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Strong all-round performance

Sumitomo reported strong Q1FY22 with revenue growth of 20.7% (Two-year revenue CAGR of 11.8%). We note (1) While input prices have increased, the EBITDA margin expanded 80bps with better realizations, cost saving initiatives and operating leverage and (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 reduce to 94 days in FY23.

We model Sumitomo to gain market shares from smaller players. It also plans to supply five products to its parent and global affiliates generating revenues of Rs2-2.5bn. 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 Rs460 (51x FY23E; Earlier TP- Rs350).

* Q1FY22 results: Sumitomo reported YoY revenue, EBITDA and PAT growth of 20.7%, 26.2% and 33.2%, respectively. Gross and EBITDA margin expanded 140bps and 80bps YoY due to (1) focus on high margin products, (2) better realisations and (3) cost saving initiatives post-covid.

* Revenue breakup and new product launches: Speciality products accounted for 25% of revenues in Q1FY22 vs 34% in Q1FY21. Domestic revenues were 87% of total sales vs 85%, YoY. Sumitomo introduced three new insecticides, two PGRs and two herbicides in FY21 and we expect healthy revenue contribution in FY22.

* 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 14.7% and 13.4%, respectively, over FY21-FY23. We maintain ADD rating on the stock. We value the stock at a DCF-based target price of Rs460, implying a target P/E of 51x FY23E.

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