Sharda Cropchem Q2: Pressure on margins continues amid China's raw material supply challenge
Nov. 5, 2018
Revenue growth was largely driven by steady growth in NAFTA and Rest of the world regions, however, de-growth in Europe and Latin America impacted the overall growth. Higher realisation was aided by a favourable product mix during the quarter. Though realisations improved, the overall volumes dipped by 7.4 percent yoy. Adverse weather conditions impacted volumes in the Latam region.
Margins during the quarter saw a sharp contraction owing to higher raw material costs and write-offs. The company is highly dependent on sourcing input materials from China. With closing down of factories in China, the supply has been impacted and this has led to a surge in raw material costs. While the supply situation is not worsening further, scarcity of certain raw material is impacting production. The hit on the margins was also a result of limited pricing power as innovator companies have tapered prices.
The company generated a healthy cash flow during the first half of the year which has been utilised to pay off debts of around Rs 120 crore in order to strengthen the balance sheet. With lower debt, interest cost, which saw a sharp surge in the quarter, is expected to reduce. However, net working capital situation deteriorated to 102 days from 69 days owing to lower payable days.
The company is going through a difficult period with external factors taking a toll on the margins and impacting the profitability. However, the company has a healthy line up of new registration and the management is working on building alternate sources for raw materials.
China supply disruption has been a major overhang on the stock. Though there is an expectation of some relief on that front, we believe it would take time before it normalises. While the margin pressure is expected to continue in the short run, we expect the robust pipeline to provide respite in the longer term. We would wait for supply normalisation before turning decisively positive.
More from AgroNews
Subscribe to daily email alerts of AgroNews.