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Outsourcing opportunities to the group companies

Three highlights:

(1) The company has focussed on improving product and segment mix in FY21. The speciality segment contributed 32% of FY21 revenues, 300bps improvement over FY20. The improved mix has led to 470bps higher EBITDA margin,

(2) It has also continued its focus on reducing the working capital. It declined to 98 days in FY21 from 112 in FY20. We model the working capital to steadily reduce to 94 days in FY23 and

(3) The company is on track to gain market share in FY21-23 from smaller players. The synergy benefits will help to further gain market shares. The company also plans to supply five products to its parent and global affiliates generating revenues of Rs2-2.5bn with similar margins. We believe outsourcing of products to global group companies offers huge value creation opportunity to Sumitomo India in medium-long term. It will also benefit from its parent’s R&D support and distribution expansion in India. We maintain ADD rating on the stock with DCF-based target price of Rs350 (implied target P/E 40.8x FY23E; Earlier TP- Rs340).

Q4FY21 results:

Sumitomo reported YoY revenue, EBITDA and PAT growth of 19.9%, 69.9% and 124.5%, respectively. The EBITDA margin expanded ~390bps YoY in Q4FY21 due to (1) focus on high margin products, (2) better realisations and (3) cost saving initiatives post-covid. Sumitomo introduced three new insecticides, two PGRs and two herbicides during FY21.

Improvement in EBITDA margin continues:

Sumitomo’s EBITDA margin has steadily improved from 11.5% in FY18 to 18.4% in FY21. Key reasons for improvement in margins were (1) synergy benefits post-merger of Sumitomo and Excel crop care, (2) focus on higher margin products and (3) operating leverage. However, we believe the EBITDA margins to stabilise ~17% over FY22-23.

Exports opportunity to parent:

Sumitomo India has approval to manufacture and supply five proprietary products to SCC Japan and its global affiliates. It plans additional ~Rs1bn capex over FY22-23 for its production facilities and expects commercialization in the same period. We believe this will increase the exports revenue of the company. The revenue potential of these five products is Rs2-2.5bn with similar profit margins.

Expect market share gains in FY22-23:

We expect Sumitomo to gain market share in FY22-23 from smaller agrochemical companies in India. Its current market share is ~5%. Sumitomo is likely to benefit from strong R&D support of its parent and steady distribution expansion in India.

Maintain ADD:.

We model the company to report revenue and PAT CAGRs of 13.9% and 11.0%, respectively, over FY21-FY23. We maintain ADD rating on the stock. We value the stock at a DCF-based target price of Rs350, implying a target P/E of 41x FY23E

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