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CRAMS offers strong visibility ahead…

Sumitomo Chemicals reported topline growth of 20% YoY to | 534.3 crore against our expectation of | 500.8 crore. Revenue from the agrochemical segment was up 19.6% YoY to | 478.1 crore while the same from other segment remained at | 56.2 crore (up 19.7% YoY). Since the Rabi season was comparatively better this year, we believe better volume growth, along with rise in realisation owing to higher RMAT, supported growth for the quarter. OPM for the quarter expanded 408 bps YoY to 13.4% leading to EBITDA growth of 72% YoY to | 71.3 crore against our estimate of | 67.5 crore.

EBITDA from agrochemical business remained at | 65.7 crore (up 88% YoY) while the same from other segments was | 5.2 crore (up 121% YoY). Lower taxes (12% vs. 28% in Q4FY20) boosted bottomline growth, which was up 136% YoY to | 54.1 crore against our estimate of | 44.3 crore.

New capex to aid topline growth ahead

The company has announced a capex of | 100-110 crore for the five proprietary products, which it will supply to SCC Japan. The asset turn is expected to be between 2x and 2.5x. Out of the five molecules, one is expected to be commercialised by Q2FY22E while the remaining four would be altogether by the end of FY22 or beginning of FY23E. The management envisaged that they are setting up a capacity of 350 tonnes per year initially for one molecule, which is ~33% of the size of SCC Japan’s consumption and, thus, bodes well for another expansion in coming years. We expect that since the company is also purchasing land for further expansion, additional capex is bound to happen for contract manufacturing segment post FY22, FY23E. This would improve export share in overall revenue and, thereby, improves diversification.

LatAm business to grow considerably in years to come

Revenue from LatAm increased 68% YoY to | 105.8 crore, resulting in a revenue share of 4% of overall revenue. Going ahead, the increased capacity of tebuconazole along with supply of other molecules will likely aid LatAm growth. We believe even if 10-20% of RMAT consumption by Nufarm is outsourced to Sumitomo India, the opportunity size can become large for the Indian entity. Since the company is focused on increasing speciality share in the overall portfolio, we also expect higher scale in the business to aid gross margins for the group and thereby OPM in the medium to long term.

Valuation & Outlook

We value the company at 40x PER FY23E and arrive at a target price of | 400 (earlier | 360). We maintain our BUY recommendation on the stock.

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