Buy Sharda Cropchem Ltd For Target Rs.745 - Anand Rathi Share and Stock Brokers
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Adverse currency movement hurt margins; guidance maintained; Buy
Despite currency-movement challenges, management maintained its guidance of 15-20% revenue growth in FY23, supported by better pricing and strong demand globally. It says it is seeing positive traction in old and new products. The company is expanding its range of products in each region for future growth. We are positive about Sharda’s future performance, considering its focus on registrations, rising proportion of high-margin products and deeper penetration.
Adverse currency movements hurt Q1 margin.
Higher prices (up 38% y/y) helped Sharda register 32% y/y revenue growth to Rs8.2bn despite volumes dropping 2.5% y/y. Nearly 50% of agrochemicals sales were to Europe. The Q1 gross margin was impacted 392bps y/y, 383bps q/q, by the unexpected weakening of the euro to the dollar (7% in Q1 FY23) and by the increase in freight costs. This resulted in a 489bp EBITDA margin contraction y/y to 11.7%. Profit declined 40.5% y/y to Rs226m, impacted by higher depreciation and forex losses of Rs432m (vs. a Rs115m gain a year ago).
Outlook
Management says that degree of depreciation of the euro to the dollar was unexpected. It guided to the euro depreciation bottoming out at this level, then improving. To reduce such a currency risk, the company is taking various steps such as sourcing in euros from China, and raising prices to minimize the forex impact. Despite the challenging Q1, management maintained its guidance of 15-20% revenue growth, with 18-20 % EBITDA margins (earlier 20-22%) in FY23. Capex in Q1 FY23 was Rs1bn and management maintained its guidance of Rs3.8bn-Rs4bn capex for FY23.
Valuation
Considering the Q1 performance and margin pressure, we cut our FY23e/FY24e profit 13%/5%. We maintain our Buy rating, though with a lower TP of Rs745, valuing the stock at 15x FY24e earnings. Margin movement is the key monitorable. Risks: Forex movements, dependence on China for raw material, delay in registrations.
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