Sharda Cropchem's Q3FY20 results (Outperformer) - Weakness continues
Q3FY20 result
- Sharda’s revenues declined by 18.7% to Rs3.8bn (below our est.) led by 25% fall in realisations. Volumes grew by 7.3% yoy
- Among key geographies Latam registered 87% yoy growth, while revenues from Nafta, Europe and RoW region declined by 29.7%, 9.9% and 29.1% respectively
- Gross margins declined sharply by 467bps to 24.7% owing to unfavourable product mix and challenging market environment in Europe and Nafta
- Forex gain of Rs92m vs loss of Rs44m in Q3FY19 led to 37bps improvement in EBITDA margins. EBITDA declined by 15.7% to Rs395m ( below our est: Rs509m)
- Despite higher other income (up 158% yoy) , higher depreciation cost (up 45% , in line with est) and higher tax rate 66% vs 28% in Q3FY19 led to 71% yoy decline in PAT to Rs59m ( below est : Rs185m)
Key positives: Strong growth in Latam
Key negatives: Sharp decline in revenue and gross margins
Impact on financials: Cut FY20E/21E EPS by 14%/5% respectively to factor in subdued performance in 9MFY20. Introduce FY21 EPS of Rs25.4/sh
Valuations & view
Sharda’s performance in 9MFY20 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 7%/9% over FY19-22E. 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 Rs317 (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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