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Weather plays spoilsport
Sharda Cropchem’s agrochemical division was impacted by weather vagaries in North America (heavy flooding) and Europe (dry weather), leading to 16% YoY decline in Agchem revenue (750 bps decline in sales mix YoY to 75%) at Rs 3.2 bn and 700 bps decline in agchem margins to 5.0%. High cost inventories added further pressure on blended gross margins which declined by 337 bps YoY to 28%. Elevated depreciation charge continues (up 92% YoY) due to increased captalisation of intangible assets in FY19 (@ Rs 2.4 bn, 40% of Intang. GB). While Sharda is expected to be the biggest beneficiary on declining raw material prices in China, the company is facing significant headwinds on the revenue front for the past 2 quarters, which is expected to keep continued pressure on the overall financial performance. Tts business model also provides the fluidity to rapidly realign its product with market demand, but profitability will be under pressure in the near term due to headwinds in the global agchem market. Reduce topline/EBITDA/PAT estimates by 4.3%/3.9%/4.4% for FY20 and 4.3%/3.9%/5.7% for FY21E. Maintain accumulate rating (despite 30% upside) with revised target price of Rs 379 (Previous TP 400) based on 15x FY21E earnings.
Decline of ~4% each in volume and realisation:
Sharda reported volume decline of 4.2% YoY driven by Europe (down 6.5%) and LatAM (down 32.9%). Declining realisations dulled revenue down by 3.8% due to high competitive intensity within Europe and NAFTA (according to the management). Forex impact contributed 0.7% favourable to growth. While the management has been claims that there is competition from innovators interms of price, most of the innovators have been seeing increasing realisation on the crop protection portfolio for the past 5 quarters (Exhibit 2).
Depreciation doubled YoY due to capitalisation of registrations:
Depreciation charge doubled YoY to Rs 352 bn in Q1FY20 driven by capitalisation of registrations (Rs 2.4 bn in FY19). Depreciation is likely to remain at elevated levels due to continued high capex plans of the company. Sharda plans to invest Rs 1.5- 1.7 bn on registrations in FY20 as well.
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