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Sharda Cropchem's Q2FY19 results (Outperformer) - Higher input costs impacts profitability

Q2FY19 results

• Sharda Cropchem’s Q2FY19 revenues increased by 11.4% yoy to Rs3.09bn (marginally below our est. Rs3.19bn) led by 11.3% realisation growth and favourable currency impact of 7.5%. Volumes declined by 7.4% yoy
• Among key geographies, strong revenue growth of 45.5% and 41.3%    from NAFTA and RoW respectively was moderated by weak performance in Europe and Latam which declined by 11.6% and 27.5% respectively. 
• Gross margins declined sharply 452bps to 31% due to increase in raw material prices led by supply disruption from China.
• Forex loss and CWIP write-offs which was booked in other expenses led to further decline in EBITDA margins by 679bps to 11.2% (much below our est : 15.6%). EBITDA declined by 30.7%yoy  to Rs347m(est :Rs498m)
• Higher tax rate and interest cost led to 33.7% decline in PAT to Rs162m (est: Rs203m)  

Key positives: Strong revenue growth in NAFTA and RoW  

Key negatives: Decline in Gross Margins, weak growth in Europe and Latam

Impact on financials: No change in Earnings Estimates

Valuations & view

Sharda’s performance in Q2FY19 was impacted by weak revenue growth in Europe and Latam, while profitability was marred by sharp increase in raw material costs due to supply disruptions from China. Going forward we expect improvement in revenue growth 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 revised TP price of Rs472 (16x FY20E earnings).