Sharda Cropchem's Q2FY20 results (Outperformer) - Weak performance
Q2FY20 result
- Sharda reported revenue growth of 4.7% to Rs3.2bn (in line with our est.) led by 5.3% volume growth, 3.1% forex impact and 2.8% realisation growth
- Among key geographies Europe registered 30.4%, while revenues from Nafta, Latam and RoW region declined by 10.7%, 11.6% and 9.2% respectively
- Gross margins declined sharply by 400bps to 27% on increasing prices of raw material procured from China and Sharda’s inability to pass on the increase to its customers
- Despite stable operating expenses, forex loss of Rs88m vs gain of Rs174m in Q2FYFY19 led to 509bps decline in EBITDA margins. EBITDA declined by 42.9% to Rs198m ( below our est: Rs374m)
- Lower other income (down 52%) , higher depreciation cost (up 68% , in line with est) led to PAT loss of Rs56m ( below est : +Rs82m)
Key positives: Strong growth in Europe
Key negatives: Sharp decline in gross margins
Impact on financials: Cut FY20E/21E EPS by 18.8%/8.8% respectively to factor in subdued performance in H1FY20
Valuations & view
Sharda’s performance in H1FY20 was adversely impacted by poor weather conditions in Nafta along with unfavourable product mix and steep rise in raw material prices hampering profitability. Going forward, we believe gradual normalisation of raw material prices with steady introduction of high margin molecules in Europe and NAFTA should aid bounce back in earnings 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 8%/7% over FY19-21E. An asset-light business model (RoCE~21%) with focus on building product registration, nil investment in manufacturing assets makes it one of the best play on global generic agrochemical market. Maintain Outperformer, with revised target price of Rs334 (15x FY21E 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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