Sharda Cropchem Q3 review: Robust pipeline to provide respite in long-term

After a period of consecutive subdued quarters, Sharda Cropchem (SCC) reported a healthy performance with a sharp 45 percent year-on-year (YoY) uptick in topline majorly driven by non-core belts division. Operating and net profits too reported a strong YoY and sequential improvement on a consolidated basis.
 

Key positives

-Company reported a 44.9 percent yoy increase in revenues driven by a 17 percent YoY growth in prices, 19 percent volume uptick and a 9 percent favourable currency impact.

-While agrochemicals business reported a growth of 40.4 percent YoY, non-agrochemicals sales increased by 66.6 percent YoY.

-Change in product mix towards higher margin value added products along with a marginal decline in technical prices helped improve gross margins.

-Most major geographies reported a healthy revenue growth with 78 percent growth in NAFTA, 25 percent uptick in Europe and 49 percent growth in RoW.

-The repayment of working capital loans enabled a substantial decline in the interest cost sequentially. After repayments, the balance sheet has become debt free.

Key negatives

-Weak performance in Latin American market with a 60 percent yoy de-growth in the region's revenue affected the overall performance in the quarter

-Other expenses ticked up 66 percent yoy due to forex loss of around Rs 4.9 crore and substantial Rs 31 crore write off from capital work in progress (CWIP). This led to a 100 bps decline in EBITDA margins.

-Agrochemical segment reported 170 bps decline in EBIT margins to 3.7 percent, lowest Q3 margins in the last 4 years, due to limited power to pass on high raw material costs and higher revenue growth from less profitable geographies.

Other Notes

-While there was a yoy deterioration in net working capital (Q3 FY19: 60 days Vs Q3 FY18: 53 days), there was a substantial improvement sequentially (Q2FY19: 102 days).

-The CWIP write offs increased substantially due to banning and phasing out of certain products due to stricter regulations. Moreover certain products were not able to fetch the expected margins.

-The management expects an impact on margins if the cross currency rate continues to remain at current levels. The company hedges only 50-60 percent of its cross currency exposure.

-China supply situation is now stabilising and raw material prices are now either coming off or stabilizing at the same levels. This would give a relief on margins in the future.

-The management expects NAFTA region to witness strong growth over the next 6 months on increased demand from MNC’s and improved product mix.

-While the drought in Europe has had marginal impact it is expected to register stable growth with registration of new high margin products.

Outlook

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.
 

The stock has corrected 33 percent from its 52-week high. It is trading at a 2020e PE of 11.9x. China supply disruption has been a major overhang on the stock. Though there is expectation of some relief on that front, we believe it would take time before it normalises. We expect the robust pipeline to provide respite in the longer term.