Fundamental Stock

SHARDA CROPCHEM LIMITED - Equity Research Report
DATE: 30/10/2017
  • COMPANY NAME: SHARDA CROPCHEM LIMITED
  • BSE CODE: 538666
  • NSE CODE: SHARDACROP
  • SECTOR: Agrochemical Sector
  • BUY: 436 Rs
  • TARGET: 600 Rs
  • MARKET CAPITAL: 3935 Cr.
  • FACE VALUE: 10
  • 52 WEEK HIGH/LOW: 351/567
  • BOOK VALUE: 106.39
  • DIVIDEND YIELD(%): 40%
  • SHARE PLEDGE : Nil
  • CURRENT PRICE/EARNING (TTM): 20.42
  • PRICE TO BOOK VALUE: 4.10
  • DESCRIPTION:

     

     

    Recommendation - Buy

    Hold for 2 years

    Target: 600 Rs.

     

    Part – 1 Company background:

    • Sharda Cropchem Limited was incorporated in 2004 and original name was Sharda Worldwide Exports Private Limited as a private limited company and changed to Sharda Cropchem Limited in 2013.
    • Sharda Cropchem Limited is an agrochemicals company.
    • The Company's business is in various segments include

    Agrochemicals - consists of insecticides, herbicides, fungicides and biocides,

    Belts - supplying a variety of Conveyor belts, V-belts

    Industrial Chemicals – Organic & Inorganic chemicals (Dye & Dye intermediates)

    Biocides - as disinfectants

    • The Company has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations through third party distributors or it's own sales force
    • The Company not only has an extensive distribution network of third party distributors but has also setup its own sales force in various countries in Europe and in Mexico, Colombia, South Afirca and India.
    • Company globally markets and distributes crop protection chemical products which include fungicides, herbicides, insecticides, and biocides.
    • The Company is a fast growing global agrochemicals company with leadership position in the generic crop protection chemicals industry.
    • It has made deep inroads in the highly developed European and US markets which are characterized as high entry barrier markets
    • It also has a significant presence in other regulated markets such as LATAM and Rest of the World
    • The company has a firm base in India and China, the two leading nations in chemicals production.
    • Distribution & warehousing in Antwerp (Europe)
    • 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
    • Its product portfolio in agrochemical business comprises of formulations and generic active ingredients in fungicide, herbicide and insecticide segments for protecting different kind of crops as well as serves turf and specialty markets and in biocide segment as disinfectants offering varied range of formulations and generic active ingredients.
    • The product portfolio in non-agrochemical business comprises of Belts, general chemicals, dyes and dye intermediates which enables the Company to cater to varied demands.
    • Sharda Cropchem LTD ('SCC') is a generics agrochemical company, follows a differentiated asset-light business model focusing on product registrations and outsourced manufacturing. It operates in formulations and active ingredients solely based on generic off patent molecules.
    • This differentiates it from an innovator company which expends capital, time and resources primarily towards R&D.
    • The company is all geared up to make its presence embedded in the world of Agrochemicals.
    • The European region has been the key revenue contributor for the Company due to attractive margin it offers.
    • The geography from where the Company’s major revenues comes from are highly developed European countries and US markets

     

    Part – 2 Company Group and Subsidiary:

     

    • Company is having 29 direct company and 11 indirect company plus 1 associate company.

     

    Part – 3 Ware house / Firm / Third party distributor / Infrastructure for Products delivery:

     

    • The company has a firm base in India and China, the two leading nations in chemicals production.
    • The competitive advantage of its presence in both India and China is beneficial to its customers alike.
    • Distribution & warehousing in Antwerp (Europe)
    • Having infrastructure in Italy, Spain, Hungary, Poland & Germany
    • Company’s own sales force in various countries in Europe as well as in Mexico, Colombia, South Africa and India; and other jurisdictions in addition to third party distributors.
    • More than 724 third-party distributors and over 115 direct sales force

     

     

    Part – 4 Strong Distributor Channel plus Global Network:

     

    • Strong eestablished  network of 724 established third-party distributors to serve 78 countries across Europe, NAFTA, Latin America, and the Rest of the World

     

     

     

    Part – 5 Sharda Cropchem Ltd - Shareholding Pattern:

     

    Share holding Pattern

    Description

    Percent of Share (%)

    Promoters & Promoters Group

    74.78

    Public Holding

    25.22

    Total

    100

     

    Share Holding Structure:

     

     

     

    Part – 6 Company Dividend History:

    Sharda Cropchem Ltd

    Dividend Declared

    Announcement

    Effective

    Dividend

    Dividend

    Remarks

    Date

    Date

    Type

    (%)

     

    43034

    43045

    Interim

    20

    Rs.2.0000 per share(20%)Interim Dividend

    42815

    42824

    Interim

    20

    Rs.2.0000 per share (20%)Interim Dividend.

    42678

    42691

    Interim

    20

    Rs.2.0000 per share(20%)Interim Dividend

    42433

    42450

    Interim

    30

    Rs.3.0000 per share(30%)Interim Dividend

    42156

    42257

    Final

    25

    Rs.2.5000 per share(25%)Dividend

     

    Part 7 –  Financial Focus:

    Focus on - Financial Results March 2017:

    • The total revenue of Sharda Cropchem for FY 2017 increased by 14.5% from Rs,12,221 mn in FY 2016 to Rs,13,992 mn.
    • EBITDA (excluding other income) grew by 15.1% from Rs,2,714 mn in FY 2016 to Rs,3,124 mn in FY 2017, in line with the higher revenues.
    • Net profit after tax and minority interest grew by 8.7% to Rs,1,904 mn.
    • EBITDA margin and PAT margin stood at 22.3% and 13.6% in FY 2017.

    Segment wise Sales:

    • Agrochemical Division:

    During the year, the agrochemical division saw a volume growth of 16.8%, which translated into a revenue growth of 16.4% at Rs,11,988 mn.

    The revenue of the business were driven primarily by the contribution of European Union region, which constitutes 50.4% of the agrochemical revenues, followed by NAFTA region with 26.5%, LATAM with 12.7% and rest of the world with 10.4% contribution.

    • Non Agrochemical Division

    The revenues from non-agro division, which constitutes 14.3% of the revenues, grew by 4.4% from Rs,1921 mn in the previous year to Rs,2,004 mn in FY 2017.

     

    Geography-wise performance is mentioned below:

     

    • NAFTA: Company revenues in the NAFTA region grew by 56.3% during the year on the back of increase in new registrations. Company has received registration in crops such as soyabean, corn and vegetables in this region during the year. The NAFTA region’s share overall business continues to keep growing, standing at more that 26.5% of total business by FY 17, a surge from 19.7% of total business in FY 16.
    • EUROPE: Company has an established track of securing registrations in the ‘toughest’ markets such as Europe.
    • Company has secured around 191 registrations in Europe out of the 409 total registrations across geographies. The revenue from this region stood at 6,042 mn in FY 17 against 5,709 mn in the previous year.

     

    Focus on - Financial Results Q1FY18 YOY Basis:

     

    • Q1 FY18 Total Revenues increased by 8.4% YoY from Rs. 3,146.7 mn to Rs. 3,411.2 mn primarily driven by volume growth of 15.7% and adverse currency movement of -5.4%.
    • Region-wise growth YoY– Europe: -3.4%, NAFTA: 49.7%, LATAM: -26.5%, ROW 3.7%
    • Q1 FY18 gross profit declined by 2.4% YoY from Rs. 1,129.9 mn to Rs. 1,102.7 mn. Gross margin declined by 358 bps from 35.9% to 32.3%.
    • Q1 FY18 EBIDTA including foreign exchange impacts declined by 6.6% YoY from Rs. 665.3 mn to Rs. 621.7 mn. EBIDTA margin declined by 292 bps from 21.1% to 18.2%.
    • Q1 FY18 EBIDTA excluding foreign exchange impacts declined by 13.7% YoY from Rs. 720.1 mn to Rs. 621.7 mn. EBIDTA margin declined by 466 bps from 22.9% to 18.2%.
    • Q1 FY18 PAT after minority interest increased by 5.6% from Rs. 409.2 mn to Rs. 432.2 mn. PAT margin marginally declined by 34 bps from 13.0% to 12.7%.
    • The total number of registrations was 2,069 as of June 2017 as compared to 1,830 as on June 2016 and 2,174 as of March 2017.
    • Revenue contribution from Top 10 molecules reduced from 61.6% in Q1 FY17 to 51.2% in Q1 FY18.
    • Working capital cycle for the quarter was at 75 days as against 77 days in the immediate preceding last quarter.
    • The net working capital days increased from 56 days to 75 days and receivable days increased from 135 to 151 days

     

     

     

    Agrochemical Business:

     

     

    Non Agrochemical Business:

     

     

    Focus on - Financial Results September quarter 2017:

     

    • For the quarter ended 30-09-2017, the company has reported a standalone sales of Rs 221.57 Crore, up by 23.7 % from last quarter Sales of Rs 179.06 Crore.
    • For the quarter ended 30-09-2017, the company has reported a standalone net profit of Rs 14.29 Crore, down by 51 % from last quarter net profit of Rs 21.57 Crore due to high depreciation and amortization expense for the quarter, it was higher by 21.8% on account of capitalisation of registration cost plus high raw material price.

     

    Part – 8 Company Financial Chart:

     

    Part – 9 Risk and Concerns:

     

    1. Dependence on top ten products - Total revenue contribution from the top 10 molecules of Sharda has been 52.5 % in FY17. Hence, regulatory changes in any key molecules or new products to substitute the existing molecules by its peers could impact the company’s revenue. 
    2. Increase in expenses for new registration (high demonetization & amortization) 
    3. Raw material high price
    4. Fluctuations in the currency and exchange rates can hamper the profit and margins of company, as most of the revenue comes from outside India and it is denominated with USD, EUR or Yen. 
    5. Any adverse changes in government policies relating to agro sector like reduction in government expenditure in agriculture, reduction in incentives and subsidy systems, export policy for crops, price of commodities – will affect the Company’s business.
    6. Subject to Weather conditions
    7. Market competition

     

    Part – 10 Registration Details:

     

    • During the year (2016-2017), company added 409 new registrations. Of these, added 191 in Europe, 42 in NAFTA, 149 in LATAM and 27 in RoW.
    • 31st March 2017, Company is having 458 registrations in the pipeline in European regions, 131 in the NAFTA region, 199 registrations in LATAM and 57 registrations in the Rest of the World.
    • Company is having total 2,174 certified dossiers across Europe, NAFTA, Latin America and the Rest of the World during FY17. Of these, 1,901 registrations relate to formulations, and 273 registrations are for generic active ingredients.
    • Sharda Cropchem has secured 1,041 registrations in Europe, out of its 2,174 total registration across geographies.
    • Company has received registration in crops of corn and soya and got into the markets of the USA and Canada.
    • Total number of registrations were 2,069 as of Jun-17 as compared to 1,830 as of Jun-16 and 2,174 as of Mar-17.
    • Registrations declined compared to Mar-17 as company did not renew few registrations which expired and had lower profitability.
    • As of 30th June 2017, Sharda owned 1,835 registrations for formulations and 234 registrations for active ingredients (AIs).
    • The company has another 862 registrations in pipeline across geographies.
    • Total number of registrations were 2,069 as of Jun-17 as compared to 1,830 as of Jun-16 and 2,174 as of Mar-17.
    • Registrations declined compared to Mar-17 as company did not renew few registrations which expired and had lower profitability.
    • As of 30th June 2017, Sharda owned 1,835 registrations for formulations and 234 registrations for active ingredients (AIs)
    • The company has another 862 registrations in pipeline across geographies.

     

    Investment Rational:

    1. Zero debt company
    2. Cash rich company
    3. Dedicated & strong technocrat promoter group & well experienced management team
    4. Excellent growth in Net sale – 5 year CAGR - 16%
    5. Excellent growth in EBITDA & EBITDA margin – 5 year CAGR - 22%
    6. Excellent growth in Net Profit & Net profit margin - 5 year CAGR - 23%
    7. Have strongly contributed to the resilience of both top and bottom lines.
    8. Healthy Ratio - ROCE – 5 Year Average >20% & ROE – 21%
    9. Robust Global distribution network
    10. Strong asset-light business model - Sharda has an asset-light business model whereby it focuses on identifying generic molecules, preparing dossiers, seeking registrations, marketing and distributing formulations through third party distributors or its own sales force.
    11. Diversified product portfolio - The Company is capable of providing a wide bouquet of products to its customers. Growth prospect of agriculture industry -
    12. New registrations and product pipeline – With growing demand for agrochemicals worldwide, Sharda Cropchem is a successful emerging crop-protection player. With focused efforts in seeking registrations in different countries, company has another 862 registrations in pipeline across geographies.
    13. Biocides offer huge growth opportunity - The increasing demand for specialty biocides in water treatment is one of the key growth drivers of the specialty biocides market. An expanding population and drastic climate changes have increased the demand for clean water globally. Growing health awareness and change in lifestyle is expected to have a positive influence on the personal and health care industry where usage of biocides is at the peak
    14. Growth prospect of agriculture industry - Growing population and declining arable land to feed the resultant population are driving the overall agrochemicals market. Increasing pest concerns and emergence of a variety of agrochemicals are expected to drive the demand for agrochemicals in the near future. The agrochemicals market is also driven by factors such as rigorous research & sharing of intellectual property rights and shifting R&D investments. Development of safe alternatives such as bio-farming and organic pesticides is restraining the growth of the agrochemicals market.
    15. Market for agrochemicals is being driven by increasing awareness among the farmers across developing nations with the technology driven farm practices. The use of agrochemicals is highly seasonal and improved, protected crop production is driving the year-round demand for agrochemicals products, especially pesticides and- fertilizers.
    16. The global agrochemicals market was at USD 54.5 bn in 2014 and tt is expected to continue a steady growth over the next five years to reach USD 71.3 bn by 2019.
    17. Off Patent Products: Agrochemicals worth USD 2.9 mn are expected to go off patent by 2020. This provides significant opportunities for companies which have expertise in generic segment.
    18. Strong Global Presence and Diversified Portfolio
    19. Growth of Biocides business and marketing and distributing biocides in various countries such as Spain, France, Italy, Hungary, Croatia, United Kingdom, Slovakia, Slovenia, Belgium, Bulgaria, Greece, Poland, and Czech Republic.
    20. Indian agrochemical industry, which is estimated at $ 4.4 billion in FY15, is expected to grow at 7.5 percent annually to reach $ 6.3 billion by FY20, with domestic demand growing at 6.5 percent per annum and export demand at 9 percent per annum. (Source - Report jointly presented by Tata Strategic Management Group (TSMG) and FICCI at the latter’s sixth National Conference on Agrochemicals 2016 in New Delhi).
    21. The Indian agriculture sector is currently facing critical challenges like reduction in arable land, decreasing farm size, increasing pest attacks, low per hectare yield and a shift towards animal products consumption, all of which are leading to demand outpacing supply in the country’s food chain. Agrochemicals could play a significant role in overcoming this imbalance.
    22. The agro-chemicals sector in the country is estimated to touch $7.5 billion by 2018-19 with 60% of the contribution coming from exports (Source :Tata Strategic Management Group report)
    23. Growth in fungicides has grown by 7.5 percent over the last five years, and this growth is expected to continue
    24. The Indian agriculture sector remains the backbone of the nation’s economy, accounting for about 15 percent of the country's GDP. Nearly 60 percent of rural households rely on agriculture as their principal means of livelihood. To support continued growth, the agrochemical industry sector is developing strategies to leverage opportunities involving insecticides and fungicides, new labor-saving herbicides, more products moving off-patent, and innovations in agrochemical solutions.
    25. In many ways, the Indian agrochemical industry represents both the challenges and opportunities of today’s emerging markets. Backed by government policies such as Make in India and tax reform measures such as the Goods and Services Tax (GST), crop protection and crop enhancement solutions are being developed based on best global practices and the latest technologies. Properly designed and executed, current initiatives can help India become a global manufacturing hub of quality crop protection chemicals.
    26. Low consumption of pesticides in India: The per hectare consumption of pesticides in India is amongst the lowest in the world — 0.6 kg/ha compared to 13 kg/ha in China.3 Usage is bound to increase to help boost yields.
    27. The Indian government has been focusing mostly on small and marginal farmers and the weaker sections of the society, to enable them to adopt modern technology and improved agricultural practices, thereby increasing agricultural production and productivity.
    28. India is the second biggest consumer of agrochemical products in the world after China.
    29. Globalization of agrochemical industry has a huge impact on the Indian market. With the high rate of population growth, increasing the need for food production and economic growth, the market for agrochemicals gets pushed ahead
    30. Agrochemical in India 2017 Market Expected to Grow at CAGR 9% and Forecast to 2020
    31. The herbicide consumption in India stands at 0.4 USD billion in FY15 and is expected to grow at a CAGR of 15% over the next five years to reach ~0.8 USD billion by FY20. On the other hand the fungicide industry in India has grown due to the growth in Indian horticulture industry, which has grown at a CAGR of 7.5% over the last five years.
    32. The industry is dominated by insecticides accounting for 60 percent of the overall demand, followed by fungicides and herbicides contributing 18 percent and 16 percent, respectively.

     

    33. Market for agrochemicals is being driven by increasing awareness among the farmers across developing nations with the technology driven farm practices

     

     

    Recommendation:

    • Stock CMP is 440 Rs. and stock is trading at P/E 20.42 which is below the Industry P/E 44.28 & TTM EPS 21.36, based on all above investment points, stock may touch 600 Rs. within 2 years’ time horizon.

     

    Please note:

    • Note: The articles are not research reports but assimilation of information available on public domain and it should not be treated as a research report. Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations” Disclosure: It is safe to assume that I might have the discussed companies in my portfolio and hence my point of view can be biased. Readers should consult registered consultants before making any investments.
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