Sharda Cropchem's Q1FY19 results (Outperformer) - Strong revenue growth
Q1FY19 results
- Sharda Cropchem’s Q1FY19 revenues increased significantly by 34%yoy to Rs4.6bn (our est. Rs3.8bn) led by 20.8% realisation growth. Volume growth and exchange rate impact was 4.8% and 9% respectively
- Geographical growth split: Europe: (+57.5%), NAFTA (11%), Latam(+62.4%), RoW(+81.7%)
- Gross margins declined 116bps to 34.7% due to increase in raw material prices led by supply disruption from China.
- Sharda incurred forex loss of Rs140m which was booked in other expenses. This led to 270bps decline in EBITDA margins to 15.5%. EBITDA stood at Rs711m ( est:Rs766m), up 14.3% yoy
- Higher interest cost (Rs36m vs nil) and higher tax rate (34.1% vs 31.8% in Q4FY17) restricted PAT growth. Net profit for the quarter stood at Rs342mn (est.Rs460m), down 20.8% yoy
Key positives: Growth in Europe and Latam
Key negatives: Increase in working capital
Impact on financials: FY19E EPS cut by 8% to factor in forex loss in Q1FY19 and higher interest cost.
Valuations & view
Sharda reported strong revenue growth in Q1FY19E led by growth in EU, however forex losses and interest cost on working capital weighed negatively on profitability. In FY19E, we expect the revenue growth momentum to continue with steady introduction of high margin molecules in Europe and NAFTA which will also aid profitability. In the long term, Sharda’s investment to secure product registrations and low market share in the global markets imply significant growth opportunity. We expect Sharda to post revenue/ earnings CAGR of 17%/18% over FY18-20E. An asset-light business model (RoCE~23%) with focus on building product registration, nil investment in manufacturing assets makes it one of the best play on global generic agrochemical market. Given limited access to bank funds, Sharda’s ability to fund its increased working capital requirements remains an issue. Maintain Outperformer, with TP price of Rs525 (18x FY20E earnings).
Sharda Cropchem Ltd. Sharda Cropchem Limited is an agrochemicals company. The Company is engaged in the marketing and distribution of a range of formulations and generic active ingredients around the global. The Company's segments include Agrochemicals, Belts and Others. Its Agrochemicals segment consists of insecticides, herbicides, fungicides and biocides. Its Belts segment consists of conveyor belts, V Belts and timing belts. Its Others segment consists of dyes and dye intermediates, and general chemicals. The Company is engaged in order-based procurement and supply of non-agrochemical products, such as belts, general chemicals, and dyes and dye intermediates. The non-agrochemical product portfolio caters to customers, primarily, distributors, across Australia, Asia, Africa, Europe, North America and Latin America. It also serves the biocide segments as disinfectants. It V Belts and timing belts cater to water treatment, food and food ingredients, and other industrial applications.
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