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Strong all round performance

Sumitomo reported strong Q3FY22 with revenue growth of 26.1% YoY (two-year revenue CAGR of 16.3%). We note (1) while gross margins were flat YoY, lower staff costs and operating leverage improved its EBITDA margins 398bps YoY in Q3FY22 and (2) working capital investments increased in 9MFY22 due to significant increase in creditor days. We model Sumitomo to gain market shares from smaller players in Indian agrochemicals. We also believe outsourcing of products to global group companies offers huge value creation opportunity to Sumitomo India in the medium-long term. It will benefit from its parent’s R&D support and distribution expansion in India. We model it to report earnings CAGR of 12.3% over FY21-24E and maintain ADD rating on the stock with a revised DCFbased target price of Rs440 (implied 45x FY24E EPS; earlier TP: Rs435).

Q3FY22 results: Sumitomo reported strong revenue, EBITDA and PAT growth of 26.1%, 62.1% and 64.2% YoY, respectively. While gross margin was flat YoY, reduction in staff costs (150bps) and other expenses (254bps) improved EBITDA margin by 398bps YoY. The company reported PAT of Rs889mn, up from Rs541mn in Q3FY21.

Segment-wise performance: In Q3FY22, Agrochemicals (90.3% revenue contribution) reported revenue increase of 25.3% YoY. Operating margin of Agrochemicals improved 597bps YoY. Revenue mix in 9MFY22 – Insecticides 43%, Herbicides 22%, PGR 10%, Metal phosphides 8%, fungicides 10% and others 7%. Generic products’ contribution increased to 69% in 9MFY22, from 66% in 9MFY21.

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 PAT CAGRs of 12.3%, over FY21- FY24, and RoE to move to 19.4% 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 Rs440, implying a target P/E of 45x FY24E.

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