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Higher speciality share to aid margins further…

Sumitomo Chemical reported topline growth of 7.2% YoY to | 561 crore largely led by herbicide (+21% YoY), PGR (+57% YoY), animal nutrition & environmental health segments (+41% YoY). On the other hand, revenue from insecticide (-4.3% YoY, ~39% of revenue) and metal phosphides (-4% YoY, ~10% of revenue) stayed subdued, denting the topline performance to that extent. OPM for the quarter expanded 514 bps YoY to 13.9% owing to improvement in gross margins due to a change in the product mix, leading to EBITDA growth of 70% YoY to | 78 crore. OPM from agrochemical business expanded 565 bps YoY to 14.5% while the same from other segments was up 277 bps YoY to 7.9%. PAT was at | 54.1 crore (+2274% YoY) against our estimate of | 58.7 crore. The bottomline growth was led by a better operational performance and lower tax outgo (24% vs. 94%).

Strategy towards improving specialty share continues

The company has been reducing share of generic portfolio from its basket and improving the share of speciality business, which should expand gross margins for the overall business ahead. Revenue from speciality business for 9MFY21 increased 17% YoY to | 718 crore while the same from generic remained at | 1393 crore (up 2% YoY). This expanded gross margins by 431 bps YoY to 37.4% for 9MFY21. Going ahead, we expect the focus to continue on improving speciality share given the management also expects to increase CRAMS revenue mix by introducing five technical over the next two to three years. Further, we also expect increasing share from Nufarm along with higher growth from PGR, AND & EHD to aid speciality share and thereby bodes well for gross margins and OPM in the years to come.

FCF generation likely to be robust

We expect an improvement in OPM and control on working capital to improve FCF of the company, to a certain extent, which can be utilised for backward integration capex or better inorganic expansion. This, in turn, can improve RoCE further and, thereby, valuations.

Valuation & Outlook

We believe the strategy of the company would improve margins through changes in the product mix. The speciality business revenue share increased to 34% for 9MFY21 vs. 31% in 9MFY20. This led an improvement in the OPM (up 497 bps YoY to 18.8%) for 9MFY21. This was partly due to a favourable pricing scenario along with higher share of speciality business. Going ahead, we expect increasing share towards CRAMS, PGR, AND & EHD would aid this mix further and thereby group operational performance. This should support group return ratios, FCF and thereby valuations. We introduce FY23E and roll over our valuations on that. We value the company at 40x PER FY23E and arrive at a target price of | 360 (vs. | 335 earlier). We maintain our BUY recommendation on the stock.

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