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Sharda Cropchem's Q4FY19 results (Outperformer) - Profitability declines

Q4FY19 result highlights

• Sharda Cropchem reported muted revenue growth with 0.2% yoy   decline to Rs7.6bn (below our est of Rs8.7bn).   Revenue growth in Q4FY19 was impacted by 21% yoy decline in volumes despite 16.7% realisation growth and 4.2% favourable currency impact.
• Among key geographies, NAFTA and  Europe  registered 6.8% and 5% yoy growth  respectively , while revenues from RoW and Latam region declined by 46.5% and 35.5% respectively 
• Gross margins declined by 335bps yoy to 31% on steep rise in prices of raw material procured from China.
• Despite stable employee costs, higher other expenses (up 24% yoy ) led to 505bps yoy decline in EBITDA margins to 20.2% (est : 24.1%) .EBITDA declined by 20.2% yoy to Rs1.54bn (est: Rs2.09bn)
• Despite higher depreciation (up 105% yoy), decline in interest cost with repayment of working capital loan and higher other income restricted further decline in PAT.  Cons PAT declined by 6.8% yoy to Rs1.05bn (est Rs1.25bn).

Key positives: Improvement in working capital

Key negatives: Muted revenue growth, decline in EBITDA Margins

Impact on financials: Cut FY20E/21E EPS by 9.5%/8.7% respectively

Valuations & view

During FY19, Sharda registered healthy topline growth driven by increasing penetration in NAFTA and Europe ; however profitability was impacted by CWIP write-offs  and steep rise in raw material prices. 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. 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 14%/20% over FY18-21E. 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 Rs391 (14x FY21E earnings).