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Strong performance; Growth trajectory remains intact

Sumitomo Chemicals reported strong revenue growth of 26% YoY during the quarter in-spite of delayed monsoon. We note (1) gross margin declined 96bps due to continued input material inflation; lower staff costs arrested the impact on EBITDA margin at 12bps YoY, (2) We believe Sumitomo has gained market shares from smaller players in Indian agrochemicals and (3) We also 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 revise earnings estimate to factor-in strong Q1FY23. We model it to report earnings CAGR of 18.9% over FY22-24E and maintain ADD rating on the stock with a revised DCF-based target price of Rs520 (implied 43x FY24E EPS; earlier TP: Rs465).

* Q1FY23 result: Sumitomo reported strong revenue growth of 26% YoY during the quarter. EBITDA and adj. PAT growth was at 25.2% and 30.6% YoY, respectively. While the gross margin declined 96bps YoY led by input inflation pressure, the impact on EBITDA margins was arrested to just 12bps, due to reduction in staff costs (112bps). The company reported PAT of Rs1407mn, up 30.6% YoY.

* Exports to likely drive revenue growth for the company: We believe Sumitomo India is uniquely positioned to benefit from the exports opportunity present in the global agro-chemicals market. Global shortage of food grains and other agricultural produce due to Russia-Ukraine conflict will boost demand for agro-chemicals to improve the farm productivity. We also expect Sumitomo India to start supplying five proprietary products to SCC Japan and its global affiliates starting from FY23.

* Delayed monsoon impacted off-take in Q1FY23: While the rainfall was adequate, delayed monsoon in some parts of the country has impacted application season of agro-chemicals. Thus, we expect higher domestic demand in Q2FY23 YoY.

* Maintain ADD: We model the company to report PAT CAGRs of 18.9%, over FY22- FY24E, and RoE to move to 22.1%in FY24 from 24.4% in FY22. We maintain ADD rating on the stock. We value the stock at a revised DCF-based target price of Rs520, implying a target P/E of 43x FY24E. Key risks: Steep increase in input prices and/or irrational competitive pressures will result in downside to our estimates.

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