • Return on equity/ROCE(metrics are same as debt free): Way above 20% for last few years.
    • Dividends: Paid it recently due to turnaround.
    • Valuations: Around 6 times FY20-21 earnings
    • Market Capitalisation: Rs 90 crore

    Reasons for Turnaround:-

    Phase 1- 2008-2014
    • Conducted R&D activities to build a product portfolio
    • Obtained required registrations in respective markets for sales
    • Commercialised production by optimising process to achieve low per unit cost
    • Has invested considerable time, intellectual and financial resources to build products.

    Phase 2- 2014-2017
    • Conducts sales and distribution activities to enhance sales and generate free cash flows
    • Leverages product portfolio built by R&D, gets required registrations, positive market response, reduces manufacturing costs through process optimisation.

    2017-18: Brazil is its biggest export market, which had one of its worst times, thanks to a plunge in crude prices. That fortunately has normalised now. Last year it was also an aberration as company had to take some tough operational decisions to pave the way for an amazing 2018-19 and further.

    2018-19: The company ended fiscal 2017-18 with sales and PAT of Rs 108 crore and Rs 2 crore (adjusted for Rs 5 crore other income) respectively. For 2018-19, company came up with a fabulous set of numbers where sales grew 90 per cent and PAT grew 60 per cent. It also announced a dividend of Rs 1.5, ensuring a yield of 1.5 per cent. Promoters and their associates took a decent quantity at Rs 180 through a placement and doubled their net block with that money. The numbers are a result of capacity expansion, which is sufficient to take care of all the demands for next few of years.

    Competitive Advantage: Intangibles
    R&D Abilities: Ability to develop innovative products in pesticide sector

    Regulatory knowledge: The company exports its products and hence appropriate knowledge for getting registrations is required

    Registered products: Getting regulatory approvals and subsequent products registered is time-consuming process. Hence having products which have got regulatory approvals acts a significant time barrier.

    Competent promoter: Founder Pradip Dave has headed Pesticides Manufacturers and Formulators Association of India (PMFAI) and fought for its well-being on different occasions. He is wellknown in the industry because of his knowledge and experience in pesticides business for two decades. In this industry, key questions like ability to innovate, product category selection, regulatory knowledge, geography selection, cost optimization would all be a function of intellectual competence. He also has a strong track-record of promoter acts. His sons, Sameer and Ashit Dave have laid the foundation for a robust future.

    Manufacturing Abilities: The company has set up a fully automatic liquid formulation plant having capacity of 2 million litres per annum. Due to the backward integration, the company has an edge over other manufacturers by being able to supply a wide range of pesticide formulations to the farmers

    Low-cost advantage: Backward Integration-It manufactures certain raw material in-house, enabling it to produce at lower costs.

    Switching costs: It has a broad product portfolio giving the customer a one-stop solution, which enhances the customer stickiness

    So, what are the growth opportunities?

    Capacity expansion: The company has done a preferential issue of size Rs 8.33 crore, at an issue price of Rs 168 per share. Promoters (close associates of promoters) have subscribed to the issue. The gross block has doubled. Promoters putting in capital also depicts confidence of the management about business prospects. The future phase would be to scale up current capacity whenever further required, in response to catering market demand, to leverage on existing product portfolio.

    Product portfolio: Consistent building up of product portfolio would increase potential market size and growth prospects. This variable needs to be monitored actively as time progresses.

    Management competence: The management’s ability to turn around from a rough phase by building an arsenal of products, which required significant time and financial resources, and strengthening of balance sheet demonstrate its intellectual and operational capabilities. The strong track record and two decades’ experience of founder Pradip Dave signifies possession of relevant expertise in pesticide industry.

    Growth mindset: The management is having growth mindset. It has invested in innovation and did a prudent capacity expansion. It has also created a professional management structure to cater to growth.

    Integrity: They have settled their debt obligations and no major corporate misgovernance issues have come to light. They hold above 50% stake in the business, and hence, has higher probability of their interests being aligned with that of company.

    Diversification: The company has also diversified into specialty chemicals through its subsidiaries, moving into micro-nutrients and bio-nutrients, which is a much higher margin sun rising business. On a small base, the growth should be spectacular.

    Tailwinds: On Aprril 13, 2019, China closed down nearly 4,000 chemical production sites in Jiangsu and Shandong provinces, and a number of provinces including these two as well as Hebei and Henan have banned the establishment of new chemical parks. Though most of these plants were small and mid-sized, this still had a substantial impact on production of some chemicals, particularly pesticides.

    Prices of three pesticides – chlorpyrifos, fipronil and imidacloprid – increased by at least 30 per cent in 2018-19.

    Aimco is largest producer of chlorpyrifos at 1,200 million tonnes, and even at Rs 400 a kg, it should add Rs 48 crore to turnover.

    So far this financial year, the company is set for good growth. In full capacity, the recent Rs 10 crore ‘brownfield expansion’ for technicals will translate into a Rs 70-90 crore topline with good margins.

    What are the risks?

    Product/technological obsolescence:
    Products witnessing traction currently may become irrelevant with the arrival of substitutes. Hence, there is a need to innovate constantly and find required solutions. The company invests consistently in R&D and has expertise to navigate the problem.

    Forex risk: Since the company derives earnings from exports, any depreciation of the dollar can impact realisations. However, the risk can be managed through forward currency contracts.

    Raw material Risk: Any increase in prices of raw materials is absorbed by manufacturing specialised, high margin products, which command pricing power.

    Industry Risk: Demand slowdown due to weather patterns is another risk. Hence, the company has a broad product portfolio with diverse applications and exports to multiple geographies. Also, it maintains an efficient supply chain.

    The company has set a target to achieve a Rs 300-350 crore turnover within next two years, with an operating profit margin of 12-13%. If we put that in numbers, Aimco looks very attractive on valuation front.

    Currently, the stock is available at a PE of 6 its FY20-21 earnings. It is a debt-free company working on almost negative working capital. It is innovative, makes high-margin products and caters to a niche export market R&D-based products and regulatory approvals provide it a strong defence.

    It is currently seeking to leverage its product portfolio and enhance growth by scaling up capacity (which it has done recently). The promoter has put in capital for expansion via preferential issue, which further adds confidence. The stock currently trades at a discount to their purchase price. It will be the cheapest company in the sector by any valuation metric. The company is at an inflection point with rich tailwinds.

    June Quarter Result
    Aimco came out with good numbers for June quarter. Net profit rose 94.33 per cent to Rs 2.74 crore against Rs 1.41 crore in the year-ago quarter. Sales rose 94.30% to Rs 62.39 crore from Rs 32.11 crore in the same quarter last financial year.

    (The writers are partners of SA Investment Advisors, a Sebi-registered investment advisory firm. They along with their family members may have position in the company discussed above)
    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice on ETMarkets. Also, is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.)

    4 Comments on this Story

    Debashis Sarkar375 days ago
    If you think about pledging of promoters share then for your kind information 8 out of 50 shares in Nifty 50, promoter pledged their share.The big names include Asian paints,Indusind bank,Adani port,Adani enterprise etc. Even in Reliance industry the Debt is more than Rs.3,50,000 crores.Even highest stock MRF Tyre also has certain pledged shares. Of course when you judge the performence of a stock ,you have to think about pledged share also. But other way you have to look about the Debt of the company.It is a zero debt company.Not many of the microcap stocks are zero debit stock. My experience says only small cap stocks with less share holder can gain rapidly. For example you look , ION EXCHANGE,KANCHI KARPOORAM, MANGALAM ORGANICS. Now it is totally your choice whether you invest in this stock or not.Thanks.
    Mahendra B.rao377 days ago
    Seems that you couldn''t buy at low price and left out of this rally. So the classic grapes are sour case. Ha ha ha.
    Vijay377 days ago
    This is one of the numerous penny stocks. The nett profit includes other income of 6Cr odd, which is exceptional and not relating to the business that they are doing. Hence the profitability is much lower than that which is shown.
    It is a classic SHAM.
    The Economic Times