Buy Sumitomo Chemicals Ltd For Target Rs.505 - ICICI Direct
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CRAMS offers strong visibility ahead…
About the stock: Incorporated in 2000, Sumitomo Chemical India (SCI) is present in the three business verticals of agro solutions (ASD), environmental health (EHD) and animal nutrition business (AND).
* SCI provides solutions for insecticide, herbicide, fungicide, plant growth regulator (PGR) under agro segment. Under animal nutrition, it manufactures methionine for feed additive use
* In terms of revenue contribution, insecticide constitutes ~51% while around 19% is from herbicide, 9% from fungicide and 20% from other segments such as PGR, AND & EHD
Q1FY22 Results: Overall numbers were almost in line with our estimates.
* Reported revenue growth of 20.7% YoY to | 782 crore, led by higher growth from herbicide segment (up 67.2% YoY)
* Gross margins rose 140 bps YoY to ~36.1% while EBITDA margin improved 90 bps YoY to 19.2%, due to higher other operating cost (+35% YoY)
* EBITDA was up 26% YoY to | 149.8 crore
* PAT increased 33% YoY to | 105.7 crore owing to higher other income (+134% YoY)
What should investors do?
The stock appreciated at 63% CAGR in last two years.
* We retain BUY rating on the back of better growth outlook from outsourcing opportunity of SCC Japan
Target Price and Valuation: We value Sumitomo Chemicals at 50x P/E FY23E EPS to arrive at a revised target price of | 505/share (earlier | 400/share).
Key triggers for future price performance:
* Upcoming capex for five molecules, which will be supplied to SCC Japan. Capex is earmarked of | 100-110 crore with an asset turn of around 2-2.5x
* Potential opportunity of technicals manufacturing for Nufarm to improve export share meaningfully
* Allocation of incremental FCF towards organic/inorganic growth likely to expand return ratios further.
Alternate Stock Idea: Apart from Sumitomo Chemicals, in our chemical coverage we also like Neogen Chemical.
* Trigger for Neogen Chemical’s future revenue growth would be increasing CRAMS opportunity
* BUY with a target price of | 1085
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