Sharda Cropchem's Q3FY18 results (Outperformer) - Muted profitabilty
Q3FY18 results
- Sharda Cropchem’s Q3FY18 revenues increased significantly by 34% yoy to Rs3.2bn (our est., Rs2.7bn). Strong growth in revenue from Europe and NAFTA region more than made up for the decline in revenue from RoW and Latam.
- Gross margins declined 609bps from 35% in Q3FY17 to 28.9% due to steep rise in raw material prices due to plant shut down in China. In Q3FY18, NAFTA sales contribution rose to 40.1% (28.3% in Q3FY17), while Europe revenue contribution remained stable at 35.2%.
- Q3FY18 EBITDA increased by 10.3% yoy to Rs356m (est.Rs443m), while EBITDA margins declined by 235bps to 11%. Increase in depreciation and amortisation (up 48.7% yoy) due to commercialisation of registrations coupled with lower other income (down 71% yoy) led to 32% yoy decline in PBT. Net profit for the quarter stood at Rs99m (est.Rs221m), down 43.6% yoy.
Key positives: Strong revenue growth in Europe and NAFTA
Key negatives: Decline in gross margins
Impact on financials: EPS cut by 14.8%/16.1% in FY18/19E, we introduce FY20e EPS of Rs23.4/sh.
Valuations & view
Sharda reported strong revenue growth in Q3FY18 led by growth in NAFTA and Europe regions, however steep increase in prices of raw material weighed negatively on gross margins. In the near term (Q4FY18E), we expect the revenue growth momentum to continue with with increased focus on developed markets such as NAFTA and introduction of high margin molecules in Europe, while margins to improve with better product mix. 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 14.1%/7.4% over FY17-20E. An asset-light business model (RoCE~23%) with focus on building product registration, nil investment in manufacturing assets and debt free balance sheet makes it one of the best play on global generic agrochemical market. Maintain Outperformer, with TP price of Rs523 (20x FY20E 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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