Sharda Cropchem's Q3FY19 results (Outperformer) - Strong revenue growth, CWIP write-off impacts profitability
Q3FY19 results
- In Q3FY19, Sharda reported revenue growth above our estimates, however EBITDA was in line with our expectation
- Sharda Cropchem reported strong revenue growth of 44.9% yoy to Rs4.7bn (much above our est of Rs3.7bn) led by 19% volume growth, 17% realisation growth and 9% favourable currency impact
- Among key geographies, strong revenue growth of 78% ,25% and 49% from NAFTA, Europe and RoW respectively was partially offset by weak performance in Latam which declined by 60%.
- Gross margins improved marginally by 60bps yoy to 29.4% (est: 30%) with easing of situation in China.
- Despite stable employee costs, higher other expenses ( up 66% yoy) due to forex loss (Rs49m) and substantial CWIP write-offs (Rs310m) booked in other expenses led to 100bps decline in EBITDA margins to 10% (est : 12.7%). EBITDA increased by 34.2%yoy to Rs473m(in line with our est :Rs478m)
- Decline in interest cost with repayment of working capital loan and lower tax rate led to 104.9% yoy growth in PAT to Rs203m (est: Rs164m)
Key positives: Strong revenue growth, improving working capital
Key negatives: Decline in EBITDA Margins due to CWIP writeoffs
Impact on financials: FY19E/FY20E EPS cut by 6.8%/8.1%to factor in impact of CWIP writeoffs and forex loss.Introduce FY21E EPS of Rs30.8/sh
Valuations & view
Sharda continued to register strong topline growth driven by increasing penetration in NAFTA and Europe. Profitability was impacted by CWIP write-offs and forex loss. Going forward we expect revenue growth momentum to continue with steady introduction of high margin molecules in Europe and NAFTA which will also aid profitability. Moreover easing of situation in China with improving availability of raw material augurs well 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 16%/13% over FY18-21E. 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. Maintain Outperformer, with TP price of Rs431 (14x 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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