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Muted revenue growth; lower margins

Sumitomo reported muted Q2FY22 with flat revenue growth of 0.9% YoY (two-year revenue CAGR of 4.8%). We note (1) while input prices have increased, the impact on EBITDA margin was arrested to -68bps, due to decline in staff cost and (2) likely increase in freight cost and ad-spends led to increase in other expenses (our view). We model Sumitomo to gain market shares from smaller players in Indian agrochemicals. We believe outsourcing of products to global group companies offers huge value creation opportunity to Sumitomo India in mediumlong term. It will also benefit from its parent’s R&D support and distribution expansion in India. We model the company to report earnings CAGR of 12.5% over FY21-24E and maintain ADD rating on the stock with revised DCF-based target price of Rs425 (43x FY24E; Earlier TP- Rs460).

* Q2FY22 results: While Sumitomo’s reported revenue growth of 0.9% YoY, EBITDA and PAT declined 1.9% and 2.2% YoY, respectively. Gross margin declined 94bps YoY due to higher input cost, but reduction in staff costs (100bps) arrested the impact on EBITDA margin, down only 68bps. The company reported adjusted PAT of Rs1,542mn, down from 1,578mn in Q2FY21.

* Segment-wise performance: Agrochemicals (93.9% revenue contribution) reported revenue decline of 1.5% YoY. However, operating margin of the segment improved 63bps YoY. Other reported revenue growth of 63.7% YoY.

* Exports opportunity to parent: Sumitomo India has approval to manufacture and supply five proprietary products to SCC Japan and its global affiliates. 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 FY23-24 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 13.1% and 12.5%, respectively, over FY21-FY24, and RoE to move to 19.5% in FY24 from 25.1% in FY21. We maintain ADD rating on the stock. We value the stock at a revised DCF-based target price of Rs425, implying a target P/E of 43x FY24E.

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