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Sharda Cropchem's Q1FY20 results (Outperformer) - Weak performance

Q1FY20 result

• Sharda’s revenues declined by 7.5% to Rs4.2bn (below our est : Rs5.3bn) led by  4.2% yoy  and 3.8% fall in volume and realisations respectively,  marginally offset by 0.7% favourable currency impact.
• Among key geographies, NAFTA and RoW registered 18.2% and 5%  yoy growth  , while revenues from Europe and  Latam region declined by 15.2% and 39.4% respectively  
• Gross margins declined by 340bps to 27.8% (est :30.8%)  on increasing  prices of raw material procured from China and Sharda’s inability to pass on the increase  to its  customers
• Stable operating expenses along with forex gain of Rs24.8m vs loss of Rs1.39bn in Q1FY20 restricted further decline in EBITDA margins. EBITDA margins declined by 97bps to 14.6% (est 16%) .EBITDA  declined by 13.3% to Rs616m ( below our est: Rs848m)
• Despite higher other income (up 143% ,est Rs30m) , higher depreciation cost ( up 92% , in line with est) led to 34.2% decline in PAT to Rs228m( below our est :Rs357m)

Key positives: Improvement in working capital

Key negatives: Subdued revenue growth, decline in gross margins

Impact on financials: Cut FY20E/21E EPS by 15%/13% respectively to factor in subdued performance in the current quarter

Valuations & view

Sharda’s performance in Q1FY20 was adversely impacted by poor weather conditions in Europe and 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 13%/12% 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 Rs366 (15x FY21E earnings).