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Prabhudas Lilladher
Sharda Cropchem (Accumulate)
CMP: ₹341.5
Target: ₹401
Sharda Cropchem reported lower than expected results this quarter. Topline was flat y-o-y at ₹760 crore due to subdued performance from the agrochemical segment. Heightened competitive intensity from the innovators in the EU region led to 720 bps decline y-o-y in agchem EBIT margins at 16.5 per cent. Other expenses shot up 28 per cent on account of sharp spike in write-offs of intangible assets (at ₹42 crore in Q4) dragging the EBITDA margins down by 516 bps to 20.6 per cent. The business model of Sharda Cropchem, (which used to be its USP at a point of time) has now become its biggest drawback due to the control of environmental pollution in China.
It has been most impacted among its peers with agrochemical segment margins nearly halving over the last three years (from 30.4 per cent in 4QFY16 to 16.5 per cent in 4QFY19). While the business model also provides a fluidity to rapidly realign its product with market demand, stress on gross margin is expected to continue in the near term due to pressure on both cost and revenue. Our topline and EBITDA estimates are largely unchanged but we reduce our PAT estimates for FY20E and FY21E by 13.8 per cent and 10 per cent respectively due factor in higher depreciation (led by higher capitalisation of registrations costs).
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